When the financial crisis first hit, the U.S. government bailed out major banks in part so the banks' foreign government clients would not suffer huge losses on their U.S. loan exposures. So where are U.S. policymakers when a foreign government bilks Americans out of billions of dollars? It's been nearly a decade since Argentina perpetrated the largest sovereign default in history, and the South American country still owes roughly $15 billion to international creditors, including $2 billion to New York taxpayers and to U.S. investors ranging from university endowments to pension funds.
Rather than make good on its outstanding defaulted bonds, the Argentine government has been sheltering some $45 billion worth of liquid foreign reserves (86% of its total supply) in the Basel-based Bank of International Settlements (BIS), which is immune from most legal challenges. Earlier this month, two bondholders reportedly lodged a formal complaint with the Swiss government, saying that Buenos Aires has used the BIS to engage in money laundering.
The matter should be of particular interest to Federal Reserve chairman Ben Bernanke and New York Fed President/CEO William Dudley, each of whom is a BIS board member. For that matter, the United States is a member of the Paris Club, to which Argentina owes around $9 billion. So, in effect, Bernanke and Dudley have direct authority and a responsibility to oversee the BIS's immunity as it relates to Argentina. They would be wise to re-examine Argentina's abuse of BIS and help return Argentina's funds to U.S. taxpayers.
The criminal complaint has further highlighted the duplicity of Argentine president Cristina F. Kirchner, whose Chávez-style economic policies have alarmed private investors, sparked capital flight, damaged her country's global image, and contributed to rampant inflation.
Of course the "official" Argentine inflation rate remains in the single digits, but nobody takes that number seriously. According to a June survey of Argentine inflation expectations conducted by Torcuato Di Tella University, the median projection for the next twelve months is a remarkable 25%. While inflation rages, Cristina F. Kirchner grows more autocratic in her treatment of critics. As the Wall Street Journal reports, the Argentine government is "escalating its persecution of independent economists" who dare to question its obviously bogus inflation and poverty numbers.
Argentina enjoys an abundance of agricultural resources, and high commodity prices have been fueling strong economic growth. But the real inflation rate dwarfs the real growth rate, and this has had devastating consequences for the Argentine poor. "The poverty level is higher now than the worst moments of the 1990s," former Argentine economy minister Domingo Cavallo told the New York Times this past winter. "Without a doubt, inflation is increasing poverty."
To appreciate just how much Kirchner and her late husband, Néstor, who preceded her as president from 2003 to 2007 and died last October, have diminished economic liberty, look at the Heritage Foundation's Index of Economic Freedom. Between 2003 and 2011, Argentina's ranking fell from 68th (out of 156 economies) to 138th (out of 179 economies). It now ranks behind even Haiti and Cameroon. Meanwhile, the World Economic Forum's Global Competitiveness Index ranks Argentina behind Guatemala, Rwanda, Trinidad and Tobago, the Philippines, and Algeria.
Argentine press freedoms have declined, and corruption has become a massive problem. Indeed, Peruvian Nobel laureate Mario Vargas Llosa has said that the Kirchner government "is corroded by corruption, and to such an extent that it is losing its natural leadership and disappearing as a political reference for Latin America." A WikiLeaks cable from the U.S. embassy in Buenos Aires lamented that Argentina's "emasculated institutional framework" is "incapable of providing needed checks and balances."
In her foreign policy, Kirchner has cozied up to Hugo Chávez (whose bond purchases helped Argentina recover from its 2001 financial crisis), poisoned bilateral relations with Washington, and reportedly offered to suspend two investigations of Iranian-backed terror bombings in return for economic concessions from Tehran. Earlier this year, her foreign minister, Héctor Timerman, accused the United States of operating torture schools. A few weeks later, Argentine officials abruptly and bizarrely seized the contents of a U.S. military plane that was delivering equipment for police training.
Is it any wonder that the former "Jewel of South America" has lost regional influence, respect, and credibility?
Nevertheless, its quasi-autocratic president is hoping that rapid GDP growth and profligate public spending will help her secure re-election in October. With the opposition bitterly divided, four more years of Kirchnerism may be unavoidable. But it's not something that Argentines or Americans should applaud.
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