“The important thing about the Argentine case is that it demonstrated that the system works,” said Dr. Arturo Porzecanski, an expert in international finance, emerging markets, and the Latin American economy, when referring to the situation in the neighboring country during the conference “Argentina: Lessons for Today from the 2002–2016 Default.”
The event, co-organized with the CFA Society, was part of the Management and Business Lecture Series hosted by the Graduate School of the Faculty of Administration and Social Sciences and took place on Thursday, November 22, 2018.
Arturo Porzecanski is an economist and professor at American University; he was also the first Uruguayan to earn a Ph.D. in economics. He has had a successful career as an international economist on Wall Street and has published numerous academic papers.
The Investment Castle
“Every now and then, Cavallo would call me,” Porzecanski recalled as he reflected on the crisis Argentina faced beginning in 2001, during part of which Domingo Cavallo served as Minister of Economy. “There were hundreds of thousands of investors who held Argentine debt securities,” he said. “It was estimated that a quarter of a million of them were Italian.”
Italian banks marketed these bonds as a sound investment with high returns; however, investors repeatedly ran into Argentina’s refusal to pay on the bonds it had issued. Porzecanski shared details of his work representing Italian and Argentine citizens (mostly retirees) who had invested most—if not all—of their savings in debt securities.
The 1990s were a period of heavy strategic investment in Argentina, as well as of debt issuance. According to the expert, the intention of Argentina’s leaders at the time was to build an “investment fortress” that would make it impossible to dismantle the system established by the Austral Convertibility Law (the well-known “1-to-1” exchange rate).
Lesson 1: The Rules of the Game
“A lesson for everyone is that failure to comply leads to penalties,” explained Porzecanski. In his view, by issuing debt securities, Argentina assumed a series of responsibilities that it later systematically evaded, creating an uncomfortable situation for everyone involved.
“Be careful about radically changing the rules of the game,” he advised later. Argentina made several changes to the rules governing its debt without its creditors’ authorization, which led to significant conflict and amounted to “an invitation to litigate.”
Lesson Two: Consistency
“You can’t go begging when you’re in a period of strong tax revenue,” Porzecanski explained. As the 2000s progressed, Argentina’s situation began to show signs of improvement ( commodity prices began to rise in 2003, for example), but the official stance remained one of seeking forgiveness for the debt owed to private individuals and a long list of organizations.
“Argentina’s model was based on the most pessimistic assumptions possible,” said the expert, explaining that over the years a gap between the projections and reality would become apparent—a gap that caused unease among investors.
Against a backdrop of substantial improvements, Argentina would raise taxes on exports, making its requests for debt relief even less tenable. Porzecanski said that by 2005, Argentina’s tax collection capacity was similar to that of 2001.
“Many of Argentina’s creditors were people of very modest means,” he revealed, adding that, in his view, there had been an “ideological restructuring” aimed at attacking those who had grown wealthy through the purchase of debt securities and fostering public disapproval of them.
Lesson Three: Choose Your Battles
“It’s dangerous to pick fights with everyone at once,” said Porzecanski, referring to the stance taken by Argentina, which deliberately sought confrontation with all its creditors—both domestic and foreign—by failing to make payments to private investors and multilateral lending institutions for years.
Porzecanski, who followed live the proceedings presided over by U.S. District Judge Thomas Griesa regarding Argentina’s default in the United States, shared some anecdotes about the case.
As he explained, Griesa initially ruled in favor of the Argentine government. However, the Argentine representatives’ lack of respect exhausted the judge’s patience, and he gradually became less tolerant and began to revise his decisions.
Lesson Four: The Benefits of Vultures
“Vulture funds, like birds of prey, generate positive externalities for society,” he remarked at another point in the conference. “If buying low and selling high were illegal, capitalism would have to be outlawed.” In his view, this reasoning undermines Argentina’s argument for refusing to pay the aforementioned funds.
Porzecanski noted that hedge funds were the first to invest during Mexico’s crisis, known as the “tequila effect,” and added that, because of their power, they are able to fight for investors’ rights when others cannot.
“The concept of ‘vulture funds’ does not exist in the United States, London, or the world’s major economic capitals,” he explained.
Toward the end of the discussion, Porzecanski addressed the possible creation of an International Debt Court to arbitrate on the commitments made by countries—a move that many experts view as necessary. “You shouldn’t fix what works well,” he said, noting that there is no consensus on establishing such a body.
“The important thing about the Argentine case is that it showed the system works,” he concluded.
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