[stop-imf] Argentina and the IFIs: Better off Without Them?

[robert weissman]

Argentina and the IFIs:
Better off Without Them?

By Alan Cibils | October 20, 2004


Americas Program, Interhemispheric Resource Center (IRC)
www.americaspolicy.org



There is a popular saying in Argentina: m=E1s vale estar solo que mal
acompa=F1ado (better to be alone than in bad company). Increasingly
Argentines are wondering whether it isn=92t time to go it alone and leave
the International Financial Institutions (IFIs, the IMF, the World Bank,
and the Inter-American Development Bank) behind.

During his August 31st, 2004 ten-hour, self-invited visit to Argentina,
IMF Managing Director Rodrigo Rato told President N=E9stor Kirchner: =93At
the IMF we have a problem called Argentina =94. Kirchner promptly replied:
=93I have a problem called 15 million poor people=94, a clear reference to
what Kirchner considers the outcome of decades of mistaken IMF policy
prescriptions in Argentina.1

This frigid exchange is an indicator that the relationship between
Argentina and the IMF is not going smoothly. In fact, the three-year
agreement with the Fund, signed in September of 2003,2 is in limbo. In
what has become a regular event, the IMF delayed approval of the third
quarterly review of the agreement due in July, alleging that Argentina
had not complied with certain structural reforms.

In previous reviews, Argentina responded to IMF delays by threatening to
default on its $15 billion debt to the institution.3 This time, however,
Argentine officials tried a novel strategy: President Kirchner and
Economy Minister Roberto Lavagna decided to unilaterally suspend the
agreement until January, 2005 and pay the IMF on schedule the $1.5
billion due between August and January. While this approach temporarily
gets the IMF off Argentina=92s back, it is by no means a sustainable
arrangement. As Table 1 shows, without the refinancing of capital
payments provided by the agreement, Argentina must face impossible debt
service payments in the coming years, reaching 8.2% of GDP in 2005.4
This would be roughly equivalent to 35% of total government spending in
2005, an unthinkable amount given the huge need for government spending
required to undo 10 years of IMF-mandated austerity and the magnitude of
the social crisis. According to the Argentine government, unemployment
is at 19.1%, underemployment is at 15%, 44% of the population is below
the poverty line and almost 20% of the population is indigent. 5


[Table Deleted: To see table, go to:
http://www.americaspolicy.org/articles/2004/0410argentdebt.html]



How did Argentina get so deep in the debt cycle? Is there a way out?

Much is at stake for both Argentina and the IMF in the current
negotiations. Central issues are Argentina=92s defaulted debt
renegotiation process, the country=92s continued debt payments to the
IFIs, and its ability to design and implement economic policies that run
contrary to IMF prescriptions but would reduce its appalling levels of
hunger, poverty and unemployment.


The Unattainable Goal of a Manageable Debt

Since the onset of the social and economic crisis three years ago,
national and international attention focused on Argentina=92s gargantuan
public debt. In December 2001, at the height of the crisis that sealed
the fate of Argentina=92s decade-long experiment with rampant
neoliberalism, president-for-a-week Adolfo Rodr=EDguez Sa=E1 defaulted on
roughly $80 billion of Argentina=92s debt with private creditors
(predominantly individual and institutional bond-holders). However,
Rodr=EDguez Sa=E1 did not default on Argentina=92s $30 billion debt to the =
IFIs.

Argentina=92s chaotic devaluation in early 2002 resulted in the
accumulation of an extra $35 billion in public debt, mostly to bail out
banks and private businesses. This =93new=94 debt, added to IFI and
defaulted debt brings total public debt to approximately $180 billion,
roughly 130% of GDP.6

Argentina=92s emergence from default requires negotiating a swap of the
old defaulted bonds for new ones. To begin this process, in September
2003 Argentina issued a set of conditions to creditors under which it
was willing to restructure its debt.7 These included a 75% capital
reduction or =93haircut=94, considerably lower interest rates, longer
maturities, and no recognition of interest due since the default.
Creditors were outspokenly opposed to these restructuring conditions and
demanded a higher offer. One of the more outspoken groups, the Global
Committee of Argentine Bond-holders (GCAB), teamed up with the IMF to
pressure Argentina for a better deal for private creditors.

