You can’t have a debt default without a morality tale, and Argentina’s is no exception. But who’s the villain?

The Vulture Funds

You haven’t lived if you haven’t heard Argentine financial minister Axel Kicillof rail against “los fondos buitres,” the investors who swept in after Argentina defaulted on its debt in 2001, buying up its bonds for as little as 20 cents on the dollar. They have spent the last 13 years fighting to get paid in full even as 92.4% of bondholders accepted losses ranging from 40% to 70% when Argentina restructured. The funds, led in litigation by NML Capital, a subsidiary of Paul Singer’s Elliott Management, say they simply wanted to negotiate a fair deal, but the Argentine government wouldn’t talk to them until the day before default. While this tactic has been criticized as unsporting, and something that potentially makes future sovereign restructuring more challenging, the funds are playing by the letter of the law. So that means the real villain must be …

The entire system of international finance dating back to Bretton Woods

The whole reason for Argentina’s 2001 default was the string of currency crises in Asia and South America in the 1990s, with the IMF and other international financial leaders having bungled their responses to a series of problems in developing economies. Between the specter of contagion, local corruption, and an unwise attempt to peg Argentina’s currency to the dollar, foreign investment poured out of Argentina, and the economy slumped. Social unrest rose, and amid a volatile mix of political chaos, bank runs and high unemployment, Argentina defaulted on $100 billion of debt, going from a poster child for the Washington consensus to its biggest victim.

The country was able to restructure the bulk of its debt, and managed to rebound thanks to high global commodity prices that led to lucrative trade with China, proving that international finance isn’t all bad. Argentina’s not the only country to default and restructure, so maybe the bigger problem is how that process works. There’s no bankruptcy court where countries can work out an equitable solution, so absent cooperation with the international community, à la Greece, borrowers and creditors have to go to court where the bonds were issued—in Argentina’s case, New York. So maybe the real villain is …

Judge Thomas Griesa and the US justice system

The challenge for the holdouts was always collecting on their debt; thanks to various sovereign immunity laws, the best the creditors could do was attempt to seize the occasional Argentine naval vessel. Until last year, that is, when US judge Thomas Griesa interpreted a clause in the bonds to mean that unless Argentina paid both the holdouts and its restructured bondholders, it couldn’t pay either. This fateful decision lit the fuse for default. There’s been no shortage of critics of Griesa’s handling of the issue—at one point, he didn’t understand which bonds were which. Before the Supreme Court denied Argentina’s request for an appeal in the case, the countries of Brazil, France and Mexico, along with economics Nobelist Joseph Stiglitz weighed in urging the high court to find a better solution. Even the IMF reportedly wanted a different outcome to avoid complicating future sovereign restructuring.

Now, because the courts didn’t provide a pathway to a settlement, some say that New York’s status as a center for international finance may wane. But why did Argentina issue its bonds in New York in the first place? In no small part because people with money trusted US law more than that of Argentina, thanks to the country’s history of erratic economic policy. That suggests the real villain is…

Argentina’s political leadership since 1930

Since a military coup deposed a democratically-elected president during the Great Depression, Argentina’s politics has been volatile—and frequently detrimental to foreign investors. It’s not just the occasional nationalization of foreign businesses; Argentina also has had a hard time controlling inflation, which is a no-no for anyone looking to borrow money in their own currency. For that reason, the country had to borrow abroad, in foreign currencies and under foreign jurisdiction. Even in the boom times after Argentina’s default, when the government under President Cristina Kirchner worked to regain international trust by paying down international aid loans and promptly servicing its restructured debt, there was no effort to negotiate with the holdouts when such a settlement would have come more cheaply than today. While Kirchner’s obstinance may have bolstered her political capital at home, now economic policies brought about by its inability to borrow from foreign markets are leading the country into a recession. Argentina may yet avoid paying the holdouts, but it seems clear that such a victory would be pyrrhic at best.

There are good cases to blame each party: If the vulture funds had exchanged their bonds earlier, they would have made a decent profit and saved us all this mess—but there’s no law saying they had to do that. If global finance hadn’t integrated the world’s economies, Argentina wouldn’t have suffered from capital flight—but it wouldn’t have had access to capital to begin with absent that system. If Judge Griesa hadn’t issued his controversial order, the holdouts contracts would be unenforceable—but it will be harder for any sovereign to borrow money if lenders fear they can’t collect. And if Argentina’s various regimes hadn’t made economic policy mistakes or had simply been more pragmatic, this whole situation might never have arisen—but it’s their citizens, and likely not the leaders themselves, who will pay the stiffest price. Maybe there’s not much morality in this tale after all.