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A Chiseler As Well As A Deadbeat

Since 2007, Argentina has saved $6.8 billion in interest payments on its government-issued, inflation-indexed bonds, according to Buenos Aires-based research firm ACM Consultores. That would be good news, except for the fact that, in this case, the word “saved” could be replaced more accurately with “chiseled.”

The International Monetary Fund recently took the rare step of censuring Argentina for systematically misstating economic data, including its inflation rate. By claiming that inflation is lower than it really is, the country has avoided paying the full interest due on its $37.6 billion of inflation-linked bonds. The bonds make up 21 percent of Argentine government debt.

In 2012, Argentina’s inflation rate climbed to 25.6 percent, according to private economists. The official report put the inflation rate for the same period at 10.8 percent. Rather than inviting the private economists to discuss the source of the discrepancy, the government has forced them to retreat into anonymity under threat of heavy fines for challenging the official figures.

The censure marks the beginning of a process that could eventually lead to Argentina’s expulsion from the IMF. Argentina has until Sept. 29 to implement reforms before it risks losing membership privileges, such the ability to borrow from the IMF. If it fails to mend its ways, Argentina would be the second country to be forced out for failing to provide accurate economic information. The former Czechoslovakia was kicked out for the same reason in 1954.

Neither Argentina’s data manipulation nor the IMF’s response comes as much of a surprise. What does surprise, or at least puzzle, me is that anyone is still willing to buy Argentina’s lies - or its debt.

Argentine bonds offer an attractively high yield, with interest rates averaging around 10 percentage points higher than those provided by similar U.S. Treasury products. But that higher rate reflects the risks of dealing with a national government that is a habitual deadbeat.

If Argentina defaulted on its current debts, it wouldn’t be the first time. In 2001, the country threw up its hands at $95 billion of debt. In later deals, the government paid off the majority of its one-time creditors by offering as little as 30 cents on the dollar. A small portion of the bondholders, however, continue to hold out for what they are owed. Last fall, one of those remaining creditors, the U.S.-based hedge fund NML Capital, which owns over $1 billion of Argentine debt, went so far as to file a claim seeking possession of an Argentine naval ship temporarily docked in Ghana.

Since the default, Argentina’s understanding of private property has not improved. That became more than clear last summer when President Cristina Fernández de Kirchner announced that her government would seize YPF, the country’s main oil producer, from its Spanish corporate parent Repsol. Kirchner had no intention of offering Repsol fair compensation. As I wrote here at the time, that move should have signaled to the international community that Argentina is prepared to regard anything within its borders as potential government property.

In fact, the Kirchner government’s grabs are not even limited to Argentina’s borders. Last year, following the news that the nearby British-controlled Falkland Islands might contain significant oil reserves, Argentina decided to renew its decades-old assertion of sovereignty over the islands, which were the scene of a brief but bloody war with the United Kingdom in 1982. For Argentina, the fact that the residents of the Falklands are happy under British rule and have no desire to hand over their resources to a foreign country is irrelevant. Kirchner and her government continue to insist that the Falklands, which the Argentines call the Malvinas, ought to ruled by Argentina.

Given all this, it’s difficult to imagine an interest rate that would make Argentine bonds worthwhile. Since the Buenos Aires government obviously has no particular qualms about mistreating its investors, it can advertise whatever rate it wants with the assurance that, when that money comes due, it can always change the numbers, steal from someone else or simply not pay. The IMF’s action highlights the problem, but until Argentines themselves become fed up with their government, I doubt any external force is going to put an end to the kleptocracy.

According to an old angling quote, often attributed to Samuel Johnson, a fishing rod is “a stick with a hook at one end and a fool at the other.” Investors trolling for returns in Argentina are likely to prove that definition true.

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