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Argentina is cautionary tale as U.S. debates debt limit

Creditors are trying to seize the property of Argentina, which defaulted on its bonds in 2001. Could the same thing happen to the U.S.?

January 15, 2013|Michael Hiltzik
  • The Argentine ship Libertad heads home after being stuck in Ghana for two months. In October, creditors attempted to seize the ship in order to collect on the country's debts.
The Argentine ship Libertad heads home after being stuck in Ghana for two… (Argentina President's…)

You know all those warnings about how America's addiction to deficit spending is going to make us look like Greece?

Stop worrying. The bigger concern should be that America will look like Argentina.

That could happen, theoretically, if the threatened refusal by Republicans in the House to raise the federal debt limit leads to a default on U.S. government bonds. How bad would it be, you ask?

Think about this: Because of lawsuits over Argentina's 2001 default on nearly $100 billion in sovereign debt, President Cristina Fernandez de Kirchner rents a private jet for state visits abroad. That's because she fears that her presidential plane (dubbed "Tango 01") would be seized by creditors the moment it landed at a foreign airport.

In October, the creditors came this close to grabbing an Argentine naval frigate, the Libertad, when it put in at port in Ghana with 220 crew aboard. Ghana detained the training vessel for about two months, until an international court ruled that, as a military asset, it was immune from seizure.

QUIZ: Test your knowledge about the debt limit

The creditors, which include Elliott Management, a hedge fund that also has been a big investor in Hollywood, have also taken steps to go after personal assets of Fernandez and members of her Cabinet. They've succeeded in freezing Argentine central bank assets in the U.S., and in 2009 even tried to attach a dozen Argentine dinosaur fossils on exhibit in Germany.

In short, it's a mess.

Now think of the United States in a similar situation. President Obama can't fly Air Force One to a summit meeting for fear that a bill collector will take the keys. The carrier Enterprise gets detained at Okinawa. The family car of a low-level consular official gets pulled over and impounded in Beijing. The Obamas' checking account gets attached by a hedge fund.

This may sound far-fetched, and the international debt experts I've consulted say it is far-fetched. But the U.S. government itself has said that some U.S. court rulings against Argentina — such as those allowing creditors to seize Argentine property here — could backfire against the U.S. The State Department and Treasury said in a brief last April that they're concerned that the rulings could encourage foreign courts to "issue like orders against the United States and its property abroad." That would undermine the principle of sovereign immunity that protects U.S. diplomatic personnel, embassies and military assets overseas.

Experts in international finance say a U.S. bond default, even if "technical" and even if it lasts a day, puts us in uncharted territory. After all, Argentina also thought all the existing consequences of its post-default settlement were far-fetched. Its settlement, which involved trading its defaulted bonds for new ones on which it has kept up payments, was drawn from the standard textbooks on Third World default settlements.

Owners of 93% of the defaulted bonds traded them in for the new issues at about 30 cents on the dollar, so the Argentines thought they were free and clear. They didn't reckon with the tenacity of the holdout "vulture funds" that now own the other 7% and have created the subsequent dolores de cabeza.

These days, headaches are almost a statutory feature of U.S. government debt, thanks to the game of brinkmanship being played by the House GOP over the federal debt limit.

It's proper to remember that the debt limit, which was enacted in 1917 to make the issuance of Treasury bonds easier, not more fraught, has nothing to do with how much money the government spends. Rather, it's about how to pay for programs that Congress (including Republicans) already has enacted, but for which it hasn't made sufficient provisions to fund via taxation. For Congress to set fiscal demands requiring borrowing and then to prohibit that borrowing as a tool of "fiscal responsibility" could make sense only to people still playing with their toes in the crib. But when your government is held hostage by infants, these things happen.

Technically speaking, the government has already breached the debt limit, but the U.S. Treasury's ability to move accounts around has staved off an actual breach for a few weeks or so. If Congress fails to act by then, the consequences for the U.S. economy and global financial markets could be dire. Interest rates could spike, the recession could return, the federal deficit could soar. That's just for starters.

"It's a pretty dangerous game to be playing," says Stephen J. Lubben, a debt expert at Seton Hall Law School in New Jersey. "So much of the financial system depends on U.S. government debt being risk-free that if you call that into question, there's a domino effect that could happen to all kinds of other assets."

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