IMF and creditor pressure resulted in a new offer on June 1 st, 2004.
Known as the =93 Buenos Aires proposal,=948 the new offer doubled interest
rates and reduced the haircut from 75% to between 52 and 46%, depending
on how many bondholders accept the restructuring offer.9

Since most of the new bonds (to be swapped for the ones in default) will
be issued in New York, the Argentine proposal needed the approval of the
U.S. Securities and Exchange Commission (SEC). The critical green light
from the SEC came on September 29 th and the bond swap is scheduled to
be launched by mid November. Creditor groups, especially the GCAB, are
still not happy and the IMF continues to pressure Argentina to up its
offer.10

The alarming news is that even if a majority of defaulted creditors take
the Argentine government=92s offer,11 total debt would only shrink by
approximately $50 billion dollars, to about $130 billion--a whopping 90%
of GDP.12 Most economists agree that this is still a dangerously
unsustainable debt level. For example, The European Union agreed to a
maximum 60% debt-to-GDP ratio in the Maastricht Treaty. Former IMF Chief
Economist Kenneth Rogoff concluded in a recent paper that a sustainable
debt level for a country like Argentina would be about 30% of GDP.13

Furthermore, as Table 1 shows, there are extremely heavy debt service
payments due in the next 5 years. If Argentina does not manage to reach
some sort of refinancing arrangement with the IMF, most of the country=92s
$15 billion debt with the Fund will have to be paid off in 2005-2007.

Even in the best case scenario of a successful debt restructuring along
the Buenos Aires proposal guidelines, Argentina=92s still-huge public debt
continues to leave the country on the verge of another major crisis.

The outcome of Argentina=92s debt saga depends largely on how the current
standoff with the IMF is resolved and on the country=92s substantial debt
to the IFIs.14 Argentina=92s debt situation cannot be resolved in any
meaningful way if it continues under the tutelage of the IMF--forced to
continue to implement failed policy prescriptions on the one hand, and
to bleed out ifs coffers through IFI debt payments on the other.


The IFIs: Better Off Without Them?

There are at least six good reasons for Argentina to consider leaving
the IFIs behind and forge its own future. First, Argentina =92s explosive
debt accumulation and resulting crisis were due, in large part, to the
implementation of IFI promoted economic policies during the 1990s. Just
one of these policies--the privatization of the social security system
foisted upon Argentina by the World Bank (WB) and required by the
IMF--is one of the major culprits of Argentina=92s fiscal deficits since
1994 and contributed heavily to the public debt explosion.15 The WB is
now backtracking from its earlier dogmatic stance on the superiority of
market solutions for workers=92 retirement, acknowledging that a strong
state-sponsored program should be the backbone of the retirement system.
However, in Argentina the damage is already done.

Second, the IMF=92s blunders in Argentina in the 1990s are also well known
and much has been written on them.16 However, the IMF refuses to admit
its mistakes. The so-called Independent Evaluation Office, in reality a
branch of the IMF, recently completed a study on the IMF=92s performance
in Argentina during the 1990s. The study lays the blame for the crisis
squarely on Argentine government officials, parroting the usual IMF line
about Argentina=92s fiscal profligacy and incomplete structural reforms.17
The only mistakes the IMF admits to are not having supervised Argentina
closely enough and not having paid enough attention to warnings sounded
prior to 2001 that the fixed-exchange rate regime was in trouble.
Indeed, not only did the IMF ignore clear warnings, but they tripled
their exposure to Argentina in the months preceding the December 2001
crisis, taking total loans to Argentina from $5 billion to $15 billion.
In sum, the IMF was unprepared for the crisis, prescribed mistaken
economic policies--such as government spending cuts in the middle of a
deep recession--and poured money into Argentina to prop up an unviable
system.

Third, the IMF=92s management of the Argentine crisis (since December
2001) has been plagued with errors in diagnosis, macroeconomic
projections, and policy prescriptions. In an unprecedented document
published in early July, the Argentine government described in detail
IMF mistakes.18 For example, six months into the economic recovery
following the crisis, the IMF continued to predict that hyperinflation
and a major banking system collapse were imminent. Needless to say,
neither happened. The government=92s paper highlights the extent of IMF
cluelessness and inability to deal with the crisis. The document also
details IMF meddling in national affairs far outside its official
mandate, such as demanding modifications to the bankruptcy code and the
repeal of a law that allowed for the prosecution of white-collar crime.

