Gregory Makoff
Topic: Argentina Won’t Pay
Bio: Senior fellow at the Centre for International Governance Innovation and an expert on sovereign debt management
Readings: Default: The Landmark Court Battle over Argentina’s $100 Billion Debt Restructuring is here
If you’d like to share your thoughts on this episode, consider sending a message to @larrybernstein on Substack.
Transcript:
Larry Bernstein:
Welcome to What Happens Next. My name is Larry Bernstein. What Happens Next is a podcast which covers economics, politics, and medicine.
Today’s topic is Argentina Won’t Pay!
Our speaker is Greg Makoff who has a new book entitled Default: The Landmark Court Battle over Argentina’s $100 Billion Debt Restructuring.
Emerging market countries are issuing billions of new bonds every day, and some of these countries will not pay. I want to learn about what happened to Argentina to figure out what the appropriate public policy responses should be for the IMF and the Federal courts to allow investors to restructure these debts.
I first met Greg when we worked together at Salomon Brothers in 1993, and Greg will provide you insight to complex public policy problems on what to do when there is no bankruptcy solution for a sovereign.
Buckle up!
Greg Makoff:
Argentina was an IMF success story until it was not. Unwilling and unable to pay, Argentina defaulted on $100 billion of bonds in December 2001. Then Argentina faced a fundamental problem: Countries cannot file for bankruptcies.
Individuals can file for personal bankruptcy. Troubled companies file for protection from creditors under Chapter 11 of the bankruptcy code. But there is no legal mechanism to guide the restructuring of sovereign debt under US law.
But developing countries, like Argentina, have borrowed nearly $1 trillion dollars in bonds under the laws of the State of New York. This subjects them – including Argentina after 2001—to suit and collection efforts under NY. law.
Why do countries do this? To save money: In the 1990s Argentina could borrow at 9 percent under New York law but at 12 percent under Argentine law. So, the country chose to reduce interest expense at the risk of a mess in court later.
And when Argentina defaulted on $100 billion of bonds 2001 it paid the price; it was hit by an unprecedented wave of litigation.
But Argentina was special. Countries had defaulted on the debt before but not been sued. They avoided lawsuits because most countries carried out consensual debt restructuring deals with their creditors and with the support of the IMF and the US Treasury. Argentina didn’t; instead of getting along after its default, all the parties got into a fight. Argentina fought with the IMF over the failure of its program of the 1990s. Then Argentina and its creditors fought over the terms of its deal. And then Argentina sold its deal on threats.
Argentina told creditors take 34 cents on the dollar or we will never pay you a penny. Most creditors took this deal. But about 25 percent rejected Argentina’s deal and sued in NY--as was their legal right.
While Argentina got some sympathy from the judge at first. He slowed down the litigation for a few years as the country tried to restructure its debt. But the judge got mad after ten years when Argentina kept saying in court again and again take our 34 cents on the dollar deal or get nothing. Argentina was totally inflexible.
This made the Judge Thomas P. Griesa nuts because Argentina outright refused to pay all of judgments that he had granted. And when the country recovered and had plenty of money in the bank, he repeatedly asked Argentina for help ending the lawsuits.
After 2010, Judge Griesa was at wits end. Argentina had $50 billion in the bank. He asked Argentina one last time to help him find an end to the litigation, but the country said, “My way or the highway”.
Infuriated, Judge Griesa imposed an extraordinary blockade on the country’s finances until it paid the remaining holdouts in full and with interest.
It took Argentina 15 years to resolves its default. Most countries take one or two. Hardball tactics and the lack of a sovereign bankruptcy law are to blame.
But the bond market was not happy with the outcome. 92 percent of creditors took a big loss and 8 percent made a great profit. And the emerging markets creditors demanded that this never happen again.
Going forward, the sovereign bonds included covenants that will force all the creditors to take the same deal. To do that, bonds now allow a vote so that if 75% of a country’s creditors take a deal all 100 percent are forced to take it. This huge change in practice came directly from the Argentina litigation chaos.
These collective action clauses in bonds issued today are intending to replicate what a formal bankruptcy process does for corporate bonds by dealing with a dispersed market of bondholders: It allows for a vote of creditors that binds all creditors to the same deal. Adopting these Collective Action Clauses was a sea change, and the world has Argentina’s messy debt restructuring to thank.
