Last week Ecuadorians were introduced, through their mass media, to a speech by Robert Shapiro warning the country not to follow the Argentine precedent with regard to its foreign public debt. Mr. Shapiro is the co-Chair of the American Task Force on Argentina (AFTA). This organization represents a group of bondholders who hold about $20 billion of Argentine debt.
These bondholders rejected the settlement that Argentina negotiated with about 75 percent of its creditors in 2005. They are hoping to win more than everyone else got by lobbying the US government – especially the US Congress -- to put pressure on Argentina.
If Mr. Shapiro intended to frighten Ecuadorians about the possibility of their government defaulting on its debt, he sure picked the wrong example. Argentina's default on $100 billion of public debt – the largest sovereign debt default in history -- has turned out to be far more successful than almost anyone imagined. The Argentine economy shrank for about three months in 2003 after the default, but then began to rebound and hasn't stopped its rapid growth for more than five years. In fact, Argentina has had the fastest-growing economy in the hemisphere over the last five years, averaging more than 8.6 percent annually.
This phenomenal economic growth has allowed Argentina to pull more than nine million people out of poverty. It would have been difficult, if not impossible, to achieve these results without having cleared this debt – about two-thirds of the total -- off the books, and restructured payments for the rest. The debt service burden would have drained resources from the economy, and discouraged investment by maintaining a state of uncertainty over the government's finances and the economy in general.
When Argentina defaulted on its debt, most of the experts quoted in the media predicted that the country would pay a high price for its decision. The International Monetary Fund used its power to try to force Argentina to negotiate an agreement more favorable for the creditors. During the years of negotiations, the international press was dominated by experts who continued to predict severe punishment for Argentina, even as Argentina's economic recovery gathered steam.
These experts and the business press that relied on them turned out to be dead wrong. Of course, this does not mean that Ecuador should default on its own public debt. Ecuador's new government has not announced that it would default, but has pledged to put its obligations to the people that elected it ahead of the interests of bondholders. It has also pledged to undertake a full audit of its foreign debt in order to determine which part of this debt might be illegitimate.
There is nothing improper about these decisions. In fact, there is currently a bill pending in the U.S. Congress which would require the U.S. Government Accountability Office to audit the loan portfolios held by the United States, of governments where there is evidence of odious, illegal or onerous debt. Ecuador is a possible candidate for such an audit, and if this bill were to become law, it would be important to have a government that wants to co-operate in such an audit.
There are recent precedents for debt cancellation on the basis of illegitimacy. The government of Norway unilaterally cancelled debt owed by Ecuador and four other countries late last year on the grounds that these loans were made as part of a failed development policy. And the illegitimacy of Iraq's debt accumulated under Saddam Hussein was undoubtedly a factor in the recent cancellation of a large part of this debt.
Looking forward, the Ecuadorian government will weigh the expected costs of a default, moratorium, or unilateral restructuring of the debt against the benefits of reduced debt service – including poverty reduction, and other spending on social and economic development that it has promised to the voters. This is a decision that it will make, hopefully, on the basis of the public interest.
But there is no need to listen to the self-serving scare tactics of bondholders' lobbying groups. Especially when they are trying to frighten people with the remarkably successful debt restructuring carried out by Argentina.