When A Country Defaults, Who Comes Knocking?

Protesters in Argentina in 2001 wave national flags as they walk through tear gas and smoke from burning street fires set by demonstrators during the country's financial crisis. i i

Protesters in Argentina in 2001 wave national flags as they walk through tear gas and smoke from burning street fires set by demonstrators during the country's financial crisis.

Daniel Garcia/AFP/Getty Images hide caption

itoggle caption Daniel Garcia/AFP/Getty Images
Protesters in Argentina in 2001 wave national flags as they walk through tear gas and smoke from burning street fires set by demonstrators during the country's financial crisis.

Protesters in Argentina in 2001 wave national flags as they walk through tear gas and smoke from burning street fires set by demonstrators during the country's financial crisis.

Daniel Garcia/AFP/Getty Images

We all know what happens when individuals stop paying their bills: angry letters, pestering phone calls and possibly getting property repossessed. In the end, you might declare bankruptcy and start again. That's how it works for a person up to his eyeballs in debt, but how does it work for an entire country?

Harvard economist Ken Rogoff says that it's not unusual for countries to go into default. In fact, he says it's happened hundreds of times.

"A lot of countries have gone bankrupt and they don't even know it; it's not even in their history books," Rogoff told weekends on All Things Considered host Robert Smith. "Most countries have gone bankrupt at least a couple of times."

The reason lenders continue to do business with a country is that, unlike businesses or individuals, a country can't go out of business and continues to pay at least something to its creditors, Rogoff says.

He says there are many ways a country deals with a sovereign default, but most often its finance minister simply declares it does not have the money to pay back lenders.

"There isn't unfortunately a pretty way to do it. It is a big event when a country defaults on it foreign lenders," Rogoff says. "That said there are times when there's just not a better direction to turn."

The Argentina Financial Crisis

But what happens when a country chooses not to pay its debt and essentially tells its creditors to get lost? That's what Argentina did in 2001, when the country was in massive debt, there were no jobs and rioters had taken to the streets. What happened there is the nightmare scenario for lenders around the world.

Argentina's troubles began long before defaulting, as Paul Blustein recounts in his book, And the Money Kept Rolling In (and Out): Wall Street, the IMF, and the Bankrupting of Argentina.

It had tied its currency to the U.S., declaring that 1 peso equaled 1 U.S. dollar. But as the U.S. economy grew, there was no way Argentina could keep up, Blusteinsays. Policymakers couldn't devalue the peso, print more money or even increase government spending for fear investors would think they were running up excessive debt.

"They were just completely paralyzed from being able to do anything," Blustein says.

President Adolfo Rodríguez Saá eventually declared a suspension of payment of the country's debt, and said they would instead focus on "the state's internal obligation with its own people." After that declaration, no one would lend to Argentina; once it untied its currency from the U.S. dollar, because many were fleeing the banking system, the peso collapsed.

Labor union leaders take part in a protest with a giant banner reading "Basta" ("Enough") before the presidential palace in Buenos Aires in 2001. At the time, the country was mired in a three-year recession and facing default on its $128 billion public debt. i i

Labor union leaders take part in a protest with a giant banner reading "Basta" ("Enough") before the presidential palace in Buenos Aires in 2001. At the time, the country was mired in a three-year recession and facing default on its $128 billion public debt.

Daniel Garcia/AFP/Getty Images hide caption

itoggle caption Daniel Garcia/AFP/Getty Images
Labor union leaders take part in a protest with a giant banner reading "Basta" ("Enough") before the presidential palace in Buenos Aires in 2001. At the time, the country was mired in a three-year recession and facing default on its $128 billion public debt.

Labor union leaders take part in a protest with a giant banner reading "Basta" ("Enough") before the presidential palace in Buenos Aires in 2001. At the time, the country was mired in a three-year recession and facing default on its $128 billion public debt.

Daniel Garcia/AFP/Getty Images

"If you're an Argentine worker and you're earning money in pesos but have to pay back your mortgage in (U.S.) dollars, you're facing a rather difficult situation," Blustein says.

The country crashed, the rioting got worse, and the banks closed to prevent capital flight. People who had hundreds of thousands of dollars in the nation's banks suddenly found they had nothing.

What About The Creditors?

What happened in Argentina is part of the fear about what is happening in Europe today; that if Greece or another country defaults, there will be riots in the streets and runs on the banks. But there is another side to the nightmare in Argentina. How do creditors get their money back?

"The fundamental problem is that there is no international law for bankruptcy," says Robert Shapiro, formerly of the Clinton administration. But now, as co-chair of America Task Force Argentina, he represents all those who lost money lending to the country. And, he says, they aren't going away.

The issue is that Argentina didn't totally walk away form its debt. A few years later, it offered to pay back about a third of what it owed. Half the creditors agreed; the other half refused. Argentina still owes around $16 billion with interest, quite the motivation for the lenders.

"They hired lawyers and they went to court," Shapiro says.

Other Countries That Have Defaulted

Russia, August 1998 - A massive $72 billion default that rattled the entire global economy. The trouble started in August '98 when the country missed payments on local treasury obligations, and later its foreign currency obligations and foreign currency bonds. Russia's debts were eventually restructured in later years

Uruguay, May 2003 - Argentina's troubles spread to Uruguay, where the government defaulted on $5.7 billion worth of debt in May 2003. The country eventually completed a restructuring of its debt obligations with bondholders

Dominican Republic, April 2005 - Defaulted on $1.62 billion worth of debt in April 2005. Eventually completed a debt restructuring that ended up extending the maturity of its debt obligations by five years

Ecuador, December 2008 - Defaulted on $3.2 billion worth of debt obligations after calling several of its previous debt offerings "illegal and illegitimate." An unusual situation in that Ecuador is thought to have the resources not to default, but chose instead to default for "moral" reasons

Argentina has lost about 104 cases, Shapiro says, but the problem is it still refuses to pay.

"It's very hard to get a sovereign country to pay," he says.

But nations in default have to be careful because any new money they raise could be seized, Shapiro says. Lenders may also try to go after airplanes that are owned by the national airlines, or try to detain warships that dock in a foreign port. And, Shapiro says, it goes without saying that no one will lend you money for a long time.

"You cannot escape the basic rules of international capital markets," he says. "Over time, there's isn't any doubt the price Argentina has paid is much greater than any benefit."

Argentina Today

Although it has been difficult in Argentina, many people think the default was the best thing to happen.

After the banks opened up and the peso was devalued, Argentine products suddenly seemed cheap on the world market. Soybeans and wheat exports rose. The money started to pour back into Argentina.

Blustein says, in the end, the default wasn't the problem. It was the sudden and catastrophic way Argentina did it. That's the lesson for a world on the brink of another spectacular collapse.

"What the international community needs to recognize about these cases is that, if the country really can't pay it back it's much better to do it an orderly way [with] creditors," Blustein says. "In the long run it will be better for the country than if they had tried to struggle on and pay debts that were too great a burden for the economy to bear."

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