Megan McArdle comments on the folly of default:
A government, of course, can default whenever it wants, under any terms it wants. It is limited only by the prospect of future difficulties in borrowing money. But in times of duress, politicians–especially in emerging markets–are willing to deal with that comfortably far-off possibility, rather than find the money to pay the creditors now.
One of the big whiffs of my career–and every journalist has one of these eventually–was the time I wrote and filed a piece stating that Argentina was of course not going to default on its debt to the IMF, because that would be so obviously, phenomenally, stupid. Three hours later, Argentina defaulted on its debt to the IMF, and I stayed up half the night rewriting.
I also wrote that I thought it probably wouldn’t actually make good on its threats to squeeze its foreign creditors down to less than thirty cents on the dollar, because that was so clearly going to starve the country of capital as it tried to recover from a financial crisis. Argentina willfully flouted my impeccable reasoning, and wrote its foreign creditors down to less than thirty cents on the dollar. I call that spite.
And for a while, it all seemed to be working. . . [Now,] the government is running out of money–not in the vaguely doom-ridden sense in which you and I talk about coming Medicare deficits, but in the sense that it is now looting its pension system because that’s the only remaining source of ready cash. . . Argentina has no access to the credit markets at all except through state agencies with real assets. That means that it may very shortly have to run an aggressively contractionary fiscal policy in a contracting economy. Financial assets are fleeing the country, and the yield on its existing debt has risen to levels that signal a horrifyingly high risk of default.
What Argentina did wasn’t different in kind from what other emerging markets have done. It was different in degree. It bought short term prosperity at long term risk. Argentina didn’t use the respite to build a more productive economy; it used it to do social spending that kept the Kirchner’s in power. Now its citizens will pay the price.
She goes on to make a worrying comparison to Chrysler.