Fourth, the IMF continues to act in a highly contradictory way. On one
hand, it acts as a lobbyist for defaulted private creditors, demanding
that Argentina raise its debt-restructuring offer and insisting that the
government pay off its debt to the IFIs.19 On the other hand, the IMF
has also insisted that Argentina eliminate export and financial
transaction taxes, which together account for one third of the
government=92s revenue, because it claims these taxes =93distort=94 the pri=
ce
structure. So as the IMF pressures for significantly higher payments to
creditors, it also demands measures that would deeply cut government
revenue. Meanwhile, Argentina=92s millions of poor and unemployed don=92t
even enter into the IMF=92s equation.

Fifth, since the December 2001 crisis, Argentina has made net payments
to the IFIs to the tune of $8.2 billion.20 During the worst economic
crisis of its history, rather than receiving fresh loans from the IFIs
and applying scarce resources to alleviate poverty, generate employment
and kick-start the economy, Argentina was instead sending its revenues
to the IFIs.

Finally, the IFIs have not only prescribed mistaken and harmful policies
and made bad loans, but they claim =93preferred creditor=94 status,
expecting to cash in ahead of all other creditors. In other words,
contrary to the laws of the market they so vehemently promote, they are
accountable to no one nor will they pay for their mistakes.

The huge social and economic costs of IFI mistakes have Argentines
asking: why should IFIs not pay for their mistakes, much like private
creditors pay for bad investments? And how does Argentina benefit by
maintaining its links to these institutions?

Which Way Now?

Come January 2005, Argentina will have to decide what its relationship
to the IMF will be. Will the agreement signed in 2003 be restored?
Assuming a successful defaulted debt restructuring, Argentina=92s debt
sustainability will still not be guaranteed, especially if it must pay
off the IFIs. What are the options?

The most desirable--and least likely--option is debt forgiveness along
the lines proposed by the Jubilee Network.21 However, Argentina does not
fit the IMF=92s =93heavily indebted poor country=94 definition that is need=
ed
to qualify for debt cancellation. Furthermore, it appears that the IMF
wants to make an exemplary case of Argentina for having defaulted on its
debt, making debt forgiveness even less probable.

The least desirable option--and the most likely--is a restoration of the
currently suspended agreement. Despite the Argentine government=92s
combative rhetoric, when push comes to shove Argentine officials have
caved to the IFIs in the past and are likely to continue to do so. The
only benefit of a renewed agreement with the IMF would be a roll-over of
capital payments. The drawbacks would be adoption of IMF conditionality
and mistaken policy prescriptions with huge human costs. There would be
a political cost as well. Given the government=92s detailed and public
exposure of IMF blunders and their enormous social consequences, how
will it justify a renewed relationship with the Fund? If this option is
chosen by Argentine officials, they should at least demand that IFIs
submit to the accountability framework recently proposed by the Center
for Economic and Policy Research.22 Such a framework would make IFI
economists accountable for their economic projections and policy
prescription outcomes.

A third option is to default to the IFIs and force a debt restructuring.
The advantages would be considerable: freeing up resources for
development and regaining sovereignty over policy design and
implementation. The price to pay is not as clear. The cost mentioned
most often is the interruption of access to international credit
markets, but Argentina has not had access to these markets since 2001
and has still managed to emerge from the crisis. Furthermore, Argentina
has large primary fiscal and trade surpluses, and therefore the country
has been mostly self-financing. Another cost often mentioned is the
interruption of foreign investment. This is unlikely, since foreign
investors care more about profit opportunities and a predictable
investment climate than about IMF agreements. The political costs are
more of an unknown. A successful break with the IFIs is an example that
the G-7 and the IFIs themselves would like to avoid. It is not clear to
what extent they would go to do so.

The road ahead for Argentina is bumpy. However, increasingly it looks
like Argentina would be better off traveling without the IFIs. One thing
is clear, as Rato said, the IMF has =93a problem called Argentina=94. Being
the stone in the shoe of the IMF gives Argentina considerable leverage.
It should use that leverage to finally break dependence on bad IFI policies=
.

Alan B. Cibils is an Argentina-based Senior Research Associate at the
Center for Economic and Policy Research in Washington, DC (www.cepr.net)
and a Research Associate at the Centro Interdisciplinario para el
Estudio de Pol=EDticas P=FAblicas (Interdisciplinary Center for Public
Policy Studies-CIEPP) in Buenos Aires, (www.ciepp.org.ar). He is a
frequent contributor for the IRC Americas Program and can be reached at
<americas@irc-online.org>.


