Tuesday, June 24, 2008

Argentina Defaults On Debt

Argentina flagArgentina became infamous earlier this decade for defaulting on their debt during a major financial crisis, and now it appears they have defaulted once again. This time around, things aren’t quite as bad in the country, and the default is a little different, but their actions still qualify as default, according to an article written by a couple economics professors for the Wall Street Journal. Carmen Reinhart from the University of Maryland and Kenneth Rogoff from Harvard claim in their article that Argentina has manipulated their inflation data in order to pay out less on their inflation indexed debt, thus putting them in default.

The professors say that the government’s scheme began with the firing of their top statisticians. Now the inflation measurements that are being “officially” reported are drastically understated. According to the article, Argentina is reporting an inflation rate of less than 10 percent when by most external measurements, the real rate should be closer to 30 percent. The Argentine government owes around $30 billion in inflation indexed debt, according to the article.

Investors should know that circumstances such as this are always a risk when investing, especially in developing countries. Argentina isn’t alone in these types of actions, either. Across the world, countries manipulate their statistics to be in their favor. Sometimes they are minor “adjustments” and sometimes that are major and pretty blatant, like in this case.

I want to also point out that, while these types of things are more pronounced in developing countries, they happen here at home, too. The U.S. has adjusted things in their favor before (such as the gold price in the '30s) and still do it today (such as the CPI and GDP). So don’t be na├»ve and think this will never impact you because you don’t invest abroad; government manipulations of economic data happen here, too. Inflation indexed bonds just happen to be one of the easiest debts to influence, so invest in them with your eyes wide open.

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