Larry Bernstein:
Argentina is a serial defaulter. It defaulted in the 19th century. The most recent default was in the 80s. Citibank, Bank America, and all the other major American banks lent money to Argentina, and they defaulted and did not end up in the courts. Instead it was a negotiation between the banks and Argentina, and they came up with a Brady Plan.
In the mid-1990s, I worked at Salomon Brothers with Greg and my job for a couple of years was to co-head the emerging markets proprietary trading department. One of the assets that I was long were these Argentina bonds. Tell us about the historical process of going from bank loans to this new approach. And what was novel was the use of the capital markets to distribute debt obligations of emerging market countries. It would be widely held, and this would make it difficult to restructure when there was an unwillingness and inability to pay.
Greg Makoff:
You hit on the central driver of why this all happened, a change in the sovereign debt market from a loan to a bond format. Sovereign bonds are great for developing countries. Sovereign loans depended on a handful of big banks like Citibank, JP Morgan, Lloyd's Bank and Bank of Tokyo lending money for a government. In the nineties, the market exploded. Tens of thousands of buyers, all types of investors from hedge funds, insurance companies, asset managers. Sovereigns could now borrow going to investment banks in New York or London and issuing quickly in large amounts at low cost. It is a great market for the development of the world, but when it comes to restructuring, it is a lot harder to restructure a bond versus a loan.
Argentina's default was the test case that proved how hard it was, and it is a collective action problem. If you have 16 banks who have lent to a country, it is easy to get around the table and have a common interest and enough peer pressure that everybody agrees to the same deal. There were some legal features of the contracts that made it hard not to take the same deal, but when it came to bonds later, Argentina's default with hundreds of thousands of holders, it was impossible to get everybody around the table. There was no incentive for any individual hedge fund to take a loss. They could say let everybody else take the loss and I will get paid in full. And so, this debt market had a problem, which ended up being that any individual investor could opt to hold out and sue and not what was best for the community as whole. And there was no coercive binding mechanism to force them into the same deal. And that was the fundamental issue that came to the fore in the Argentina litigation.
Larry Bernstein:
I want to go over the Argentina situation after the default. Most of the bond holders took a deal where they only got 34 cents on the dollar. They did not get paid in cash; they got paid in new bonds that had a principal amount of only 34 cents on the dollar that they had previously. The other investors went to court and said, I did not get paid give me a judgment of the amount owed to me.
A Federal Judge in New York said you have a judgment, good luck collecting it. Under New York law you can get certain attachments. If for example, Argentina had a hundred dollars in a New York bank, you can take it. If Argentina has an embassy that they own on Park Avenue under US Federal law, you are not allowed to make an attachment on an embassy. If an Argentine warship were to show up in New York Harbor, you could not get an attachment because active military service is no good.
Greg Makoff:
It was not just hedge funds. Small plaintiffs tried attachments. Most of the efforts failed because even in the example you have of some money in a bank in New York, it still has to be proven that it was being used for a governmental activity, not a commercial activity. Proving something is being used for a commercial activity is tough. One of the plaintiffs tried to go after satellite parts, but the satellite's going to be used by a ministry for environmental reasons. Is that a governmental purpose or is that a commercial purpose? And more often ended up being judged to be a governmental purpose and only in two small cases did the plaintiffs manage to attach something.
Argentina made a mistake. They were going to buy some electronic microscopes for research, but buying microscopes is something anyone can do that is a commercial activity. They got the money from the Inter-American Development Bank and had that deposited in a bank in New York, which the creditors found and took. But cash flows from the Inter-American Development Bank and international organizations are immune under the law. If they had just had the Inter-American Development Bank pay the microscope provider, then Argentina never would have been attached. They just made the mistake of leaving it in a bank account where could be found. And so 19 out of 20 times attachment efforts failed. Only the smartest plaintiff with an incredible amount of research sending discovery paperwork to 3000 banks in New York could they find a couple million dollars. Most plaintiffs found nothing.
Let's use the Tango One example. Tango One is the presidential airplane of Argentina. It was coming into California for engine service. One of the small plaintiffs with two Italian retail investor clients sued and got judgments filed through their one-person law firm to attach the airplane when it landed. And that lawyer got a temporary attachment on the airplane. Argentina had millions of dollars of cash on the airplane to pay for fuel because they were afraid of putting money in bank accounts. They tell this to the court but Argentina gets wind of this, and the airplane flies off and never lands.
