The fun may soon be over for Cristina Fernández de Kirchner, the president of Argentina with a reputation for reckless populism. Among other antics, she flamboyantly fired the head of the country's Central Bank and expropriated a majority interest in YPF, Argentina's largest oil company. Since 2003, Argentina has dropped from 68th to 158th (behind Burundi and Belarus) in the Index of Economic Freedom, compiled annually by the Heritage Foundation and the Wall Street Journal. Worst of all, Kirchner has spent five years flouting international financial norms -- and getting away with it.
But perhaps not for long. Christine Lagarde, managing director of the International Monetary Fund (IMF), said on Sept. 24 in Washington that if Argentina does not start providing acceptable and accurate economic data, it will face a "red card" -- the signal from a referee that a soccer player is expelled.
A week earlier, the IMF had issued an official warning to Argentina -- in effect, a yellow card -- that if it doesn't shape up by Dec. 17, it will become the first developed country ever to be kicked out of the 188-member organization. The IMF monitors the world economy, makes loans to members in trouble, and provides technical assistance.
"My country is not a soccer team," responded Kirchner at the U.N. General Assembly last week. "It is a sovereign country and, as such, is not going to accept a threat."
We'll see. Clearly, she has a problem. Argentina is the only country out of 42 for which the Economist magazine won't list an inflation figure in its weekly data section. The reason, says a footnote: "Official number not reliable." But the magazine estimates the rate at 25 percent, notes that price controls and the YPF expropriation have discouraged investment, and says that growth, "even by the questionable official numbers," has plunged in a year by 6 percentage points to the lowest rate in Latin America.
Poor policies and phony statistics, however, are nothing new in the world of economics, and certainly not in Argentina, whose citizens have long had to deal with the consequences. The real problem, however, is contagion. Argentina has ignored its debt obligations, and until recently, the rest of the world has reacted blithely to this challenge to the global financial system. Argentina has set a dangerous example for other countries to follow. So far, the mimics have merely been Ecuador, which defaulted in 2008, and little Belize, which, while engaging Argentina's U.S.-based law firm, threatened to pay just 20 cents on the dollar to bondholders (but now seems to be relenting). The danger is that substantial European countries will see the Argentine Way as a model for them too.
Argentina defaulted on about $100 billion in bonds in 2001 -- the largest failure to repay sovereign debt in history -- and gave creditors a take-it-or-leave-it offer of 35 cents on the dollar (traditional settlements are usually in the range of 50 to 60 percent).
While many creditors took its unilateral offer in 2001, others, including several large institutions and 60,000 Italian pensioners, stood fast. In the ensuing years, Argentina has ignored more than 100 court decisions in favor of the creditors. Despite a clear ability to pay its debts, Argentina has also thumbed its nose at awards by the International Center for Settlement of Investment Disputes, the World Bank's arbitration mechanism.
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