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ROBERT SMITH, host: This is ALL THINGS CONSIDERED from NPR News. I'm Robert Smith in today for Guy Raz. We all know what happens if you stop paying your bills. First, you get the angry letters. Next thing you know, some gruff-sounding guy is calling you up while you're trying to watch "American Idol," where's my money? Eventually, there are lawsuits. Maybe they take the house, change the locks, repo the Chevy. In the end, you have no choice. You declare bankruptcy, and you start all over again.

That's how it works for a person up to his eyeballs in debt, but how does it work for an entire country? We hear about Greece getting ready to default on its loans, Ireland wracked with debt, Portugal and Italy straining under how much they owe. Our cover story today, what happens when a country can't pay its bills? It turns out someone will try to repossess your battleships, seriously.

(SOUNDBITE OF MUSIC)

SMITH: The first thing you have to know is that lending money to a country is like giving a teenager a credit card. Economist Ken Rogoff from Harvard looked back through history. It's not unusual for countries to become deadbeats.

KEN ROGOFF: That's happened hundreds of times. And a lot of countries have gone bankrupt, and they don't even know it. It's not even in their history books. Most countries have gone bankrupt at least a couple of times. Many have gone bankrupt a half dozen times or more.

SMITH: Then why do people keep lending to them?

ROGOFF: Well, they don't go bankrupt very often, so think of it as how often Halley's Comet comes around for many countries. It's also important to bear in mind that usually, when a country defaults, it pays something because it doesn't go out of business and the creditors can just hang in there, the debts are still out there. Eventually, the country wants to reengage international markets. So very often, when a country defaults, it's paying 70 cents on the dollar, 60 cents on the dollar. When companies default in the United States, it's usually less than 10 cents on the dollar.

SMITH: If you had to sit a country down in a chair and have a serious conversation and say: Listen. This is how you default. What would you say?

ROGOFF: Well, that's not an easy question. There are all different ways to do it. You can just tell your lenders to go to the devil the way Russia did after the communists overthrew the Czar. And there are other cases where the finance minister picks up the phone and says: Look. I just don't have the money. I wish I did. I'd give it to you. That's actually a lot more typical where they're not doing it out of some ideological reason, but they've just run out of options.

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

SMITH: That's economist Ken Rogoff. So every country with mountains of debt, every Greece out there, faces a stark choice: do you want to do this nice and easy or nice and rough? The rough option is to tell your creditors to get lost. And while that's tempting for a poor country, I want to tell you a scary story about what happens when they do that.

It's a story about a country whose bankruptcy was so spectacular, so gutsy, that to this day, it is the nightmare scenario for lenders around the world: Argentina, 2001. The country was in massive debt, no jobs, runs on the banks, riots in the streets. Author Paul Blustein takes us back to Buenos Aires.

PAUL BLUSTEIN: Two weeks at the end of 2001 and the beginning of 2002, where they had five presidents because there was so much rioting in the streets going on and so much upheaval, the third of those five presidents was a man named Adolfo Rodriguez Saa, and he got up in the hall of congress and declared a suspension of payment on the government's debt. And all the deputies were standing up and cheering him on, chanting, Argentina, Argentina, like that.

And he declared, quote, "The gravest thing that has happened here is that priority has been given to foreign debt while the state has an internal obligation with its own people." And you can just sort of hear the thunderous chanting going on in the background, Argentina, Argentina. This was really a cathartic moment in the country's history.

SMITH: But it was just a moment. Things were about to get worse. Blustein tells the whole story in his book "And The Money Kept Rolling In (And Out.)" Argentina had been in trouble long before defaulting. See, it had pegged its currency to the United States. That means that Argentina declared that one peso equals one dollar no matter what. The problem was that little Argentina couldn't keep up with the economy of the United States.

It was like a skateboarder gripping onto the rear bumper of a Camaro. By the end of 2001, Argentina couldn't hold on anymore. It was like that skateboarder letting go at 60 miles an hour. The country crashed. The rioting got worse. The banks closed so the people wouldn't take all the money out of the country. Pastor Eduardo Fabian Arias was living in Argentina during that time. He told us a story of his aunt, a schoolteacher, had worked and saved for 47 years, and when she heard about the banks, she and everyone else in town rushed over.

EDUARDO FABIAN ARIAS: She went to the bank. And for the first week, the bank was closed, and people respond, nothing, because the bank was absolutely closed.

SMITH: And we're not just talking about a locked door. The banks boarded up the windows. They put a fence around to keep the mobs of people away.

ARIAS: And when the bank was opened, they say, "I'm sorry, but we don't know when you will receive your money," and she was very, very upset.

