[stop-imf] It Pays to Get Tough With the IMF

[Robert Weissman]

It Pays to Get Tough With the IMF
Mark Weisbrot

       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.

Mark Weisbrot is Co-Director of the Center for
Economic and Policy Research (www.cepr.net), in
Washington, D.C.


This was distributed to newspapers by Knight-Ridder/Tribune
Information Services. If anyone wants to reprint it, please contact Mark Weisbrot:


Name: Mark Weisbrot
E-mail: <weisbrot@cepr.net>
Co-Director
Center for Economic and Policy Research
1621 Connecticut Ave NW, Suite 500
Washington, DC 20009-1052
Phone (202) 293-5380 x228
Fax (202) 588-1356
(202) 333-6141 (home)
(202) 746-7264 (cell)
www.cepr.net