[stop-imf] NYT: Argentina bailout

[Robert Weissman]

First of four items on Argentina:

August 22, 2001
New York Times
Argentina Gets $8 Billion Aid From the I.M.F.

By JOSEPH KAHN

         ASHINGTON, Aug. 21 =D1 After nearly two weeks of negotiations, the
International Monetary Fund announced tonight that it would provide up to
$8 billion in emergency aid to
         Argentina to stabilize its economy.

The agreement came after protracted talks between Argentina and the Bush
administration, which had sought to use Argentina's financial crisis to
demonstrate a new, skeptical approach to
financial bailouts that breaks with what administration officials view as
an overly accommodating stance by the Clinton administration.

The package provides incentives for Argentina to reach agreement with
creditors to restructure part of its $128 billion foreign debt.

Under the plan, Argentina would get $5 billion in loans as early as
September, but the other $3 billion would be delayed unless the country
reschedules its debt payments. The fund, which
typically makes loans to help ensure troubled nations that they can pay
their debts and defend their currencies, has not previously made such
rescheduling an integral part of a rescue package.

The plan could put pressure on American banks and other lenders to take
losses on bonds and loans to Argentina, though fund officials say that any
restructuring under their three-year plan
depends on voluntary cooperation by all parties, and that it is not an
absolute condition of the loans. Thus the plan offers a carrot but no
stick.

Treasury Secretary Paul H. O'Neill has used Argentina's case as a way to
demonstrate that the administration will back bailouts only when a nation
takes painful steps to grapple with its
financial woes before seeking emergency help =D1 and then only when there i=
s
a high probability that the aid can sustain the recipient through tough
times.

But by supporting the Argentina rescue, the administration has departed
from its own expressed reluctance to allow repeated bailouts.

Argentina received $13.7 billion in I.M.F. aid eight months ago, at the
end of the Clinton administration, and Bush administration officials had
suggested that they were not willing to make any
new loans.

That position proved difficult to maintain as economic malaise spread
round Latin America. Mexico has officially fallen into recession. Brazil's
economy has slowed to a standstill, and its
weakening currency and rising debt forced it to seek new loans from the
fund last month.

Argentina's problems are more serious. Its economy has been shrinking for
three years. Its debt burden, though not enormous relative to its overall
economy, has become unsustainable as
exports slump. Residents, fearing a financial collapse, are moving assets
out of the country at an increasing rate; investors have shifted $9
billion out since Argentina's latest round of
difficulties began in June.

President Bush has made improving political ties to Latin America a
centerpiece of his foreign policy and has said he wants to extend the
North American Free Trade Agreement to form a
hemispheric free-trade zone.

Those goals are threatened, at least temporarily, by economic weakness
across the region.

Even so, Mr. O'Neill and other Treasury officials took a tough line with
Argentina when it sent a delegation to Washington earlier this month
seeking an infusion of aid. Treasury officials
initially declined to commit to any new aid, those involved in the talks
said.

It is not unusual for the United States, the largest single shareholder in
the fund, to play an important role in shaping an emergency aid package to
a large developing country.

But several people involved in the talks said the administration's role
was especially intricate in this case, with many late-night sessions held
in Treasury offices rather than at I.M.F.
headquarters nearby.

Bush administration officials pressed a team led by Daniel Marx,
Argentina's finance secretary, to come up with ways of reorganizing
Argentina's finances and debt payments so that it could
survive without fresh loans.

If there were to be new loans, they wanted Argentina to demonstrate that
the money would be instrumental in sustaining the nation even beyond the
usual terms of three years, those involved in
the talks said.

The effort to revise the fund's approach to Argentina in the middle of a
crisis led to some tension between officials of the I.M.F and the
Treasury. Mr. O'Neill also ruffled some diplomatic
feathers with his frank comments about his reluctance to support new
loans.

"We're working to find a way to create a sustainable Argentina, not just
one that continues to consume the money of the plumbers and carpenters in
the United States who make $50,000 a year
and wonder what in the world we're doing with their money," Mr. O'Neill
told CNN late last week.

La Naci=97n, a leading Buenos Aires newspaper, wrote in an editorial on
Monday that Mr. O'Neill's comments were "outside all norms of respect and
protocol." Stock prices plummeted and
interest rates soared this week on speculation that Washington would not
back new aid.

Treasury officials declined to comment tonight on the negotiations.

Some outside analysts are sympathetic to the administration's tough- love
approach, in large part because they view Argentina's problems as
intractable. Not only does it have a debt burden that
threatens to overwhelm its ability to pay interest, beginning later this
year; it also has a rigid currency system that fixes its peso to the
dollar. Some economists say the system has undercut the
competitiveness of its companies.

"I think it's a real long shot that new aid would be of use without
restructuring the debt and devaluing the currency," said Morris Goldstein,
a former I.M.F. official who is now at the Institute
for International Economics, a research organization in Washington. "You
have to do one or the other, and maybe both."

Administration officials have backed Argentina's desire to keep its
currency system in place. But they focused on debt restructuring as the
price of American support for new loans.

The new plan takes a step in that direction, though it seems unlikely to
result in a wholesale debt reorganization =D1 akin to a bankruptcy
proceeding =D1 that some economists feel is needed.

Given the sensitivity of the I.M.F. in recommending a debt reorganization
that could result in losses for foreign investors, the wording of
tonight's announcement was cautious.

Argentina is "considering the possibility of a voluntary and market- based
operation to increase the viability of Argentina's debt profile," Horst
Kohler, the managing director, said in a
statement. "As these discussions bear fruit, I.M.F. management would be
prepared to recommend bringing forward the remaining $3 billion under this
augmentation to support such an
operation."

Other elements of the new aid package are more traditional. The fund, as
it often has in the past, is requiring Argentina to tighten its fiscal
belt, reducing both central and provincial government
spending to meet the goal of a "zero deficit" law approved by the
Argentine Congress on July 29.

Other conditions include improving tax collection and strengthening the
banking system, Mr. Kohler said.