Larry Bernstein:
In 1996 when I was trading emerging markets for Salomon Brothers. I was responsible for the Argentina book. Argentina defaulted was the expected case. I went to my boss, the head of Global Arbitrage at Salomon Brothers, and I said, we own these debt claims and they are not going to pay, and we are going to have to litigate. Are you comfortable with that? And he said, “No, Salomon Brothers is not going to sue Argentina. Salomon Brothers is an investment bank and Argentina is our client. We don't sue our clients.: I said, What are we going to do?” He said, you are going to have to sell the bonds.
In our capital markets there are different investors. There are institutions and individuals like the Italians who buy these bonds but lack the sophistication or willingness to fight. That is somebody else's job. And in this case, Elliot is a type of firm that will fight and Salomon Brothers is unwilling to fight. But in a capital market, it does not matter as long as there's competitive markets for fighters and non-fighters. The fighter Elliot only paid 10 cents on the dollar to buy these claims, they are vultures. What do you think of the holdouts being ostracized as vultures for stepping up to acquire assets from those institutions that are unwilling to put up the fight?
Greg Makoff:
I do not use the word vulture myself and the characters in the book throw nasty words at each other, and there's vulture versus deadbeat going on all the way through the book.
I come from the markets I worked for 21 years at Salomon, I met you in my first year. And so I don't really account in the book for purchases below par because if Elliot bought a bond of 10 cents, another creditor took a 90 cent loss. But the vulture haters will always say, not that they got far, but they made 10 times their money.
Larry Bernstein:
There are multiple audiences involved in this struggle. Argentina was trying to persuade the local population that it was on the moral high ground that they had to fight these vultures from attaching their assets. And the audience was not a New York Federal judge who was going to say, what kind of nonsense is this hyperbolic language? The holdouts did not seem to care that they were called vultures.
Greg Makoff:
I had an Argentine fact checker reading the book, she said, “this is not what they told us what happened.” And when I get asked by Argentine reporters, they all say, why was this being judged against us? And then the other question is, why is the IMF so mean? And when you go through the story of how long the litigation went and how Argentina was uncooperative, and the court kept saying, Argentina, can you take another deal? And Argentina was my way or the highway repeatedly. The Second Circuit even wrote a letter saying can we settle in between? And Argentina said “No.” And the court saying, “Argentina, you're a uniquely recalcitrant debtor.” There is a whole narrative that most Argentines have never heard, and the story in my book is new.
Larry Bernstein:
Argentina was the superstar in the 1990s. They announced that they would work with the IMF to follow their game plan. Their finance manager Cavallo set up a peso that was one-to-one with a dollar. They agreed with the IMF to control their budget deficits, to sell off government industries to the public markets. And in exchange the IMF willfully lent them billions and billions of dollars. And as usual for Argentina, things did not go well. They could not hold their convertibility and couldn't pay back their debts. And they went to the IMF, hat in hand, and said, “we need more money.” And at some point, the IMF said, “no mas.” And that set off a dispute that lasted for 20 years between Argentina and the IMF. Tell us about that breakdown and what had been a wonderful relationship.
Greg Makoff:
Well, the story of its default becomes a divorce story between Argentina and the IMF. There are so many feelings going both ways when the default happens, the immediate trigger around 8th of December 2001, no more money. And immediately the banks are closing. IMF pulls the plug, the country fails, but the IMF rightfully says the system is completely unsustainable. There is too much debt. The currency peg does not work. There needs to be a major adjustment. But then the finger pointing starts where the new government in Argentina said, “you gave us bad advice in the nineties.” And the IMF said, “You lied to us, and you didn't meet all the commitments you made to us.” And the Bush administration wants to take a tough line and make an example of Argentina when the country is in the deepest of crisis, a year of finger pointing over whose fault it was, and a refusal to give Argentina a couple of billion to ease the pain.
