[stop-imf] IMF Admits Fault in Argentina

[Robert Weissman]

IMF Says Its Policies Crippled Argentina
Internal Audit Finds Warnings Were Ignored

By Paul Blustein
Washington Post Staff Writer
Friday, July 30, 2004; Page E01

The International Monetary Fund's handling of the crisis in Argentina
three years ago almost certainly deepened a recession that threw
millions of Argentines into poverty and sparked political chaos
throughout the country, according to a report released yesterday by the
IMF's internal audit unit.

By overlooking Argentina's growing indebtedness in the 1990s and
continuing to lend the country money when its debt burden had become
unsustainable, the fund significantly contributed to one of the most
devastating financial crises in history, the report concluded.

The crisis peaked when the Argentine government defaulted on nearly $100
billion in debt to private creditors and had to abandon the
"convertibility" system that pegged the peso to the dollar at a
one-to-one rate. The ensuing crash led to an 11 percent decline in
Argentine output in 2002, sent the jobless rate soaring and toppled a
series of presidents in a country that the IMF had once hailed as a
model of free-market reform and development.

"It would have been an ugly crisis anyway, but perhaps not quite as bad
if the fund had supported a change in strategy earlier," said Isabelle
Mateos y Lago, an economist from the IMF's Independent Evaluation
Office, which produced the report.

The report provides potent ammunition to critics who contend that IMF
rescues often fail to save developing countries from investor panic and
even make matters worse. It also reinforces the complaint that the IMF's
loan packages frequently bail out private lenders without requiring them
to accept reductions in their claims, causing countries' debt burdens to
build and their problems to fester.

At the same time, the study helps rebut criticism that the fund insists
on excessive austerity in developing countries. In Argentina's case, the
report concluded that officials were too lenient.

Although it remains to be seen whether IMF policies will change as a
result, fund officials have long said that the Argentine debacle taught
them harsh lessons. The report echoes criticisms made by IMF staffers,
including Michael Mussa, the fund's chief economist from 1991 to 2001.

The report's critique is exceptionally damning, showing how fund
officials overlooked vulnerabilities, ignored warnings from some
staffers and shrank from confronting the economic forces that brought
Argentina to its knees. It goes considerably further than earlier
assessments by citing internal IMF memoranda, minutes of meetings and
other previously undisclosed facts
about key developments in the crisis.

For example, the report questions why the IMF agreed in the late 1990s
to a three-year program that would provide loans on a contingent basis
if Buenos Aires needed the money. A memo by the fund's research
department in November 1997 complained that the program, and in
particular the list of reforms required of Argentina, was "not ambitious
enough to warrant Fund
support," according to the report. Those concerns, however, were
downplayed by others at the IMF, especially top management, the internal
report concluded.

Although Argentina's yearly budget deficits were not overly large, the
government's indebtedness was rising at an alarming rate because of
off-budget spending. Yet the size of the debt "became the main focus of
[IMF] briefing papers and policy discussions only in late 1999 or early
2000," when it was approaching 50 percent of gross domestic product, the
report says. "By then, the economy was in recession, and efforts to
reduce the debt . . . were difficult and possibly also
counterproductive," the IMF study found.

The report also disparages the IMF's strategy for the two rescues it
marshaled for Argentina beginning in late 2000, when investors began
pulling money out of the country and interest rates spiked.

The first rescue included a $14 billion loan package from the fund, and
IMF officials knew the risk of failure was high, according to the
report. At a meeting of the 24-member board, which represents member
countries, several directors "articulated the view that, under realistic
assumptions, the debt dynamics were unsustainable and therefore the
program was very unlikely to succeed," the report states.

The report does not fault the board for giving Argentina the benefit of
the doubt so late in the crisis, because the alternative -- forcing the
country into default and devaluation -- would have been painful. But
"the critical error," according to the report, was that the IMF didn't
prepare an exit strategy that could have been used once it became clear
the rescue wasn't working. Such a strategy -- presumably including a
change in currency policy and a restructuring of debt, bolstered by
fresh IMF assistance -- might have limited the fallout if it had been
used before the recession deepened and the country's banks were weakened
in 2001, according to the report.

