[stop-imf] More on Argentine "blackmail" of the IMF

[Robert Weissman]

Excerpted from:
World Bank Press Review: Headlines for Tuesday, January 21, 2003

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World Bank Says $1 Billion Ready for Argentina
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The World Bank is ready to assist troubled Argentina with $1 billion
provided that Buenos Aires clinches a debt rollover deal with the IMF,
Reuters and El Pais (Spain) report World Bank President James Wolfensohn
said on Monday. "In the event that the current negotiations are approved
by the Fund, we would immediately announce a billion dollars' worth of
social assistance packages to Argentina," Wolfensohn told a news
conference during a visit to Denmark.

The government of heavily indebted Argentina said on Thursday it had
reached an agreement with the IMF for a $6.6 billion loan that would cover
the country's repayments to the Fund until the end of August, notes
Reuters.  IMF Managing Director Horst Kohler said on Friday he would
recommend that the Fund approve a short-term loan for the cash-strapped
South American nation. He said Argentina's economy had "somewhat
stabilized" but remained fragile. The government had developed policies,
which if put in place, could build a bridge to a more comprehensive
program with the new government after elections due in April.

Of the $1 billion package the World Bank now stands ready to provide, $600
million is earmarked for the Bank's heads of household program and $400
million for its social assistance program for families and education,
Wolfensohn said.

Meanwhile, notes Reuters in a separate report, IDB President Enrique
Iglesias said on Sunday, "We celebrate Argentina's accord with the IMF
since it also makes viable our support, to be made concrete soon."  He
declined to give further details of when the accord might be reached.

Argentina last week failed to make a $680 million payment to the IDB, thus
falling into default with one of its last foreign creditors. In accordance
with policy on late payments, the bank was forced to suspend loan
disbursements to Argentina.

Iglesias said the accord with the IMF demonstrated that Argentina was
making important efforts to dig out of a grinding four-year recession
brought on by a catastrophic economic meltdown in 2001.  "There are now
signs that Argentina, which has a vigorous economy, is beginning to
recover," he said.

Also reporting on the deal with the IMF, Agence France-Presse says
Argentina is aiming to create a "normal situation" for foreign investment
in the South American country, according to Argentine Foreign Minister
Carlos Federico Ruckauf.  During a visit to Vienna on Monday, he said the
current government had managed to stabilize Argentina's economic and
social situation.

Ruckauf also expressed concern about the effect EU expansion would have on
Argentina's sales in Europe.  "We know the EU gives subsidies of $3 per
cow daily. That's something we can't give our children," he is quoted as
saying.  He also joked that some EU officials think cows should travel in
first class on trains, while the Japanese, who also subsidize their
agriculture, "think cows should fly in planes."  But he turned serious
when he said that such subsidies extended to "former eastern European
countries would be very expensive for Europe and very dangerous for our
products."

Ruckauf said decisions on subsidies were up to Europeans but that he hoped
Europeans would have in the future "the best meat and grain with the best
quality and the best prices," a clear reference to Argentina's selling in
Europe.

Alan Beattie of the Financial Times (1/20) writes meanwhile that the IMF's
latest move shows remarkable leniency towards a debtor that has broken
most of the codes of conduct of international finance and used the threat
of default with the IMF and its sister institution, the World Bank, as one
of its main negotiating positions.  Still more exceptional is the clear
role of the IMF's rich shareholder countries-particularly Spain, Italy and
France and, to a lesser extent, the US-in pressing the IMF's management to
offer the deal. There is a deep sense of resentment and even anger in the
normally sedate beige-carpeted corridors of the IMF that a borrower
country that many officials feel has blatantly been playing chicken with
the Fund should be rewarded.

"Lavagna blackmailed us-and we gave in," says one senior IMF policymaker,
referring to Roberto Lavagna, the Argentine economy minister whose use of
brinkmanship in negotiations has made him few friends in the Fund. The
timing of the draft agreement last week-hours before the Argentines agreed
to repay $1 billion to the IMF following a year of stalling
negotiations-strikes few as a coincidence.  According to this view,
acquiescing to a deal to postpone repayment until the summer has
undermined the Fund's hard-won credibility in being tough with delinquent
borrowers.