2002 was ugly. Argentina to make a point defaulted on the World Bank, which you are never supposed to do. Then they have an election and then they make peace, but then a big war breaks out over the debt restructuring. And after the deal mostly succeeds, Nestor Kirchner fires his finance minister who led the restructuring and the stabilization of the economy, and he repays the IMF the last $9 billion it owed. Brazil repaid the same month. It was Lula and Kirchner saying, goodbye IMF. We know how to run our economies. And it was a complete divorce.
Larry Bernstein:
Oftentimes the IMF would, as part of its lending program, recommend belt tightening. Government employees cannot retire at 45 anymore. They got to retire at 65. They cannot receive pensions of a hundred percent of salary. They can get 40% of salary. You must sell off businesses that are losing money. And the result of those sales will be people being fired from state-owned companies. And the people of Argentina did not like the plans that the IMF gave. They were viewed as mean-spirited giving us bad advice. And this divorce reflected more like a drug addicted child. A parent is a better metaphor than a husband and wife. It is the drug addicted child does not work very hard and wants to smoke weed. And the parents saying, if you want more money to pay your rent, here are the steps necessary for you to get the additional coin.
Greg Makoff:
In our politicized world, a lot of public policy issues are more about the words and the spin than the reality. The reality is countries only go to the IMF if they are fiscally awful. They uniformly must tighten their belts. Raise taxes that comes with the territory of calling the IMF for help. But in Argentina, they have pictures of the globe with Uncle Sam and the IMF sawing off South America. Even today you have this leftist critique of IMF austerity hurts countries.
This is a critique I do not like and is damaging because you have countries like Zambia who had a fallen copper prices should have called the IMF in in the mid-2010s and instead does a bond and another bond and then defaults. There is an incredible reluctance to go to the IMF, which gives money, gives technical support, and helps countries deal with the political economy of pushing back on the vested interests who are milking the government for jobs or payouts or retirements that are completely unsustainable.
In a lot of the developing world, the IMF has an unwarranted image problem. It is the worst in Argentina. When you come to fix a friend or a business in complete crisis, there are always problems. And what is interesting now is the country is no longer blaming foreigners. Mileil is saying, we have to reform ourselves. We are not going to point the finger at other people. We are going to balance our own budget. And it is an open question whether the people will go through with his complete change in strategy and mindset versus the IMF is bad, and we want to blame foreigners.
Larry Bernstein
The IMF was set up after World War II to handle currency adjustments. And like many governmental organizations, its purpose shifted over time. Beginning in the late 1980s, it got into the business of lending money to countries. It would gather financial information about the country so that the creditors knew how the sovereign was doing. Second, there would be a team of professional economists, often US trained, but of a foreign nationality, not Americans, who would visit periodically and suggest ways to rectify the financial problems of the country: austerity, appropriate fiscal policy, pension schemes, et cetera. And then third, originally it was supposed to be only in a pinch. If there was a failure in the capital markets, they would lend money. They would be paid back first. In other words, that would be a priority or ranking of governmental indebtedness. It was not documented, but with the wink or nod, the understanding of the IMF be paid first.
Now, where would all this money come from? Who was lending the money to Argentina? It turned out that all the great nations of the world would participate in this IMF. The United States had like 17%. Japan was a big player. But what was interesting was you mentioned the Bush administration and Treasury, but they were trying their best not to play politics. US saying, I am not going to lend you the money. If you want money, you got to go to the IMF and the IMF is the world. The person who showed up in Argentina might be Dutch or from Indonesia, and they would be trained University of Chicago economists. And they would say, we have an action plan. You got to clean up your act. And then they would say we will do some, and then they say, if you do some, we will give you X. And if you do lot more, we will give you Y. And if you don't do Jack, we're going to leave you nothing. I would go to the IMF usually once or twice a year at these IMF meetings. And the IMF relationship got so bad that the person who represented Argentina from the IMF had not been to Argentina ever, and there was a complete breakdown in relations.
Fundamentally it comes down to Argentina's belligerence. They refused to deal with the IMF. They refused to deal with the New York judge. And it was a strategy that hurt them in the long run.
Greg Makoff:
There were a lot of mistakes made that led to this big dispute over Argentina's 2005 deal. The Wall Street and the IMF’s version is it is all Argentina's fault. And when I got into the weeds of it, there were some pretty big mistakes made in Washington, the U.S. Treasury, and the IMF. The IMF got into the business of sovereign debt lending and restructuring. Their core mission now is helping sovereigns restructure their foreign and domestic debt. But 2001, at the time of Argentina's default, the IMF had not decided exactly the scope of the fund's role.
