Thread by @michaelxpettis

For debt geeks out there, this is an excellent summary of Argentina’s recent debt travails, by Martín Guzmán, the Columbia University professor who recently became Argentina’s Minister of the Economy.

As Argentina begins to renegotiate its debt and...

ssrn.com/abstract=28611…

...seek debt relief, I would add that there is often confusion about the political or geopolitical aspects of sovereign debt restructurings. When a country like Argentina has difficulty paying off its foreign creditors, it is easy to misconceive the conflict as one primarily...

...between “their” interests and “our” interests. But that’s the wrong way to look at it. It is just as much a conflict between “our” bankers and wealthy savers and “our” producers, manufacturers and workers.

This is because when the external debt burden is excessive, capital...

...account outflows displace current account outflows. When Argentina has to struggle to make its external debt payments, in other words, the Argentine income that flows abroad does so in the form of payments to financial institutions and wealthy savers. Otherwise, Argentine...

...income (probably increased by better economic circumstances) would still flow abroad, but it would do so in the form of imports.

Put differently, the way an unsustainable external debt burden is restructured also determines which group of foreigners will bear the primary...

...cost of bad loans: foreign bankers, or foreign manufacturers and producers. Who should it be? Questions of “fairness” aside, it depends on circumstances. If we are in a world of scarce savings and expensive capital, it would probably be better for the global economy if the...

...restructuring favors savers and banks. If we are in a world of excess savings and weak demand, it probably makes more sense to favor manufacturers, producers and workers.