The report is especially scathing concerning the second rescue, an $8
billion loan in August 2001. At a meeting of senior staffers, management
sided with advocates of the loan who argued that giving the country one
last chance would "ensure that the [Argentine] authorities, not the IMF,
took responsibility" for the painful changes that might have to be made,
including a deep devaluation of the peso.

The loan was granted, the report says, despite an assessment that the
chances of success were "at most . . . 20-30 percent," and even though a
majority of staffers had concluded that "the additional few billion
dollars would not buy enough time to make a difference, but would be
more likely to disappear in capital flight." The net result, IMF staff
members argued, would simply be more government debt, not a more stable
economy -- which is precisely what happened, the report noted.

The report makes six recommendations for changes in IMF policy, strongly
urging the fund to design alternative fall-back plans when it mounts
rescues of countries.

An appended response from the staff agrees with many of the findings but
takes issue with others, saying, "some of its conclusions depend very
much on hindsight."

The report comes at a time when the IMF and Argentina are again at
loggerheads over the country's policies, and it could have an impact on
the dispute, although officials of the evaluation office said they have
no position on the situation.

The fund this week delayed a loan disbursement to Buenos Aires, and
although Argentine officials didn't respond as they have in the past -
by threatening to withhold scheduled debt payments to the IMF - Economy
Minister Roberto Lavagna suggests he might use the findings to justify a
hard line.

Noting the report that Argentina is not solely responsible for its "huge
debt," Lavagna writes: "It should be recognized that this institution
has the courage to expose and analyze its own mistakes. This should be
commended. Recognizing errors is, however, just the first step in a
healthy self-criticism exercise. The second step is bearing
responsibility for failures, namely sharing the burden of redressing
their consequences."



Argentina insists fund should take share of pain
By Adam Thomson in Buenos Aires
Financial Times; Jul 30, 2004

The Argentine government this week insisted the International Monetary
Fund should share the pain for the mistakes it made before the 2001
financial crisis.

In a statement to the IMF board, Roberto Lavagna, Argentina's economy
minister, commended the institution for admitting it had erred but said
recognising errors was just a start.

"The second step is bearing responsibility for failures, namely sharing
the burden of redressing their consequences," he wrote.

The crisis left Argentina's economy and social fabric in tatters. Its
middle class, one of the biggest in the region, was ripped apart and
about 60 per cent of the population was left living below the poverty
line. Gross domestic product shrank 11 per cent in 2002, while real
wages fell 35 per cent.

Mr Lavagna, who was responding to this week's long-awaited report on the
IMF's dealings with Argentina, argued: "Argentina is not only paying for
its own errors but also for those of the fund."

The country has been pushing the IMF and other multilateral institutions
to grant a roll-over until at least 2014 of about $35bn (29bn euros,
=A319bn) in principal it owes, an idea unlikely to be accepted by the IMF
or its largest shareholders.

Mr Lavagna's statement attempts to link the report's findings to a
discussion of Argentina's current relationship with the IMF. But the
fund insists that, while some general lessons can be drawn, the findings
are only about agreements up to 2001.

Making the link is important for Argentina when it is pressing the IMF
to speed up approval of the third review of its three-year agreement
with the institution.

Argentina is desperate for approval to avoid complicating still further
its attempts to reach a debt-restructuring agreement with its private
creditors. But it has fallen behind on several structural reforms and
approval of the review, which was originally scheduled for June, is now
highly unlikely until September at the earliest.

Mr Lavagna believes the delay is wrong. In the statement, he argues that
Argentina is for the first time in decades running an unprecedented
primary surplus, "yet in its relationship with the institution is now
being pressed in a way absent during the 90s to implement structural
reforms under a schedule that is oblivious to the political realities of
the country".

(c) Copyright The Financial Times Ltd