Anne Krueger, the Deputy Managing Director of the IMF, proposed a sovereign debt court called SDRM. John Taylor at Treasury said, let's put voting clauses in bonds so that we put holdouts out of business by the majority of creditors voting to accept a deal sweeping in the malcontents. If you get to 75%, you are at a hundred percent, no holdout litigation.
Larry Bernstein:
That is a common concept in corporate bonds as well, that you can compel all creditors if you get to a super majority to agree to a material covenant change.
Greg Makoff:
UK Bonds always had it. And a brilliant jurist in the UK wrote in like 1865, corporate bonds need to have these voting clauses or will suffer from the tyranny of the minority. But while they are fighting about the deal mechanism, the Treasury and IMF are fighting over the actual role of the IMF in negotiating the deal terms. Is the haircut 30%, 50%? Is it 64%? The U.S. Treasury got the idea, not only do you have these clauses, but let the market negotiate with the country and the IMF stop dictating the terms that's mission creep too far for us. And that did not work out well because Argentina said, I would like to settle this with a $100 billion default paying $25 billion of new bonds with a lower coupon and longer maturity. And the creditors said, I want $75 billion.
And Treasury would not let the IMF mediate. And neither side moved. And that's why Argentina sold it on threats. And it is in the context of that huge difference. Argentina believed IMF procedurally was siding with the creditors. They divorced the IMF over the dispute over the bonds. There is a big entanglement between the evolving role of the IMF and this particular debt restructuring.
Larry Bernstein:
The United States has $30 trillion plus of debt and all its debt claims are under US law. And the implication is that at any time Congress could pass a law that says that you have a claim for a hundred dollars, but guess what? It's $50. And so many sovereigns, including Argentina and Greece for example, have debt under Argentine and Greek law. And when Argentina and Greece defaulted, they simply passed a law that said either they get nothing or something trivial like 10 cents on the dollar and it is over and there's no court to adjudicate it, it's over. Argentina could have chosen to have Argentine law bonds at the time.
In 1997, when I was trading Argentine bonds, I will make some numbers up, it's possible that the local bonds under Argentine law would yield 12% and the New York law bonds would yield 9%. I would ask myself the question, if there is a default, will they selectively default only on the local bonds and not on the New York law bonds or will they default on both? And I will get 10 cents on the local bonds and 35 cents on the New York bonds because the New York judge would be tougher. And then is that incremental yield of 3%, 9% versus 12% make it so that I should own one or the other. And I had a little model and I made certain predictions. Argentina always had the chance to run its restructuring itself, but it said, I don't want to pay those extra 300 basis points. I want to live under the gavel of that New York judge and pay less interest. And then when they got into that condition, they were outraged that there was a man with a gavel who spoke English who is dictating terms.
Greg Makoff:
Exactly. That is the mystery of sovereign debt is foreign countries all around the world are borrowing under our law in New York. And when they do not pay, they are down in South America the judge can't do anything about it, that led to the frustration. The judge can make all the orders he wants, and the president can thumb his nose and say, we do not feel like doing what you say. And he says, you agreed to the jurisdiction of my court. And the president says, so what? And that happened here.
Larry Bernstein:
Over the years, the Federal judge becomes frustrated. He has a job to do. It is super complicated. There are tons of decisions he must make. He is becoming frail, he is tired, he's angry. And what judges do is there is the law, and they are finding a fair and just settlement is his task. We have a sovereign nation, and we have hedge funds who bought these defaulted claims? Come on guys, why are you bothering me? Figure this thing out. And the hedge funds show up with these attachments but cannot get any money. And the judge is asking, Argentina, what are you going to do here? We are not paying these guys. I told you to pay them something. I am not going to do it. And he gets mad. And the story changes when Elliott's attorneys and Jay Newman who represented Elliot come up with this pari-passu clause as the knife to cause a change in this case.
Can you start at the beginning? My audience has no idea what the pari-passu clause is and how it came to be the critical part of the story.
