The world was teetering on the brink of recession before the horrors of Sept. 11 gave it the definitive push. Had the US suicide attacks not happened, it is possible that the collapse of the Argentine economy would have provided the more traditional shove for international economic downturn.
Indeed, historically, economic chaos in Argentina has produced several seismic shocks around the world. In the 19th century, the British banking system was rattled to its foundations and big-name banks collapsed because of its immense overexposure to the country. Thirty years ago, a remarkably similar scenario was played out, except that this time it was US and continental European banks and investors who took the biggest hits.
South America has an unfortunate reputation as a graveyard for investment hopes. From the original Spanish and Portuguese colonizers who were lured there by gold and silver, to all subsequent the investors, the potential of South American investment has always turned out to be far greater than the reality. When it comes to running economies, the South Americans do not seem to be notably corrupt. Rather, their governments seem to have been incurably incompetent, never collecting enough taxes while at the same time failing completely to learn that they cannot go on spending money they do not have.
Argentina is currently being hung out to dry by the International Monetary Fund, because of its latest period of fiscal and economic lunacy. Yet another messy restructuring program, which will require tough negotiations at every step along the way, seems to be ahead. Investors who have seen their assets dwindle to virtually nothing will form clubs that will waive capital repayments and earnings in the short term for guaranteed payments at a later date. Hundreds of thousands of air miles and tens of thousands of man-hours will go into this process and it could be years before anyone sees a dime of their money back.
What this does is to strengthen the argument that the whole legal and regulatory process of corporate bankruptcy should be extended to nation states. When companies fail, they may initially seek a period of protection, which means that none of their creditors can force them to the wall. If after this grace period, the problems have still not been fixed, receivers take over, save what they can from the wreck and then parcel out that sum among the creditors, according to their original investment. Within a few months, the surviving capital has been freed up to seek more worthwhile investments, the business has been sold up and everyone can start with a clean sheet.
Of course, those who propose bankruptcy methodology for country defaults are not thinking along the lines of selling up the country. What they want is that a mess such as that of Argentina today should be possible to be cleared up in months rather than years, with creditors knowing precisely where they stand and how much they are going to come out with. Treating every country default as a new and separate case which can only be resolved by prolonged negotiations and complex horse-trading is a colossal waste of time and money. There has to be a better way to sort out failed economies.
