Argentina's Deadbeat Mom

Cristina Fernández de Kirchner refuses to pay Argentina's massive debts -- and that's why she has to go.

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.

The consequences of this behavior? Not much. Argentina has been shut out of private credit markets, but it's still allowed to borrow billions of dollars from the World Bank and the Inter-American Development Bank (IDB). Even more remarkably, Argentina remains one of only 19 countries honored with inclusion in the G-20, the organization charged since 2008 with addressing the global financial crisis.

The risk is that other countries see how Argentina has acted with impunity and decide to do the same. An article in May by the Guardian's longtime economics editor carried the headline "Greece should follow Argentina's lead" and the subhead "when an economic crisis hits it is often best to go it alone."

There is a simple way, however, to nip contagion in the bud: expel Argentina from the G-20 and the IMF and end the flood of loans coming from international institutions. The United States took the first step along this path in September 2011, when a Treasury Department official announced that "the U.S. will oppose lending to Argentina" at the World Bank and the IDB.

Until recently, the United States was alone, but on Aug. 31, Germany and Spain joined in voting no on a $60 million IDB loan for a development project in Argentina's San Juan province. Spain's opposition was not surprising, given Kirchner's seizure of the shares that the Spanish company Repsol held in YPF. But Germany's vote was a real blow, and it produced a weird, wounded response from the Argentine president: "Still in this world, which has fallen and collapsed, in a world that was shown as ideal, they insist on punishing us because we are the bad example of a country that can build and stand up with no outside tutelage."

Based on discussions with public officials in Europe this summer, I wasn't shocked at all by Germany's action. Germany and the Netherlands, especially, are worried about the threat to Europe posed by broader adoption of the Argentine model, and sources told me off the record that they were ready to do something about it. The fear is that Italy, for example, might simply tell its creditors that it's adding another 20 years to the maturity of the bonds they hold and cutting interest rates to a few percentage points; that could lead international banks into cascading failures.

Opposing small loans is one thing, but a far greater impact would come from kicking Argentina out of the G-20. And, to be clear about it, Argentina really has no business being in this esteemed group of states. With my colleague Alex Brill, a research fellow at the American Enterprise Institute, I recently produced a study, supported by the National Taxpayers Union, that advocated objective criteria for G-20 admission. Under practically any set of metrics -- size, rule of law, interconnectedness of financial institutions -- Argentina falls far, far short of membership.

Up until recently, developed countries have been willing to ignore Argentina's antics, but as the global slowdown continues -- and, in some areas, intensifies -- the irresponsibility and downright clownishness can't be tolerated much longer. In the wake of Germany's no vote, Kirchner put on a brave face. This is "not a step back for Argentina from any of the conquests achieved," she claimed. But it's hard to see what those conquests are; as for steps back, they now seem inevitable.



Inside Bibi's Bunker

How Israel's prime minister is stacking his cabinet for a strike on Iran.

Prime Minister Benjamin Netanyahu's use of a cartoon bomb to illustrate Israel's red lines regarding the Iranian nuclear program may have elicited guffaws among the foreign-policy punditocracy, but the issue is no laughing matter. In fact, Israel's entire defense bureaucracy has long been engaged in an exhaustive assessment of what is undoubtedly among the most difficult decisions Israel has ever faced -- and perhaps the most difficult since David Ben-Gurion declared independence.

Israelis remain divided over what to do about Iran's pursuit of a nuclear weapon. Many believe that a nuclear Iran poses an existential threat, in the truest sense of the word, and that Israel must do everything within its power to prevent such an outcome. Others believe that the threat is "merely" dire, though probably not existential, that Israel should do everything within reason to prevent it -- but not necessarily everything possible -- and that Israel could, in extremis, live with a nuclear Iran.

In the past year these differences became public, with former senior officials accusing Netanyahu and Defense Minister Ehud Barak of irresponsible behavior, and various ministers and senior defense officials indicating that they oppose military action at this time. Conversely, Netanyahu and Barak issued a number of statements in August aimed at preparing the Israeli public for a conflict with Iran. With his speech at the United Nations, Netanyahu has now begun preparing the international community as well.

How these debates will be resolved depends on Israel's unique policymaking process. The question of whether to strike Iran is not just up to Netanyahu: In Israel, like other parliamentary democracies, the premier is merely "first among equals" -- not the chief executive or commander in chief, as in the United States. With the exception of very limited circumstances, such as responding to imminent attacks, the Israeli prime minister requires cabinet approval for all national security decisions. Indeed, even compared with other parliamentary systems, the Israeli premier's prerogatives are quite limited.

National security decision-making in Israel, at the highest level, is conducted in four forums. First, the cabinet plenum, which is made up of all government ministers, is the senior statutory forum for decision-making. It has, however, become so large, politicized, and leak-prone that it is rarely the true locus of policy formulation. Second, the Ministerial Committee on Defense (MCoD) is designed to be a forum for expedited and discreet decision-making -- but it suffers from the same pathologies as the plenum and thus is often not where decisions are really made. Third, informal subcabinet committees such as the current "Forum of Nine," a ministerial body assembled by Netanyahu to deal with high-level security issues, lack legal authority to make formal decisions but are nevertheless the arena where much substantive policy debate takes place. And finally, the informal consultations convened by the premier, which include the defense minister and a handful of trusted ministers and relevant senior defense officials, are also an important venue for policy formulation.

