[stop-imf] The IMF in Argentina: Bailouts for Investors (fwd)

[Robert Weissman]

Wall Street Journal
September 7, 2001
The IMF in Argentina: Bailouts for Investors

By Mary Anastasia O'Grady. Ms. O'Grady edits the Americas.

Stanley Fischer's parting message to the markets last week as he stepped
down as managing director of the International Monetary Fund could not
have been more emblematic of his tenure. Argentina, he said in an
interview with the Financial Times, is likely to need more aid. More,
that is, on top of the $40 billion package laid out in December 2000 and
the $8 billion announced two weeks ago.

How much more, Mr. Fischer couldn't say. "There is no answer to how much
is enough," he admitted.

Mr. Fischer's relentless diversion of other people's money to
Argentina's creditors is of a piece with the series of IMF mega-bailouts
he masterminded  over more than six years, starting with Mexico in 1994.
He can hardly be  expected to disavow his own legacy now. Yet his
recognition of the uncertain costs ahead is instructive.

For if his signature practices -- the  bailout of creditors, and fiscal
austerity forced on debtors -- remain intact
after his departure, it is quite right to say that there is no way to
know how  much more money Argentina will need. There is also no telling
how much  more money other large emerging markets might require to
ensure that they  too avoid default.

As emerging markets tapped into international financing in the 1990s, we
were told Mr. Fischer's bailouts would help stabilize markets. But
treating developing countries as bottomless pits, while making losing
investors who bet on them whole again, has hardly been good for
stability; in fact, quite the opposite has occurred.

With $128 billion in public-sector debt, Argentina's high-tax economy is
likely to remain hobbled. The much-lauded "zero deficit" appears a shell
game, entailing a shift in accounting from an accrual basis to a cash
basis to make  the numbers work. And there is still the question of how
to come up with the  money needed to meet maturing obligations. The
government might have to keep stuffing its unmarketable debt into
domestic banks, weakening one of  Argentina's few good institutions.
Meanwhile, politicians still resist dollarization, despite its obvious
advantages. The economy could languish for some time, while creditors
capture high premiums backed by the full faith and credit of the G-7.
The IMF is supposed be interested in "poverty
alleviation" but a clinical evaluation of Argentina leaves one wondering
whose burden it seeks to lighten.

IMF bailouts to Argentina carry the misnomer "aid," but those billions
go to  the creditors, who otherwise would have to sit down with the
Argentine  government, hammer out the restructuring of bad loans, and
take losses. Economy Minister Domingo Cavallo's attempt to force his
country to make  good on its obligations is, at first glance, admirable.
Argentina borrowed the money and it should pay it back. Yet it is hardly
more moral to avoid default  by passing the bill to a third party like
the IMF while the odds for authentic  repayment remain impossibly long.

Investors no longer worry about those odds though. Instead they assess
Argentine investments by evaluating the G-7's level of fear of contagion
--   panic selling and a reverberation that destabilizes the
international financial system -- and political instability associated
with an Argentine default. The winners of the latest round were those
who wagered that the Bush administration would cave when it looked like
Argentina was sinking fast last  month. Analysts still recommending
Argentine bonds seem to be doing so  largely on the grounds that, with
25% of total emerging-market debt, the country remains "too big to
fail."

Yet Argentina's best chances for a recovery might come from an
admission  that bailouts and austerity are not working. If the IMF were
to signal an end  to rescues, investors would immediately begin
assessing Argentine returns  net of IMF intervention and markets would
clear. In the very short run,  investors would probably sell Argentina.
But that would create an incentive  -- one that presently does not exist
-- for the country to restructure the  economy with sound banking and
monetary commitments and low taxes.  Getting out from under crushing
debt is not a policy on its own, but together  with serious reform the
country could woo back investors. The U.S. could  help legitimately by
expanding free trade.

Reducing moral hazard -- lending irrespective of risk because there is a
perception that the IMF will rescue creditors -- is an urgent task if
the world  is to ward off future financial crises. To do this, investors
must face their  losses when a country cannot pay. So far policy makers
have been afraid to  let this happen in Argentina because of contagion
fears. But a few months ago economists Alan Meltzer and Adam Lerrick
proposed a plan for the IMF to let Argentina default while still
controlling for a free-fall. The idea is for the IMF to create a floor
for bondholders, below the minimum price that  the government expects to
pay in a workout. While this would prevent panic,  investors would still
lose to the extent of the write-down. Free of IMF conditionality and
stripped of IMF backup, Argentina would then have the latitude and
incentive to undertake reform.

This looks like a moderate solution to the problem of contagion but it
does not seem to have changed Mr. Fischer's views of bailouts. This may
be because he is not concerned about the underlying problem of moral
hazard,  which he says is a "feature of every insurance arrangement." He
defends this insurance on the grounds that without it, emerging markets
would receive less international lending and pay higher borrowing rates.

This then, is the heart of the ideological conflict between those who
want to reform the IMF and the dinosaurs. Interventionist stalwarts
believe that   abundant low-cost capital for emerging markets is a
public good that rich
countries must provide. For proponents of the market though, investor
unwillingness to put money into countries with bad policies is the
transmission of valuable information necessary to make markets work and
governments behave. IMF "insurance" only distorts that process. What we
have here is Mr. Fischer's worldview of international finance, with its
flare toward socialist redistribution, clashing with the view that the
market, with all  its risk, is the best vehicle for economic
development.

If the Bush administration is to reverse rampant moral hazard caused by
six years of bailouts, it must start by letting the market and Argentina
sort out the risk. The best policy option may well be taking advantage
of the
depressed Argentine bond market by letting investors undergo their long
overdue haircuts and freeing Argentina from both unmanageable debt and
IMF austerity.