Debt and Default from a Post-Keynesian Perspective: A Historical Case Study of the Argentine Puzzle

Abstract

The subject of sovereign debt and default has received intense focus since the beginning of this century. This interest was fuelled by the largest default in history - by Argentina in 2001 - but it was the Global Financial Crisis of 2007-2008 and its effects that placed the issue of debt in the centre of attention. The ensuing debate has been stuck, however, in the contrived opposition between ‘fiscally irresponsible governments’ and ‘evil creditors’ in both mainstream neoclassical circles and among so-called critical scholars. This thesis overcomes this, and similarly untenable positions, by taking a long-term look at the nature and implications of sovereign defaults, focusing specifically on the experience of Argentina since its independence. With its complex and unique history of debt, Argentina provides the perfect vantage point and case study to compare different causes and impacts of sovereign default. In a contribution to the post-Keynesian literature on government debt, and particularly to the Modern Monetary Theory (MMT) school of economics, the thesis argues that sovereign defaults are not necessarily harmful to the health of an economy, and to the well-being of the people. Elaborating on MMT, it argues that preventing or postponing an inevitable default is sometimes more detrimental for the indebted country in the long-run. That being said, under certain conditions a sovereign default can also have devastating effects. Argentina’s history contains examples of both outcomes.

This raises a puzzle: What determines the outcomes of sovereign defaults? What makes them beneficial or harmful? To answer these questions, this study investigates the range of episodes during which Argentina fell into default (or restructuring) over a period of two centuries. It combines a historical process-tracing methodology with a theoretically informed and nuanced political-economic analysis of data in order to understand what determines the different outcomes. The main claim defended here is that it all depends on how governments approach defaults. If default is not seen as an inevitable evil to be avoided at all costs, but as a strategic option, space is created for government policy to prevent potential damage, and to exploit the opportunity to address underlying structural problems in the economy Both the historical and political-economic analysis support this conclusion, and indicate the need for a broader reappraisal of official and public perceptions of defaults and their dynamics.