Positions adopted by the Forum of Nine and in the premier's consultations have no legal standing and thus are not binding -- the cabinet and MCoD are free to adopt any decision they wish. These positions do, however, carry great, possibly crucial, weight. The membership of the Forum of Nine includes the most senior and respected ministers, as well as representation from across Netanyahu's governing coalition. A consensus achieved by the forum or in the premier's consultations is more than likely, at the end of the day, to sway the cabinet plenum or MCoD.

To date, virtually all decision-making on the Iranian nuclear program has taken place in the Forum of Nine and informal consultations convened by the premier. Given the sensitivity of the topic, the final call will likely be made by the MCoD, not the plenum, even though it has not dealt with the issue extensively so far.

Given the legal requirement for cabinet or MCoD approval for military action, such as a strike on Iran, Netanyahu must build a majority in favor of such action. Although unanimous support is not required, Netanyahu would likely be hesitant to make such a historic decision with anything less than broad, if incomplete, consensus. Netanyahu has clearly been working to build such support, and many Israeli analysts think that his recent decision to expand the former "Octet" into the current Forum of Nine by adding Avi Dichter as minister for homeland defense was partially designed to tip the balance in favor of an attack.

Due to the severity of the threat, most Israeli politicians and former officials have been careful to keep debate over the Iranian nuclear program -- unlike debate over most major national security issues in Israel -- largely free of partisan politics. Even those who have expressed the strongest opposition to a strike, such as former Mossad chief Meir Dagan, former Shin Bet head Yuval Diskin, President Shimon Peres, and less explicitly, former Israel Defense Forces chief of staff Gabi Ashkenazi, have focused their criticism on the merits of the issue and, with few exceptions, have refrained from partisan point-scoring. One prominent exception has been Kadima party leader Shaul Mofaz, a former defense minister and chief of staff, who said that the consequences of a strike could be "catastrophic" for Israel. Nevertheless, the absence of much political squabbling certainly strengthens the position of the premier and defense minister, greatly easing their ability to obtain cabinet approval.

The Israeli public clearly has misgivings regarding a possible strike. It is fully cognizant of the risks of military action, greatly prefers a diplomatic resolution if possible, and attaches significant importance to the need for U.S. support, whatever Israel decides to do. At the same time, Israelis are deeply concerned by the Iranian threat, and support for a strike, though limited, is growing. In August, 32 percent of Israelis were in favor of an attack, up from 23 percent in March, whereas those opposed had decreased from 56 percent to 46 percent. Surprisingly, just over half of Israelis believed in September that Israel was in some or even significant danger of destruction in the event of a war with Iran.

Although this is hardly resounding support for military action, there is little doubt that Netanyahu and Barak will succeed in building the necessary public and cabinet support for a strike on Iran. There is a broad national consensus on the gravity of the Iranian threat and the need to resolve it one way or the other. In numerous statements, Netanyahu has stressed the failure of sanctions to effect a change in Iranian nuclear policy and has repeatedly drawn an analogy between the present situation and the Holocaust -- with its implied lessons being that tyrants must be stopped before it is too late and that Israel can ultimately rely only on itself. Barak has been more circumspect and his public position has wavered at times, but he appears to be fully in favor of military action at the appropriate time.

Indeed, Netanyahu probably already has a majority in favor of an attack in the Forum of Nine, and all indications are that he will easily win the next election -- widely expected to be held in the spring, but by law no later than November 2013 -- thereby further strengthening his hand. For Netanyahu, who views a nuclear Iran through the prism of the Holocaust and believes that its prevention is the primary challenge of his premiership, doing so is a matter of deep personal commitment.

At the bureaucratic level, Israeli Military Intelligence and the Mossad, Israel's equivalent of the CIA, are the primary sources of information on the Iranian nuclear program and have presumably been involved in providing staff support for strategic planning. The Mossad was named the lead coordinating agency for all prevention efforts, while the Israeli Air Force and the Israel Defense Forces' Planning and Operations branches will play a crucial role in advising the cabinet on the prospects and ramifications of an attack. The Foreign Ministry, rarely an important player in policy formulation, does not appear to be highly influential at this point.

Over the decades, Israel has achieved resounding national security successes and has suffered painful failures. The failings of its national security decision-making processes are often significant and recurrent. Nevertheless, it is hard to think of any other issue in recent decades to which Israel has devoted longer, deeper, and more sophisticated thought -- carefully considering and reconsidering the ramifications of every possible scenario and policy option. Even the voices of opposition emanating from within the defense establishment reflect the depth and sobriety of the planning process. The stakes are so momentous for Israel that nothing less would be acceptable.

Netanyahu and Barak will be excoriated whatever they do -- either for having failed to prevent the emergence of an existential threat to Israel, or for having led the country on a reckless misadventure. But one thing is abundantly clear: No one in Israel approaches this issue lightly or is "trigger happy."

A decision to attack, should one be made, will occur only if Israel believes that time is truly running out and that all other options have been exhausted. A strike will be controversial, and different people will have legitimate, and vehement, disagreements. The cartoon bomb that Netanyahu wielded at the United Nations may have been a useful prop, but Israel's exhaustive decision-making process is not so easily caricatured.

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