SMITH: Her life savings were gone.

ARIAS: Ninety-seven, $98,000, they put it in the bank, and in one moment, she no have nothing.

SMITH: This is 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. And remember, there is another side to this nightmare in Argentina. Investors had lent this country billions of dollars, and the president said, sorry, not going to happen. So did the creditors get their money back?

ROBERT SHAPIRO: The fundamental problem is there is no international law for bankruptcy.

SMITH: That's Robert Shapiro, who was in the Clinton administration. But now, he represents all those people who lost money lending to Argentina. And guess what? They're not going away.

SHAPIRO: It's got a lot of people banging on its door.

SMITH: And those people have a scary-sounding name: America Taskforce Argentina. Shapiro is the co-chair. So here's the issue. Argentina didn't totally walk away from its debt. A few years later, it offered to pay back about a third of what it owed. Half the creditors said: Okay. At least it's something. But the other half said no way. And remember how I was joking about bill collectors and repo men? That's actually what happens when a country defaults. Around the world, Argentina still owes around $16 billion if you include the interest. That's quite the motivation for the lenders.

SHAPIRO: They hired lawyers, and they went to court.

SMITH: But where would you go to court? You can't go to court in Argentina. They'd throw it out.

SHAPIRO: No. You go to court in the country where the bonds were actually floated.

SMITH: Which was?

SHAPIRO: The United States, mainly.

SMITH: So they go to court in the United States.

SHAPIRO: Yes.

SMITH: And does Argentina show up?

SHAPIRO: Oh, yes. Argentina showed up. And Argentina has lost about 104 cases.

SMITH: So you sue and you win.

SHAPIRO: You win.

SMITH: What do you do then?

SHAPIRO: So the problem now is, yes, she's lost, and she refuses to pay. And it's very hard to get a sovereign government to pay.

SMITH: So this is where the muscle comes in. In the old days, countries would go to war when one government stiffed someone else over loans. But these days, the fighting is on the field of international finance.

SHAPIRO: You could seize financial holdings, but those holdings, like those reserves, have all been moved or largely been moved to the Bank of International Settlements in Switzerland where they enjoy the immunity that Switzerland gives to all banks.

(SOUNDBITE OF LAUGHTER)

SMITH: So the lenders actually tried to find the money out there. They tried to...

SHAPIRO: Oh, yes. They've been trying to find the money for years now.

SMITH: If they can find an Argentinean bank account somewhere, they can legally take it.

SHAPIRO: Correct.

SMITH: But they have to find it first.

SHAPIRO: Correct.

(SOUNDBITE OF LAUGHTER)

SHAPIRO: And that means that Argentina is effectively barred from raising money in international credit markets because anything that they raise could be seized. That's the sanction.

SMITH: Now, these guys have to own some land in New York City or something. They have embassies.

SHAPIRO: Yeah. It's - that's immune from...

SMITH: Oh, you looked into it, huh?

SHAPIRO: Well, I haven't, but other people have.

SMITH: People have been very creative trying to find something Argentinean they can take, huh?

SHAPIRO: Yes. Absolutely.

SMITH: If a country chooses to default, then they have to be careful about everything. Lenders may try to go after airplanes that are owned by the national airlines, or they may try to detain warships that dock in a foreign port. And Robert Shapiro says it goes without saying that nobody, no one, will lend you money for a long, long time.

SHAPIRO: You cannot escape the basic rules of the international capital markets. You cannot abrogate them and think that you will pay no price. And, you know, over time, there isn't any doubt that the price that Argentina has paid is much greater than any benefit.

SMITH: Now, Robert Shapiro is speaking for the folks that lost money, but here's the crazy thing. Yeah, it's been difficult for Argentina, but a lot of people think that the default was the best thing to happen to them. After the banks opened up and the money was devalued, Argentinean products suddenly seemed cheap on the world market. Soybean and wheat exports went up, the money started to pour back into Argentina. But this time, it wasn't loans. It was profits.

Paul Blustein, who wrote the book on the default, says that in the end, the default wasn't the problem, it was the way Argentina did it suddenly, catastrophically. That's the lesson for a world on the brink of another spectacular collapse.

BLUSTEIN: 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 in an orderly way. Get the creditors to sit down and accept that they're just not going to get all their money back, and in the long run, it will be better. It often is much better for the country than if they had just tried to struggle on and pay debts that are just too great a burden for the economy to bear.

SMITH: And this is what they're thinking about in Europe right now as they raise bailout money for Greece, as they try to come up with a deal to reduce its debts. What they're hearing in their head is, Argentina, Argentina.

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