Some of the G7 countries, particularly the Europeans, backed the deal out
of fear for the health of the international financial institutions and the
knock-on effects on other borrowers if Argentina defaulted. Italy and
Spain also seemed to be particularly concerned about the potential risk to
their investments in Argentina. The relatively small IDB, in particular,
to which Argentina missed a $680 million payment last week, would have
been severely hit by a complete Argentine default. Under the IMF's
burden-sharing arrangements, the borrowing costs for other countries would
also have to rise if Argentina were simply to walk away from the $14
billion it has already borrowed from the Fund.

The argument for the roll-over deal is that, given the recent
stabilization of the Argentine economy, it provides some breathing space
until after April's presidential elections without compromising the Fund's
position by offering new money.

When the agreement comes to the IMF's governing board of shareholder
countries this week, it is almost certain to be passed. One or two of the
smaller countries may express their distaste by abstaining, as Switzerland
and the Netherlands did over the futile last-ditch $8 billion lending
package for Argentina in August 2001. But even if they do, they will be
outvoted by the dominant bloc of G7 industrialized countries; even Germany
and Britain, often skeptical of large bailout packages, have supported
this deal.

More generally, the Argentina deal seems to mark a break in the
relationship of the IMF's large shareholder countries with Kohler and his
deputy, Anne Krueger, since they were appointed in 2000 and 2001. By
interfering in the Fund's decision-making, the US is putting it into a
difficult situation. If the G7 wants to pursue its own interests, some
observers say, it should pay for them with bilateral grants, not push for
IMF lending, which adds to unstable countries' debt burdens-thus reducing
the amount left to pay private creditors if they default-and places the
Fund itself in jeopardy.

Commenting in an editorial reprinted in El Cronista (Argentina), the FT
(1/20) says this operation may turn out to be a terrible error-damaging to
the Fund, Argentina and other emerging market economies.  The G7 leading
industrialized countries took this decision over the opposition of the
Fund's management. They did so partly because they were worried about the
consequences of Argentina's growing arrears for the credit ratings of the
World Bank and the IDB. Some countries-notably in continental Europe-were
also concerned over investments made by their nationals. With US support,
they have imposed a transitional agreement, aimed at giving Argentina the
appearance of good standing with the international financial institutions
until after the presidential elections due in April.

The G7 has, as a result, hung up bright signs carrying the words
"blackmail us" and "the IMF-experts at massaging balance sheets".  That is
bad, says the editorial.  But the agreement may also harm Argentina. In
Buenos Aires, it will be viewed as a seal of approval on the Duhalde
government's record. It could undermine the position of candidates
offering rational policies in the election. It will make it more difficult
for other governments, particularly in South America, to pursue
disciplined and rational policies.

Yet this program can be defended. First, Argentina's government has not
done as badly as all that: it has avoided hyperinflation; the budget is in
surplus, if only before interest payments; the currency has stabilized;
public spending has been cut by more than 30 percent, in real terms; and
deposits are returning to the banking system.  Second, no new money is
involved. Finally, the commitments in the program should help those
policymakers who are trying to restore economic stability. While Argentina
has no more money than if there had been no agreement, it does have a
commitment it needs to honor.

These arguments are not worthless, but they are also far from
overwhelming. The G7 has taken a huge gamble. It will be justified only if
it both helps Argentina recover from its crisis and does not become a
baleful precedent. The odds must be against, though not massively so. Only
Argentina's own behavior can show that the gamble was worth taking.

Also commenting, the Washington Post (1/20) says this minimalist
muddling-through can't last; at best it might serve until presidential
elections are held and a new leader replaces Duhalde on May 25. In an
attempt to make that outcome more likely, the US administration and
several of its G7 allies have strong-armed the IMF into signing an
agreement that will roll over $6 billion of Argentina's debt. It's a risky
maneuver that may backfire.

Administration officials tend to see the new accord in political terms: as
a good-faith gesture that could prove valuable at a moment when the
various Argentine presidential candidates are hotly debating whether to
continue cooperation with the international financial institutions. But
the carrot comes at the cost of a rift between the IMF administration and
its government sponsors and the violation of a principle the IMF
previously has been chastised for failing to uphold in Argentina's case:
that an agreement, and the signal of endorsement it usually represents for
international financial markets, should not be granted unless the
government commits to a serious economic reform plan.