Further information:

=93Argentina and the IMF: Down to the Wire--Again=94 by Alan Cibils
(http://www.americaspolicy.org/reports/2004/0404argentinedebt.html).

=93Argentina's IMF Agreement: The Dawn of a New Era?=94 by Alan Cibils, (
Silver City, NM & Washington, DC: Foreign Policy In Focus, October 10,
2003) (http://www.fpif.org/commentary/2003/0310argdefault.html).

=93Renegociaci=F3n de la deuda: un panorama confuso de montos, quitas, pago=
s
y sustentabilidad futura=94 by Jorge Schvarzer and Hern=E1n Finkelstein,
Centro de Estudios de la Situaci=F3n y Perspectivas de la Argentina, Notas
de Coyuntura N=BA16, August 2004
(http://www.econ.uba.ar/www/institutos/economia/CESPA/archivos/NC16CESPA.zi=
p).

Instituto Nacional de Estad=EDstica y Censo (INDEC, www.indec.gov.ar).

Information on Argentina=92s debt: http://www.argentinedebtinfo.gov.ar/

=93Debt Intolerance,=94 Kenneth Rogoff, Carmen Reinhardt and Miguel
Savastano, National Bureau of Economics Research Working Paper 9908,
August 2003 (http://www.nber.org/papers/w9908).

=93The Role of Social Security Privatization in Argentina=92s Economic
Crisis,=94 by Dean Baker and Mark Weisbrot, Center for Economic and Policy
Research, April 16, 2002
(http://www.cepr.net/argentina_and_ss_privatization.htm).

=93Argentina Since Default: The IMF and the Depression,=94 by Alan Cibils,
Mark Weisbrot, and Debayani Kar, Center for Economic and Policy
Research, Briefing Paper, September 3, 2002
(http://www.cepr.net/argentina_since_default.htm).

=93An=E1lisis N=BA II: Argentina, el FMI y la Crisis de la Deuda=94
http://www.mecon.gov.ar/analisis_economico/nro2/2_fmi_crisis_deuda.pdf .

=93Applying Economics to Economists: Good Governance at the International
Financial Institutions=94 by Mark Weisbrot and Dean Baker, CEPR, July 2004
(http://www.cepr.net/publications/ifi_accountability.htm).


Resources:

Jubilee Network
http://www.jubileeusa.org/

Center for Economic and Policy Research (CERP) in Washington, DC
http://www.cepr.net/

Centro Interdisciplinario para el Estudio de Pol=EDticas P=FAblicas
(Interdisciplinary Center for Public Policy Studies-CIEPP) in Buenos Aires
http://www.ciepp.org.ar/