Greg Makoff:
Let me start with the injunction to force Argentina to pay. It is an enforcement mechanism, a legal widget. And Argentina has settled with 92% of its creditors at a deep discount. It has not paid a penny for over a decade to the other 8%. And it says in public, we will never pay them a penny. Maybe we will let them have the same deal as the others, but if they do not capitulate to my demands, they won't get a penny. The idea of the injunction is for Judge Griesa to make an order forbidding Argentina to pay the 92% unless it pays the 8% in full. And the reason in the genius of it is that the president cannot thumb her nose at this order because all of Argentina's payments passed through New York financial institutions.
If the Federal judge imposes an order, a New York institution will not take actions contrary to that order. And the companion argument made by former solicitor General Theodore Olson is Argentina has the money and will pay. Argentina's reserves have grown to $50 billion. This injunction is on behalf of a small number of cases owed a couple of billion dollars. He said, they can pay. It was a way out of the mess. But so how does that connect to this clause? A judge can't just impose a remedy to force a country to pay out of the blue. It has to be connected to something. And Argentina's bonds, like most sovereign debt included a clause saying you have to treat your debt equally. These clauses are written differently. Argentina's was particularly badly drafted, and Argentina's lawyers held it up in court and it said, this clause means you have to pay creditors equally.
Whereas other lawyers said it means you rank creditors equally. You cannot for over 10 years refuse to pay a penny to these 8% while you're making every payment on the 92% who took the offers in 2005. That is unequal treatment. And you need to impose the injunction to remedy it. And it's a repeating harm, every interest payment date. I am being harmed again because what Argentina's lawyers say their remedy is to attach. And the judge and the plaintiff say, well, that doesn't work because of sovereign immunity and the harm is going to repeat. You're going to stop this harm from occurring again is very powerful. And the judge gets convinced to impose it. And the Second Circuit agrees.
Larry Bernstein:
I want to review these points as this was the critical legal argument in this Argentina case. An angry Federal judge has been handling thousands of cases for hundreds of thousands of plaintiffs. There is no bankruptcy court to manage this process because sovereigns cannot go bankrupt. Each creditor must file a suit or find a way to sue collectively. If a creditor gets a judgment, then the first one to get an attachment gets it. It is chaos and Argentina was unwilling to seek an equitable solution. In desperation, the judge ruled in favor of the creditors based on an obscure provision in the bond covenant that says that all bond holders needed to be treated pari-passu which the judge interprets to mean that you cannot pay one group of bondholders and not pay another. And with that, the holdout bondholders were paid 100 cents on the dollar while those that exchanged their claims for new bonds received 34 cents.
Argentina was a test case, and it was a big loser for the creditors except for the few holdouts. In the future, the sovereigns can now use collective action clauses to minimize holdouts. What I expect will happen is that without the fear of holdouts to keep then honest, defaulting sovereigns will force greater write-downs in restructurings than otherwise. When creditors realize this, they will demand higher interest rates going forward.
Greg, in 2017 when you proposed a book idea to me, tell us about that conversation between the two of us, your idea of a book you wanted to write and why I encouraged you to write this one.
Greg Makoff:
I reached out to you to meet. I had had a fond memory from 1993 at Salomon Brothers of a funny situation involving a rubber lobster. I was talking to a hedge fund manager that you ran a book club. We met for tea in midtown Manhattan and you asked me what the book is about, which was going to be a bunch of chapters on different sovereign debt restructurings and an essay at the end and you told me it was boring and that I should instead write about people, write about something dramatic and interesting. And that conversation stuck with me.
And after talking to you, I realized why not write the whole book about Argentina, about the litigation and a court story would be more fun than a nerdy technical book on sovereign debt restructuring.
Larry Bernstein:
I want to tell you a personal story about the events arising around the Argentina default. I left a hedge fund job and decided that I would take my family and live in different countries. And in December 2001, I took my 1-year-old and my pregnant wife to live a month in Argentina. We took the overnight flight and arrived at seven o'clock in the morning and we met our driver at the airport. We had luggage up the wazoo and a pregnant wife and I had made business cards with the address for my apartment in Buenos Aires. I handed it to the driver. and I said, can you please take my family and my luggage to the apartment?
