Luke Coffey: The UK should confront Argentina over its debt

Luke Coffey is the Margaret Thatcher Fellow at the Heritage Foundation, a Washington, DC-based think-tank. He previously served as a Special Adviser in the Ministry of Defence. Follow Luke on Twitter.

The flag ship of the Argentine Navy, the ARA Libertad, has been captured off the coast of West Africa and more than 200 members of its crew have been detained — not by Royal Navy and not because of any dispute dealing with the Falkland Islands. The school and training ship, valued at $10 million, is now the property of NML Capital Ltd, a subsidiary of the US hedge fund Elliott Management Corporation, which has been battling Argentina over the country's debt default a decade ago.

The big story with Argentina this year has been Cristina Fernández de Kirchner’s increasingly bellicose rhetoric over the Falkland Islands and the 30^th anniversary of the Falklands War.

However, there is another issue concerning Argentina that warrants international attention: its debt.

In 2001 Argentina defaulted on $81 billion of debt. It was the largest default in history.  By some estimates, Argentina still owes global investors, both private and public, up to $35.7 billion. This very much matters to the UK, which is the world’s sixth largest investor in Argentina and has loaned the nation tens of millions of pounds though international institutions.

The international community has been vocal on this issue. Argentina has incurred more claims than any other country in the International Center for Settlement of Investment Disputes, the body in the World Bank that provides facilities for arbitration of international investment disputes. Courts in Germany, Italy, and the U.S. have issued hundreds of judgments ordering Argentina to repay its debt. Argentina simply ignores these judgments and carries on without any consequences. According to the International Monetary Fund, Argentina has almost $50 billion in foreign reserves — meaning they could pay off their debt if they wanted to.

Worryingly, Argentina’s bad habits are spreading dangerously across Latin America too. Venezuela now faces more than 20 international claims worth more than $40 billion — almost a tenth of their GDP. Let’s hope Greece does not follow this example. Argentina’s actions also undermine respect for international institutions such as the World Bank.

Although pathetically weak in its lack of support for UK sovereignty of the Falkland Islands, the Obama Administration has been surprisingly tough on the issue of Argentina’s debt. The U.S. Treasury announced last year that it would oppose further lending to Argentina through the World Bank and the Inter-American Development Bank (IADB), the two multilateral development banks in which Argentina participates. Soon after that announcement the U.S. voted against a $230 million loan in the IADB.

It is time for the United Kingdom to follow this example. The United Kingdom ranks behind only the U.S. as the largest contributor to the World Bank’s International Development Association. Through this mechanism tens of millions of British pounds — UK taxpayer’s money — has been loaned to Argentina without any real hope of ever getting it back, much less receiving the interest that is also due.

As of March 2012, outstanding loans to Argentina from the World Bank alone totaled $16.2 billion. Based on Britain’s shareholdings in the two World Bank institutions lending money to Argentina, Britain’s share of the outstanding loans is £225 million. Imagine what £225 million could buy at home during this age of austerity. Instead, UK taxpayers are funding Argentina — a country that is scandalously in the G20.

Every pound entering the Argentine black hole of debt is one less pound the British taxpayer will ever see again. Receiving international loans and refusing to pay them back also allows Argentina to free up funds for other government expenditures like defence.  In 2010 Argentina increased its defence spending by 6.6% at the same time UK defence spending was cut by 8%. With the austerity measures taken across the board at home, how is this fair to the British taxpayer?

Consequently, Argentina’s G20 membership should also be questioned. By no measure of its economic performance does Argentina still deserve a seat around the G20 table. It is not one of the world’s top 20 largest economies. It has refused to allow the International Monetary Fund to review its public accounts since 2006, making it the only G20 nation not to undergo annual reviews. According to the 2012 Index of Economic Freedom, published annually by the Washington DC based Heritage Foundation, Argentina ranks 158 out of 179 countries (just after Burundi) in terms of economic freedom — again, far below any other member of the G20. Many other nations—Poland, for example — appear far more deserving of G20 membership.

Today, millions of Britons struggle to pay off their debt, whether it is a student loan, credit card or mortgage. Meanwhile, Argentina simply ignores its obligations. Like its unacceptable behavior towards the Falkland Islands, Argentina’s cavalier attitude towards debt repayment shows a blatant disregard of international norms. As the new Development Secretary, Justine Greening has an opportunity to act in an area where her predecessor, the beleaguered Chief Whip Andrew Mitchell, never did.  The UK must lead the way in Europe and, with the U.S., vote against any future lending to Argentina until that nation prove itself to be a responsible borrower. This is in the UK’s national interest and for the benefit of the global economy.