Endnotes

    1. When the IMF=92s so-called Independent Evaluation Office issued a
report on the Fund=92s performance in Argentina during the 1990s, Kirchner
stated that the IMF=92s mistakes =93cost us 15 million poor people=94 (=93P=
ara
Kirchner los errores del FMI costaron 15 millones de pobres=94 by Mariano
Obarrio, La Naci=F3n, July 31, 2004 ) .
    2. For an analysis of that agreement, see =93 Argentina's IMF
Agreement: The Dawn of a New Era?=94 by Alan Cibils, ( Silver City, NM &
Washington, DC: Foreign Policy In Focus, October 10, 2003)
(http://www.fpif.org/commentary/2003/0310argdefault.html).
    3. For further details, see =93 Argentina and the IMF: Down to the
Wire--Again=94 by Alan Cibils
(http://www.americaspolicy.org/reports/2004/0404argentinedebt.html).
    4. Data in Table 1 is based on =93Renegociaci=F3n de la deuda: un
panorama confuso de montos, quitas, pagos y sustentabilidad futura=94 by
Jorge Schvarzer and Hern=E1n Finkelstein, Centro de Estudios de la
Situaci=F3n y Perspectivas de la Argentina, Notas de Coyuntura N=BA16,
August 2004 (
http://www.econ.uba.ar/www/institutos/economia/CESPA/archivos/NC16CESPA.zip
).
    5. See Instituto Nacional de Estad=EDstica y Censo (INDEC,
www.indec.gov.ar), Argentina=92s official statistics agency.
    6. Argentina=92s current public debt composition is as follows:
           * Approximately $32 billion of IFI debt,
           * Approximately $48 billion of =93performing=94 debt, which
includes $35 billion of new debt plus other private debt not included in
the default, and
           * Approximately $100 billion currently in default and in the
process of being renegotiated.
    7. The restructuring conditions and other official debt-related
information and data can be found at: http://www.argentinedebtinfo.gov.ar/.
    8. The specifics of this proposal haven=92t been made officially
available yet. Information publicly available comes from a government
press conference on the issue and the Argentine government=92s
presentation to the U.S. SEC, available at:
http://www.argentinedebtinfo.gov.ar/documentos/preliminary_base_prospectus.=
pdf.
    9. The haircut is smaller if more than 70% of bondholders accept the
new offer. For detailed information on the new offer, see Jorge
Schvarzer and Hern=E1n Finkelstein (2004).
   10. See, for example, IMF Managing Director Rodrigo Rato=92s remarks at
the Council on Foreign Relations on September 20 th, 2004, as reported
in =93Fuerte reclamo del jefe del FMI a la Argentina=94 by Jorge Rosales, L=
a
Naci=F3n, 09/21/04. ( Buenos Aires=92s two other major dailies, Clar=EDn an=
d
P=E1gina/12 also reported on Rato=92s remarks).
   11. In a recent article, the Financial Times predicted that the swap
would be successful simply because defaulted creditors are sick and
tired of dealing with the issue and will probably accept the Argentine
government=92s latest offer (=93 Argentina closes in on sweet debt relief
deal=94 by Adam Thomson, Financial Times, September 20 th, 2004).
   12. When Argentina defaulted on its debt in December 2001, total
public debt was 50% of GDP.
   13. Kenneth Rogoff, Carmen Reinhardt and Miguel Savastano: =93Debt
Intolerance=94, National Bureau of Economics Research Working Paper 9908,
August 2003 (http://www.nber.org/papers/w9908).
   14. Assuming a successful defaulted debt refinancing, 25% of total
Argentine public debt will be with the IFIs.
   15. See =93The Role of Social Security Privatization in Argentina=92s
Economic Crisis=94 by Dean Baker and Mark Weisbrot, Center for Economic
and Policy Research, April 16, 2002
(http://www.cepr.net/argentina_and_ss_privatization.htm).
   16. For example, =93Argentina Since Default: The IMF and the
Depression=94 by Alan Cibils, Mark Weisbrot, and Debayani Kar, Center for
Economic and Policy Research, Briefing Paper, September 3, 2002
(http://www.cepr.net/argentina_since_default.htm).
   17. The IEO study can be found at:
http://www.imf.org/External/NP/ieo/2004/arg/eng/index.htm. For recent
remarks by IMF officials repeating similar arguments, see Anne Krueger=92s
March 23, 2004 lecture at NYU
(http://www.imf.org/external/np/speeches/2004/032304a.htm), Anoop
Singh=92s March 27, 2004 speech at the Inter-American Development Bank=92s
annual meeting in Lima, Per=FA
(http://www.imf.org/external/np/speeches/2004/032704.htm), and Anne
Krueger=92s March 31, 2004 presentation at the American Enterprise
Institute in Washington, DC
(http://www.imf.org/external/np/speeches/2004/033104.htm).
   18. The document was signed by President Kirchner, his Chief of
Staff, and by Minister Lavagna and his entire cabinet. It is titled
=93An=E1lisis N=BA II: Argentina, el FMI y la Crisis de la Deuda=94 and can=
 be
found at:
http://www.mecon.gov.ar/analisis_economico/nro2/2_fmi_crisis_deuda.pdf.
   19. This is clearly stated in the official document on the IMF
mentioned in the previous paragraph.
   20. According to an explanatory text accompanying the 2005 Federal
Budget bill, Argentina has paid the IFIs a net $1.2 billion in the first
six months of 2004. According to Minister Lavagna=92s presentation at the
joint WB-IMF meetings in March 2004, Argentina made net payments of $7
billion in 2002-2003.
   21. For more information, see http://www.jubileeusa.org/.
   22. For more information see =93Applying Economics to Economists: Good
Governance at the International Financial Institutions=94 by Mark Weisbrot
and Dean Baker, CEPR, July 2004
(http://www.cepr.net/publications/ifi_accountability.htm).