Wednesday, March 09, 2005


DeLong writes about Argentina and while I haven't read the book in question (and given the stack of unread books in front of me I'm unlikely to anytime soon) I have a serious question about one of what he states are the author's reasons for Argentina's collapse:

4. The private market, for being so eager to lend money to Argentina in the mid 1990s that its politicians could ignore the fact that their much-loved currency peg required budget surpluses.

Is this really an issue of the "private market" being "so eager to lend" or is it an issue of a bunch of international lenders believing that their loans were not just backed by Argentina's ability to pay, but by the IMF and the international community's continued willingness to arrange even more loans to pay off the old ones in a Ponzi-ish scheme that left the last lenders holding the bag? I don't know the answer to that, but I'd like one. It's hard to see that there's anything approaching a genuine free market in international lending. I think it's fairly clear that there's a serious moral hazard problem here and that the eagerness to lend was completely rational on the part of the lenders. The pressure, and measures taken, to prevent sovereign nations from defaulting is truly bizarre. Default is a bad thing, but all through my economics education I never understood why default by nations was equated with nuclear self-destruction. Lenders are making loans at fairly high rates, which incorporate the risk of default. If a nation is unable to pay it is unable to pay. Two and a half cheers for default!