Sovereign Debt Default: Learning from Argentine Mistakes

By Bill Bonner (http://dailyreckoning.com)

04/12/10 Buenos Aires, Argentina – Argentina is for economists with a sense of humor, if there are any left. It’s for anyone who likes a good drink and a good laugh. And for anyone who wants a peek at the future.

What do defaults look like? Look at Argentina. The Argentines pulled off the biggest default on sovereign debt in history. In 2001, they defaulted on $132 billion in loans. Later, they negotiated a settlement that left lenders with their worst haircut ever.

But at least the lenders must have had fun. They came down to Buenos Aires on rich expense accounts. They stayed at the Four Seasons. They ate steaks that were thicker than glaciers…and washed them down with a whole rio of malbec. They probably went to a few tango shows too. The visit may have cost them billions…but heck…

…it wasn’t their money.

How about inflation? Want to see that? Argentina has had plenty. Even hyperinflation. In 1989 alone, prices rose 5,000%. By 1992, it took about 100 billion 1982 pesos to equal one single new peso. And who remembers the austral? That was a currency introduced in ’85. It was worthless by ’92.

Don’t think you have to worry about inflation? The lure of a little inflation will be irresistible. The arrival of a lot of inflation will be irreversible.

Ask the Argentines; they’re the experts.

So what kind of crisis will the US have? No one knows. But our bet is that it will have them all. Inflation…deflation…default…hyperinflation… Get ready; they’re probably all on the way.