Brad DeLong covers the Argentine crisis, in one night

DeLong is clearly working his way through Paul Blustein’s book on Argentina. Martin Wolf has a column on Argentina’s restructuring in yesterday’s Financial Times, which I quite liked, for rather obvious reasons.

Blustein puts a large share of the blame on Argentina’s failure to run a more prudent fiscal policy in the late 1990s. I would put equal, if not more, emphasis on Argentina’s currency board.

The currency board tied the peso to the dollar. That became a real problem after 1999, if not before. The dollar was strong and getting stronger back then. Soybeans (Argentina’s main export) were not doing so well. After Brazil devalued the real in early 99, it was pretty clear that the Argentine peso was substantially overvalued. Without devaluation, real exchange rate adjustment had to come through falling domestic prices (deflation), and that meant a long, sustained recession. Argentina wanted to grow out of its public debt difficulties, but the needed growth was hard to square with the deflation needed for real exchange rate adjustment.

Moreover, high levels of external debt and rising interest rates on that debt meant that Argentina needed to start generating trade surpluses to pay interest on its debt, not just pay interest with new borrowing. That too implied that real value of the peso had to fall. Running up your external debt is usually more fun than paying it back.

A more responsible fiscal policy in the mid 90s would have meant less external debt, and maybe with less debt all around, Argentina could have held on until the dollar started to fall and soybean prices started to rise. Maybe. I personally doubt it.

Remember, the dollar has not fallen all that much v. the all important Brazilian real since 2000. The real has appreciated recently, but only after falling a lot in 2002. The Washington Post also has chimed in with an oped arguing that Argentina’s restructuring took too long, and that an international bankruptcy regime might have made for a faster restructuring process.

The deal took too long to organize, unnecessarily hurting both lenders and Argentina. ... This is why the world may eventually create something like a bankruptcy court for dealing with governments. If Argentina were a company, a bankruptcy judge would have taken control of the debt workout, cutting out the need for a three-year game of chicken between the country and its creditors. Once a proposed debt write-down had won the support of a majority of creditors, the minority would have been left with no option to reject the deal, whereas now creditors representing a quarter of Argentina’s debt still refuse the offer. This delay and uncertainty serves nobody. Anne O. Krueger, the No. 2 official at the International Monetary Fund, put the idea of a sovereign bankruptcy mechanism on the table in 2001. She should return to the subject.

I certainly agree that it took too long to get a deal, though I suspect that with a different policy approach, the IMF and the US Treasury could have pushed Argentina to initiate its restructuring a bit faster even without an international bankruptcy regime.

I also am all for legal changes that make it a bit harder to holdout from a restructuring that most creditors are willing to accept. Realistically, though, the "aggregation clauses" in Uruguay’s and now Argentina’s new bonds hold more promise than a revived international bankruptcy mechanism. (aggregation = the ability to combine the votes of multiple bonds in a restructuring)

But I am also wary of overstating the impact of a new and one would hope better legal process. The link between an "orderly legal process" for sovereign debt restructuring and an "orderly" sovereign debt restructuring is not as tight as many claim.

Uruguay showed that it is possible to have a relatively orderly sovereign debt restructuring even in the absence of bond clauses or an international sovereign bankruptcy regime. In the right circumstances, bond swaps work, no matter what the legal regime. And I suspect that, in Argentina, an "orderly legal process" for bond restructuring would not have generated an "orderly" sovereign debt restructuring.

If Argentina had waited until the end of 2001 to initiate its restructuring, the process would have been messy no matter what. By then, Argentina had too few reserves, too many dollar deposits that the banking system could not honor, too much dollar-denominated domestic debt and too much external debt. An orderly external debt restructuring, given the scale of the needed debt relief, was not in the cards. And a better process for external debt restructuring would not have dealt with the biggest problems Argentina faced going into 2002: enormous domestic debts and a frozen banking system.