It Pays to Get Tough With the IMF
Providence Journal, February 8, 2004
Knight-Ridder/Tribune Information Services, Feb. 5, 2004
For the second time in less than six months, the government of Argentina stood up to the International Monetary Fund -- and the IMF backed down. Last week the Fund approved the latest installment of its lending to Argentina, after having failed in its efforts to get a better deal for Argentina's private creditors.
This is unprecedented. The IMF is the most powerful lending institution in the world, and is used to having its way -- especially with a country that is not so big (38 million people) but is one of the Fund's largest debtors in the world. And it's not like Argentina can get easy credit elsewhere. The government is currently in default on $88 billion of debt, the biggest sovereign debt default in history.
Argentina has offered the private creditors a "haircut" -- or reduction -- of 75 percent on their debt. This might sound like a lot, but it would still leave Argentina with an enormous debt burden of more than 90 percent of GDP.
To do better than this, the government of President Nestor Kirchner would have to run large primary (not counting interest) budget surpluses. This is exactly what the IMF wants from Argentina: squeeze its taxpayers and citizens and use any surplus due to long-awaited economic growth to pay off foreign creditors.
Kirchner had other ideas. From 1998 through 2002, Argentina suffered one of the most devastating depressions in the history of Latin America. It went from having the highest living standards in the region, to a country with the majority of people living below the poverty line.
When Kirchner was elected last May, he pledged not to "return to paying debt at the cost of hunger and exclusion of Argentines, generating more poverty and increasing social conflict."
IMF economists had plenty of loans to encourage the disastrous economic policies that led to the country's economic collapse. Chief among these was the "convertibility plan" that fixed Argentina's peso at one-to-one with the U.S. dollar. Together with trade and financial liberalization, this helped destroy the country's manufacturing jobs, and set the stage for a series of financial crises in the late nineties.
And the Fund pushed its standard fare of high interest rates and budget cuts to deal with the crises as they unfolded, making matters worse.
But when the currency finally collapsed, and the financial system imploded at the end of 2001 -- when Argentina was flat on its back -- the IMF offered nothing. The country descended into deeper poverty and massive unemployment, and was left to recover on its own. This it finally did, growing 8.7 percent in 2003.
The case of Argentina has enormous implications for our understanding of what the Fund actually does and does not do. Not only does it pay its clients to take economically destructive advice -- as it also did in Asia, Russia, Brazil, during the 1990s. It also fails to act as a "lender of last resort" -- the common understanding among policy makers of what the Fund's purpose is -- when such a lender is most urgently needed.
Furthermore, we can see more clearly than ever in the IMF's 60-year history its role as organizer of a creditors' cartel, as it openly tries to use its muscle on behalf of the private foreign creditors. Ironically, the U.S. Treasury Department, which has the dominant voice within the Fund, decided that the IMF should back down and approve the latest loan installment, in spite of Washington's bitterness over Argentina's treatment of its foreign private creditors.
Some of the European countries and Japan showed their anger by abstaining -- they never go so far as to vote against the U.S. -- because their constituents want a better deal on the debt. The European companies that own Argentina's privatized utilities also want a rate increase for Argentine consumers.
Apparently Washington decided after the Monterrey Summit in Mexico -- where Bush was the most unpopular president in the Americas -- that this was not a good time for a showdown with Argentina. There will be more confrontations in the months ahead, but with Argentina running a large trade surplus, it does not need any "help" from the IMF.
Indeed, some analysts -- including conservatives who believe in the "free market" -- are now questioning why the IMF (and the World Bank and other multi-lateral lenders) shouldn't share the losses of the private sector and take a haircut on their own loans. Now that would truly mark the end of an era.