Moment of truth for Argentina: the fulfillment of contracts under a rule of law has no borders

Moment of truth for Argentina: the fulfillment of contracts under a rule of law has no borders

Infolatam

March 11, 2013

By Claudio Loser

Even though the political attention in Argentina moved to the dramatick demise of Chávez , the Economic  stopwatch does not stop.  The final stretch seems to be defined in terms of the judicial procedure of the Court of Appeals of New York State with respect to the payment to the "holdouts" by Argentina. The hearing last month, attended by the Vice President and Economy Minister, among others, was hard for Argentina and its allies, especially when their lawyers suggested that they would not comply with if it forced to pay. The judges reacted promptly, indicating that at the Justice level what is sought is compliance with the law and not its possible modification.  Even so, members of the Court showed unusual deference, when on the following day after the hearing, called for Argentina to develop a payment plan proposal.  Certainly, this Court action can unleash the fantasies that are born from the attachment to the magical realism of our America.  But Argentina now has to face the reality of the rule of law, which it has tried to use to postpone action, rather than find a solution.

Now we need to wait for the verdict of the Court. According to analysts and based on the trajectory of this judgment, it is almost a certainty that Argentina will have to recognize the obligations of the holdout, even if not necessarily the full amounts..  If the trial were favorable to Argentina the urgency of the issue would be reduced. But it is at this time that the Argentine Government should consider, beyond its confrontational rhetoric, what is its proposed course of action. Already the consequences of failure to comply in this case have been widely discussed, in addition to the Paris Club arrears, and the lack of recognition of the arbitration decisions of ICSID and the vote of no confidence from the IMF. These actions imply the discrediting of Argentina as a respected member of the international community, and the trend towards institutional marginality among nations. Moreover, this situation will exacerbate internal pressures on Argentina's economy, even though the President indicated that the attack on Argentina has to do with doing things well and against the international consensus of the advanced world.

Here we enter into the concept of the rule of law. The Argentina has a terrible reputation for compliance of its international obligations, and this is reflected in the very low levels it ranks globally, for example in the index of ease of doing business (EDB) of the World Bank (number 124  of 185 and well behind its peers);  the Global Competitiveness Index of the World Economic Forum (94 out of 144); in the area of corruption (position 102 of 174); and in terms of its irrationally protectionist policy.

However, there is an index where Argentina has had a good behavior. According to the World Justice Project, although Argentina has serious problems with regard to the exercise of the rule of law in many areas, it has reasonable performance in the defense of fundamental human rights, after thirty years of democracy, and also in the functioning of the Civil Justice (approximately half-way in the rankings). These values do not match with the ability to enforce contracts, as defined by the EDB, where Argentina occupies one of the lowest positions. Even so, with a long period of institutional stability, internal contractual rights were respected.

Nonetheless, the conflicts of Argentina at the international level in this area show a huge discrepancy between the internal and external. A definitive break with international standards will have dire consequences, since everyone will see how imminent the disregard of international rules will be extended to the inner field. The distinction of us (the insiders) vs. them (the outsiders) is irrelevant to the breaking of the rule of law. Eventually, some of the  us will be them, and Argentina may lose the legality that it claims exists. Apart from domestic political considerations, the principle of institutionality and rule of law has no borders. Successful countries of Latin America, such as Chile, Uruguay and Peru know this. The Argentine Government is completely wrong to forget it.

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