Argentina: Crisis of Confidence

As the military prepares to bow out, bankruptcy menaces a dispirited nation

Just before he left the annual meeting of the International Monetary Fund in Washington last week, Argentine Central Bank President Julio González del Solar declared that his efforts to refinance his country's $40 billion foreign debt had gone remarkably smoothly. "There is no nervousness," he said. "Basically there is confidence."

González del Solar spoke too soon. Three days later, as the Harvard-trained official stepped off the Pan Am flight that had brought him back to Buenos Aires, three security men accosted him and abruptly hustled him off to a waiting car. They took González del Solar to the headquarters of the mounted police, where they held him incommunicado overnight before flying him 1,700 miles south to the federal penitentiary in the desolate Patagonian town of Rio Gallegos. The reason: an obscure, nationalistic federal judge had summoned González del Solar, whose position is roughly comparable to that of U.S. Federal Reserve Chairman Paul Volcker, to investigate "supposed violations of sovereignty" for accepting a routine clause that gives an American court jurisdiction in any dispute over loans to Argentina signed in the U.S. With those Keystone Kops antics, Judge Federico Pinto Kramer pushed Argentina to the brink of international default. Foreign banks immediately suspended all payments of new loans to Argentina, raising fears of a collapse that could set off a global chain reaction.

The crisis could hardly have struck at a worse moment. Argentines were in the midst of an election campaign that holds the promise of ending 7½ years of incompetent and sometimes murderous military rule. Still humiliated by last year's defeat by Britain in the Falkland Islands and burdened by triple-digit inflation and 15% unemployment, the military government of President Reynaldo Bignone was rapidly losing what little control it still had. As if to underscore the government's impotence, the country's two largest labor unions called a 24-hour national strike that shut down virtually all factories and public services. The prevailing attitude, warned the Buenos Aires newspaper La Nación, "is something like collective suicide, as if the will to be a nation has been crushed." The situation became so precarious, indeed, that some Argentines wondered if the election scheduled for Oct. 30 would even take place.

The country's close encounter with insolvency began when a lawyer in Rio Gallegos formally objected to a standard clause in a debt agreement between the national airline, Aerolineas Argentinas, and U.S. creditor banks. The provision stipulates that any litigation can take place in the Federal Court of the Southern District of New York as well as in Argentina. Judge Pinto Kramer agreed that the clause probably violated Argentine sovereignty. Using the broad powers that federal judges in Argentina enjoy, Pinto Kramer decreed a freeze on all loan negotiations, then ordered the arrest of González del Solar.