[stop-imf] NYTimes: Argentina's Chaos Raises New Doubts on Monetary Fund

[Robert Weissman]

December 22, 2001
Argentina's Chaos Raises New Doubts on Monetary Fund
By JOSEPH KAHN
WASHINGTON, Dec. 21 — The deadly riots in Argentina, the collapse of its
government and another multibillion dollar bailout gone awry have raised
fresh questions about the effectiveness of the International Monetary Fund
and the financial policies of the United States, the fund's leading
shareholder.

Latin American and European government leaders today joined protesters in
Buenos Aires, Wall Street traders and financial experts in putting at least
part of the blame for Argentina's problems on the lending agency and the
Clinton and Bush administrations.

Some say the monetary fund showed callousness by failing to give new aid to
Argentina early this month, as the country's economic program, designed with
I.M.F. approval, was forcing painful austerity measures on its citizens.
Others say the fund made the opposite mistake, repeatedly offering loans to
Argentina despite indications that the country's policies had become
unworkable, delaying the day of reckoning.

These criticisms, even if contradictory, increase pressure on the I.M.F. and
the Bush administration to articulate a clear policy toward financial rescue
efforts, which often come under fire even when they are judged successful.

Treasury Secretary Paul H. O'Neill came into office publicly denouncing
multibillion dollar bailouts, saying that either they fail outright or they
allow foreign governments to get away with bad policymaking and
investors to
get away with bad bets.

In practice, however, the Bush administration has yet to take a clear stance
on such bailouts and has made international financial policy a low priority.

Peru's finance minister, Pedro Pablo Kuczynski, complained today that the
fund bungled its dealings with Argentina by adopting inconsistent policies
that were at turns passive and inflexible. "The fund is partly to blame for
this because the fund did not sound the alarm in time and then took a very
hard line when things were incredibly difficult," he told Peruvian radio.

Hubert Védrine, the French foreign minister, assailed the I.M.F. for
abandoning a longtime client and imposing "demands that have been excessive
or at the wrong time." The French, who like the United States are significant
fund shareholders, have called on the lending agency to step up its
involvement to help Argentina recover.

After some hand-wringing about jeopardizing the money of American "plumbers
and carpenters," Mr. O'Neill supported a multibillion loan for Argentina in
August. He has also backed two large rescue packages for Turkey, a strategic
ally that has faced tough financial problems.

When Argentina's crisis worsened in recent weeks, Bush administration
officials did not take a firm position, allowing the I.M.F. to make the call
on withholding additional loans, people involved in the fund's deliberations
said.

Even the harshest critics of the I.M.F. put most of the blame for Argentina's
current plight on a succession of governments in Buenos Aires. But many say
the monetary fund should have called government officials to account sooner.

Argentina adopted a strict fixed- currency regime and overhauled its
banks in
the early 1990's. It tamed inflation and became, for a spell, a glowing
economic success story.

But subsequent governments allowed spending to grow out of control, building
up a foreign debt that became impossible to maintain. Argentina also fell
into a deep recession four years ago. The government beseeched the
I.M.F. for
help to stay solvent as it tried to work through its problems.

Backed by both the Clinton and Bush administrations, the I.M.F. twice
came to
the rescue, beginning late last year.

The idea was to help the country defend its fixed currency, which had become
a political touchstone, while avoiding default on $132 billion in foreign
debt, allowing it to continue good relations with foreign investors.

The terms of the aid program were wrenching. The government agreed to slash
spending during a deep recession to increase the chances of making debt
payments on schedule.

"If Argentina got its core economic policies right, it would have avoided
this problem," said Charles Calomiris, a finance and economics professor at
Columbia University who has been sounding the alarm about Argentina for
months. "But the I.M.F. and both the Clinton and Bush administrations let
them stay in denial. They all wanted the problem to fall on someone else's
watch."

It is always a tough call to cut off aid, Mr. Calomiris said. But he argued
that by delaying, the fund helped Argentina dig itself into a deeper hole.

"If you do not show leadership and make it happen early, then you face a
catastrophe," he said.

Michael Mussa, the I.M.F.'s chief economist until last spring, said the fund
was justified in providing aid to Argentina late last year.

But he said that he disagreed with the decision by the fund and the Bush
administration to continue the aid program in August, when he said the
situation in Argentina had likely deteriorated beyond repair.

"The fund made a mistake in not saying no in August," Mr. Mussa said. "The
situation might have been more controllable then."

The difficulty, of course, is that such calls are much easier to make in
hindsight. Mr. Mussa acknowledged that even when the political and economic
situation in Argentina was more stable, a move to delay debt payments or
devalue the currency ran the risk of rattling financial markets and even
causing a financial implosion in the region.

In contrast, by watching Argentina wrestle with its finances over a
period of
months, financial markets anticipated the possibility of a default. The
chances of contagion are now viewed as minimal.

Moreover, it is difficult to place blame for Argentina's economic program
squarely on the fund when much of the policy was designed by Argentina
itself, sometimes over the objections of the fund's economists.

At an August meeting at I.M.F. headquarters, fund officials told Domingo
Cavallo, Argentina's economy minister, that the country would be better off
delaying debt payments.

Argentina, however, was determined to pay its debts in full and keep its
fixed currency in place, fulfilling what it viewed as a promise to its
citizens and creditors who had been told for years that pesos were as
good as
dollars. It outlined strict fiscal policies that it claimed would allow
it to
meet its obligations.

But by December, as Mr. Cavallo resorted to freezing bank accounts and
raiding pension funds to find enough hard currency to make debt payments,
collapse looked imminent. The fund decided to suspend aid for a program that
appeared to have little chance of success.

Though there were unique elements, Argentina's demise seems certain to
add to
the doubts about the wisdom of bailouts, doubts that have grown in recent
years. Nearly every major financial rescue effort, including those in Mexico,
Thailand, Indonesia, South Korea, Russia and Brazil, has come under intense
scrutiny from the left and the right, albeit for widely varying reasons.

Fund officials say privately that they cannot avoid financial bailouts
altogether. The lesson of Argentina, they say, is that they need to find a
way to say no before the people they are supposed to be helping take to the
streets.

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