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The Club de Paris isn’t a chic night spot on the Left Bank. It’s an informal organization of 19 wealthy governments that have lent money to other governments and are trying to get it back.
Headquartered in a monstrosity of a building on the unfashionable rue de Bercy, for more than a decade the Paris Club has been tackling one of the thorniest problems in its history: recovering $9.7 billion in defaulted debt owed by Argentina. On Thursday, after a series of negotiations with Argentine officials, the club announced the problem solved. But is it really?
Under the arrangement announced last week, Argentina would pay back the money over five to seven years. But based on the country’s track record, and the fact that the usual overseer of such deals—the International Monetary Fund—was excluded from the proceedings, there’s room for a lot of doubt.
Unlike typical Paris Club debtors, such as Benin or Angola, Argentina is a relatively rich country, with per-capita GDP of $18,600 and foreign currency and gold reserves of $28.2 billion as of April 2014. Argentina is a member of the prestigious G-20, the grouping charged with preventing systemic risk and building a stronger global economy. Under President Cristina Kirchner, however, Argentina has consistently flouted the standards of international finance by doctoring its statistics, refusing to obey court orders and stiffing creditors that it has the money to pay.
Argentina’s default on roughly $100 billion in bonds in 2001 was the largest sovereign default in history. Since then, the country has bludgeoned most bondholders into accepting significant discounts. But some of its debt is still outstanding to a variety of creditors, from small pensioners to hedge funds and foreign governments. These sovereign creditors include Germany and Japan, which are each owed about $3 billion; Holland, Italy and the U.S., each owed about $800 million; and Spain, Switzerland, Canada, France, the U.K. and Austria.
Details are still scant on the deal worked out last week between Paris Club Secretary-General Clotilde L’Angevin and Argentine Economy Minister Axel Kicillof. In a short statement, the club said “clearance of arrears” would begin with a minimum payment of $1.15 billion by May 2015.
It’s uncertain whether the bulk of the payments will be in bonds—as Argentina wanted—or in cash. The surprise was that the club appeared to cave in on the matter of the IMF, which Argentina despises. An IMF spokesperson admitted to the news service BNamericas that the organization wasn’t an observer last week and had “not been asked by the Paris Club to help in monitoring the implementation.” Charles Blitzer, a former senior IMF official with wide experience in sovereign-debt restructurings, told BNamericas: “I am unaware of any prior cases in which the IMF was not an observer.”
Argentina had made the IMF’s exclusion a major condition for a deal. After last week’s announcement, Mrs. Kirchner was seen gloating in a televised speech that “against all predictions, we made a deal without the IMF.” After pausing for applause, she continued: “For the first time in history, a country with our conditions has been able to negotiate a deal with the Paris Club without resigning sovereignty over our policies.”
Still, it was a welcome development that Argentina actually recognized its obligation and negotiated a solution with some of those who hold its bonds. The country must now do the same with the rest of its creditors. So far, Argentina has refused to pay other, non-sovereign creditors, whose case is now before the U.S. Supreme Court.
While the Paris Club deal is a step in the right direction, it shouldn’t, by itself, encourage global capital flows to Argentina. Afflicted with corruption and fiscal irresponsibility, Argentina has impeded imports, prohibited the repatriation of nearly all profits, and seized foreign firms—notably including the local affiliate of Spanish energy firm Repsol (though, finally, under pressure, Argentina recently handed Repsol $5 billion in bonds as compensation).
The country has already managed to defy other institutions critical to the world financial order, including the World Bank and U.S. courts. It is hard to believe, especially without the participation of the IMF, that the Paris Club deal closes the books on Argentina’s debt to other countries. Argentina, after all, is a serial debtor with a poor track record. The very first project of the Paris Club, in 1956, was securing repayment on an Argentine default.
Argentina has already made a mockery of the international rule of law merely through its continued membership in the G-20. It should have been expelled long ago. The Paris Club was the latest redoubt for defending financial probity and sanity. Unless the Club strictly enforces its agreement with IMF supervision, and unless its cherished principle of comparability is extended to the rest of the outstanding debt, Argentina will have shown again that it is a master of defying global standards and getting its own way.
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