My wife said, no, I don't want to go to the apartment. I would like to go to the Hermes store at the Hotel Alvear in Buenos Aires. I said, honey, we can go to Hermes later. No, I want to catch the opening of the Hermes store. At 9:00 AM the doors opened, and we walked in. Julie asked for the manager. The manager came forward and said, how can I help you? And my wife said, I'd like a chocolate Birkin bag with silver handling please. He said there's a five year wait list for your bag. You can put your name on a wait list in Chicago or in Buenos Aires. It doesn't matter. In five years, you can have your bag. My wife said to the manager, my husband has informed me that a financial crisis is about to descend upon your country. Here's my card, I'll be in this country for a month. Call me when you have the bag. We walk out, I say to my wife, how'd you think that went? Perfectly as planned.
We unpacked. We vacationed for a few weeks and the president resigned, the vice president resigned, the speaker resigned and some other high official took over and then they closed the banks and the financial crisis began.
I had planned a day trip on the Tigre River to explore the country and the phone rang and my wife says, it's Hermes, they have the bag. I need $5,000. The banks are closed, our credit cards don't work. This is all the money we have. Give me the $5,000. She bought the bag and then we ran out pf cash and we had to go to Uruguay. What do you make of my wife's purchase of a chocolate Birkin bag with silver handling?
Greg Makoff:
It's a sad story. A country is reduced to complete lack of normalcy. When a country mismanages its finance, it wrecks every home, every business, every bank. And that's the cost of year after year not dealing with the country's fiscal issues. And it's not just Argentina, it's the whole world. It's us, it's China, it's Japan. Countries are kicking the can down the road, and it ends badly.
Argentina has had those Decembers 2001 again and again. They had them in the eighties, the nineties, and in 2001.
They're in a worse state today, inflation and disruption. Wise people like you can see the numbers and understand years ahead of time and consult with smart IMF people. It's basic math. When you spend more than you bring in, you eventually blow up.
Larry Bernstein:
I end each podcast with a note of optimism. Greg, what are you optimistic about?
Greg Makoff:
I'm optimistic about the future of Argentina. The country has gotten a bad rap. People talk about nine defaults in 200 years. I don’t care if they defaulted before 1929. Put away all that ancient history.
I met you in 93. The global bond market is opening. Everything’s looking good. There’s no more defaults. But out of this class, Argentina is the one that keeps falling into trouble. Columbia doesn’t have trouble, Chile doesn’t have trouble. Brazil is not defaulting. Mexico’s not defaulting. It's Argentina. The country has a lot of smart, educated people, it has great resources, and it is finally admitting with Mileil that the problem is overspending. They elected someone with a chainsaw. And while I might not be in favor as deep as cuts of the government as he is into the basic direction is correct, you overspend, you get inflation. That is his basic narrative.
He has told the people and they have accepted pain now gain later. Whereas most political systems in this world are party now, pay later, and he's turned it on its head. Anything could happen. I'm optimistic. There is a route out of this. I do not know the probabilities, but this is the first time in a long time there is a sign that the country has admitted it is different. It is troubled and the problem is its government. I wish the people good luck. They really have had enough. They voiced that displeasure, and they are working through a change in their social contract. And I hope it works. And for the moment I will bet on it.
Larry Bernstein:
Thanks, Greg, for joining us today.
If you missed our previous podcast the topic was Lessons Learned from COVID. Our speaker was Bethany McLean who is the author of the book The Big Fail: What the Pandemic Revealed About Who America Protects and Who It Leaves Behind. It is 4 years since the outbreak of COVID and we must learn from our mistakes, and how can we prepare for the next public health disaster? We covered virtue signaling and mask wearing, COVID boosters, closing the schools, lockdowns, and PPP. How and why did the public lose trust in the CDC and how can we improve transparency on the science to assist the public in evaluating medical uncertainty in real time?
I would like to make a plug for next week’s podcast. Our speaker will be Anne Curzan who is the Dean of Literature Science and Arts at the University of Michigan and the author of Says Who? A Kinder, Funner Usage Guide for Everyone Who Cares About Words.
I plan to discuss the evolution of language, the importance of the Microsoft Word Grammar Checker, the variation in dictionaries, and the ongoing acceptance of new rules of grammar.
You can find our previous episodes and transcripts on our website whathappensnextin6minutes.com. Please subscribe to our weekly emails and follow us on Apple Podcasts or Spotify.
Thank you for joining us today, good-bye.
Argentina Won’t Pay!