Whatever radical path Argentina may take after the election of firebrand Javier Milei as president, the prospect of another default is very real — and will provide another case study showing that sovereign default is a choice.
Milei has promised to honour Argentina’s debts. But the country is in a mess, even by the standards of a country that has endured economic turmoil for years.
He will soon face a decision: whether to keep investors’ money inside the country to spend on his population, and default again, or send it back to (mostly wealthier) overseas lenders. Argentina sovereign bonds are pricing in a very real prospect of default in the next few years, with yields well over 20%.
The story of Argentina turning a corner is not new. Mauricio Macri ran Argentina between 2015 and 2019, taking power shortly after the 2014 default. Macri's tenure was meant to be a great turnaround story for Argentina, and it sold tens of billions of new bonds under his tenure.
But by 2020 Argentina was back in familiar financial distress. With its economy no better than before Macri, it chose to default again. The coronavirus pandemic made life more difficult for all governments in 2020, but the vast majority did not default.
There is little to stop Argentina choosing to default again, especially when it has done so several times since 2001. The factors that encourage countries to do so are more carrot than stick as there is little international courts can do to force countries to pay.
There is pride in honouring one's debts. But once a sovereign has lost that badge of honour like Argentina has, why not just default again, and again? Particularly if investors will still buy your bonds as they did when Argentina returned to the markets under Macri.
Whatever shock therapy Milei tries to implement — and without a parliamentary majority he may not be able to do much anyway — when push comes to shove keeping investors' money may be the least worst option. It has no reputation as a borrower to maintain and investors have not turned their backs on it despite multiple defaults and restructurings.
Other countries show that default is a choice. Turkey has been irritating bond investors for years with its erratic and unorthodox economic policy. But this year it seems to have woken up and smelled the roses, performing a policy u-turn as the prospect of a real, Argentina-style economic crisis drew closer.
There is genuine hope that after years of economic mismanagement, Turkey is going to sort itself out. One of the reasons for doing so is to avoid the prospect of having to choose whether to keep billions of dollars at home or wire it abroad, back to foreign investors.
There are two even more extreme examples: Russia and Ukraine. Instead of taking an immediate and easy path to default on its debts in 2022 after attacking Ukraine, Russia chose to try its utmost to avoid default even as it became a global pariah and sanctions were laid on it to make it difficult for the sovereign to pay its debts.
It was a point of pride, or pehrhaps politics, for Russia. In April 2022, finance minister Anton Siluanov said it would do everything to pay its debts and threatened legal action if the West’s sanctions stopped it from doing so.
It may not mean much at the moment. Russia has zero prospect of re-entering the capital markets under the Putin regime and it could be decades before it can.
And in Ukraine, many corporate issuers have kept paying investors, even if few would begrudge them seeking a lifeline while their country is being invaded. The sovereign paid a $290m coupon a week after Russia rumbled in — many had urged them not to pay and put that money to better use.
Ukraine did eventually have to ask investors for debt relief, but it did so as a last resort because it needed to divert funds to defence. When it made its choice to not pay there was a good, specific reason behind it out of the country’s control.
Few will likely see an Argentina’s repeated failures to pay in the same generous light, but that may prove to be little disincentive.