Monday, December 08, 2003


I've never really understood why economists consider the government default on its international debt obligations to be a nuclear option. It would be a nuclear option for the US, of course, because people love lending us lots of money at low interest rates precisely because the chance of default is so low. On the other hand, for developing countries people tend to love lending them lots of money at very high interest rates because the probability of default is relatively high. Plenty of large companies experience hard times, go into bankruptcy, default on some of their debts, reorganize, and come back to life - at which point people line up to lend them money again. There's no reason the same shouldn't be true for smaller countries. Sure, if they just default willy nilly on their debts because they feel like it they're going to have a hard time getting anyone to lend them money again, but economic times and political leadership change, and along with that so will the willingness of international lenders to show up with the baskets of cash.

It's nice to see that the Economist is admitting that Argentina's recent policies - telling international financial institutions to piss off while spending money to increase domestic consumption - are actually doing the trick.

Third, the government has focused on boosting domestic consumption at the expense of the demands of foreign creditors, banks, and privatised utilities. This is controversial, but has arguably made economic sense.

Pissing off foreign creditors and investors who demanded huge rates of return in exchange for their cash should not only be acceptable but expected when there's a serious economic crisis. The risk premium is there for a reason.