When countries fail to meet their international debt repayments, the world financial system can exact a harsh penalty. The Argentine government has just announced that it cannot meet repayments totaling $800 million. From the point of view of the International Monetary Fund, the global financial policeman, the Argentines have had their chances to return to the path of financial rectitude but have failed to take them. Now the Argentine must take the consequences.
The consequences are dire for ordinary Argentineans. They have had their bank accounts frozen, their savings destroyed by inflation and the normal pace of economic life completely disrupted. Whenever a country nosedives into unmanageable national debt, the story is always the same. It is the man in the street and his family who suffer. Even in a democracy, where these people may well not have voted for their financially incompetent political leaders, it is patently unfair that the masses should be punished for the deeds of their government. And matters are only likely to get worse as the IMF imposes stringent conditions, in return for the inevitable bailout. Government spending will be cut, taxes will be raised as the country is refocused on the single task of earning sufficient foreign currency from exports to pay back the creditors.
It will all be a question of confidence. Once the international community has been assured that debt repayments are flowing again, international bank lines will be reopened, overseas investors will return and gradually normal trading life will recommence. It is, however, almost inevitably a long and painful process. There has to be a better way to cope with these recurrent financial wrecks. At the moment, the standard treatment for an economically distressed country is akin to applying an elastoplast to a broken leg. And worse, the subsequent treatment is rather like enforced star jumps. In working out a better solution, it is important to remember the true nature of “confidence”. Foreign bankers and business will return to a country when they believe that they will not be alone in doing so. They had almost certainly stayed on there even though they knew perfectly well that the economy was heading for disaster. It was probably very profitable for them because as the risks rose, they could charge more for the funds they lent. They only quit when it became a matter of common currency that disaster was looming. Then their departure, which was en masse, precipitated the collapse. Most of them will have lost money on outstanding short-term loans but will probably have made a great deal more on earlier loans which have been repaid.
They were “confident” until the last moment, because they were cynical. When they return to healing economies, they will be equally cynical. Subsequent recovery may not be real but it will be a recovery, as long as everyone pretends that it is.
At the heart of world finance, therefore, lies a great pretence. The same outlook underpins stock market booms when common sense dictates that the financial fundamentals are insane. Maybe a first step in avoiding the economic collapse of an economy like that of the Argentine, will be the injection of honesty into the appraisal of confidence. If a government is behaving unwisely, then those who know better should not pretend that all is well and create confidence where none should exist.
