By Steven Pearlstein
Washington Post Staff Writer
Thursday, January 3, 2002; Page E01
washingtonpost.com
Yesterday's news that Argentina is likely to sharply devalue its currency,
along with last week's announcement that it will suspend payment on its
debt, raised fresh questions about the performance of the International
Monetary Fund and benefits of the free-market, free-trade, open-investment
policies it promotes around the world.
The developments will surely mean that the Argentine people will be forced
to accept a significant decline in what had been the highest standard of
living in Latin America. They will also mean tens of billions of dollars in
losses for German dentists, Spanish banks and American pension funds that
once invested enthusiastically in Argentine bonds.
So far, the prospect of an Argentine default and devaluation has had only a
minor impact on other financial markets. But analysts warn of a possible
"political contagion" as other countries in Latin America consider pulling
back from economic reforms that Argentina, with the strong encouragement of
the IMF, had seemed to embrace.
Not surprisingly, there is already a growing chorus of critics who blame
the Washington-based IMF and its largest shareholder, the United States,
for the Argentine debacle, echoing similar criticisms made in the wake of
the Asian financial crisis of 1998.
Liberals charge that the IMF doomed the Argentine economy by imposing a
harsh regime of spending cuts and tax increases at precisely the wrong time
-- the middle of a recession -- as a condition for new loans.
Conversely, there are those who fault the IMF and the Treasury for taking
too much of a hands-off approach, in sharp contrast to the
crisis-management style during the Clinton administration, when officials
did not hesitate to employ political threats and financial promises to
bring wayward countries in line with Washington's policy advice.
Conservatives complain that the IMF continued to lend money to Argentina
well after it was clear that default and devaluation were inevitable,
squandering $11 billion over the past two years on an Argentine rescue that
even top officials knew was likely to fail.
Taking just the opposite view, Latin American officials, Western bankers
and many Argentines have charged that the IMF pulled the plug on Argentina
just as it was completing a voluntary debt swap that could well have
restored the confidence of financial markets and given the country the
financial breathing room it needed.
The contradictory nature of these criticisms lends some credence to the
defense now offered by IMF and U.S. officials -- namely that they were in a
no-win situation, faced with either backing an Argentine plan they
privately suspected would fail or trying to impose their own policies on a
freely elected government that repeatedly rejected them.
"I think the IMF didn't do anything wrong in this case," said Jeffrey
Sachs, director of Harvard University's Center for International
Development, who in the past has been one of the harshest critics of the
fund and the Treasury. "The Argentines led the way and called the shots,
but what they wanted to do was just impossible."
"I don't think a more accommodating or a more demanding IMF would have
helped in this case," agreed Caroline Atkinson, a senior fellow at the
Council on Foreign Relations and a former IMF and Treasury official. "The
story here is that the Argentines had some bad luck, mismanaged a lot of
things and rejected the advice they were given."
According to officials involved in the negotiations, the Treasury
repeatedly argued to Argentine officials that the underlying problem was
that Argentina simply had too much debt, caught in a vicious spiral in
which it was forced to borrow more and more money just to meet its
ever-increasing interest payments. Treasury officials argued some sort of
default, or voluntary "rescheduling," was inevitable.
IMF officials were less enthusiastic about default -- their view was that
the fundamental problem was really Argentina's currency regime that pegged
the value of the peso to the U.S. dollar. As the value of the dollar soared
in recent years, it dragged the peso up with it, making Argentine products
uncompetitive on world markets and forcing the economy into recession. IMF
officials argued that the only way to restore economic growth was to
devalue the peso to a lower exchange rate with the dollar or let it float
freely on world currency markets.
According to several people familiar with the talks, however, Economy
Minister Domingo Cavallo refused to even discuss devaluation and default. A
default, he argued, would make Argentina a pariah in the financial world
and deal an unacceptable blow to the country's pride. As for the dollar
peg, which Cavallo himself had ushered in a decade before, nearly every
Argentine had come to believe it was the only reliable defense against the
hyperinflation that had inflicted the country for much of the 1980s.
Cavallo warned Washington that any government that accepted devaluation
would soon find itself out of office.
Those political realities, however, put Argentine officials in a financial
box. Another country might have tried to paper over its deficits by
printing additional money -- in effect, paying for them in the form of
higher inflation and higher interest rates. But because Argentina had
pledged to exchange one dollar for every peso in circulation, "monetizing"
its debt was not an option. The only other course was to finance its debt
by borrowing the money, either from its own people or from foreigners.
And borrow it did -- up to a whopping $132 billion -- until, last spring,
lenders began demanding exorbitant interest rates or simply refusing to
lend at all. In a desperate attempt to restore investor confidence and win
immediate loans from the IMF, Cavallo devised a plan committing the
government to achieve a fiscal balance within two years and pushed it
through reluctant federal and provincial congresses.
From a theoretical perspective, the plan might have worked, but at the
Treasury and the IMF, officials were deeply skeptical that the country
could suddenly muster the political will necessary to raise tax receipts
and cut spending, particularly in the midst of a gathering global
recession. By early August, Treasury Secretary Paul H. O'Neill, who had
come into office broadly skeptical of IMF bailout schemes, had persuaded
most of his counterparts in the other industrialized nations to halt
further IMF lending to Argentina.
Cavallo, who seemed to possess an unshakable belief in his own magic,
refused to believe the game was up. For two weeks in August, he shuttled
back and forth between the IMF and the Treasury, pitching and repitching
his austerity plan. Meanwhile, the White House and the State Department
were getting urgent calls from heads of state across Latin America, who
warned that a rebuff of Argentina could cause financial panic throughout
the region and give comfort to left-wing parties opposed to the free-trade
and market reforms pushed by the United States.
Cavallo's stubborn persistence finally paid off. In mid-August, O'Neill and
the IMF's top officials reluctantly agreed to give Argentina one more try
at a plan based on fiscal austerity. As a condition to a supplemental $8
billion loan package, however, Argentina agreed not only to adhere to the
tight budget targets proposed by Cavallo but also to move expeditiously to
pursue a voluntary renegotiation of its debt with creditors.
In the end, it proved too little, too late. With the global economy sinking
into recession, the Argentine economy slowed further, pushing budget
deficits up even further. As investor confidence plummeted, interest rates
soared.
Although Cavallo was able to force a debt swap on Argentine banks and
pension funds by mid-November, it was widely viewed both within the country
and outside as a default by another name. Money began to flee the country,
forcing Cavallo to impose a freeze on withdrawals from bank accounts. On
the street, pesos began trading at a 30 percent discount from the dollar.
Finally, on Dec. 5, the IMF announced a suspension of all further lending
to Argentina. By that point, officials concluded that any additional money
lent to the country would almost immediately wind up in the hands of
Argentines and foreign creditors scrambling to get their money out of the
country -- exactly the kind of bailout for wealthy investors for which the
fund had been criticized in the past.
Even among IMF sympathizers, however, there remains a widespread view that
the cutoff came several months too late.
"Lending them more money back in August -- without debt restructuring,
without a change in the currency regime -- was a terrible mistake," said
Morris Goldstein, a senior fellow at the Institute for International
Economics and a former IMF official. "There was no way they could turn
things around simply on the basis of fiscal austerity."
Michael Mussa, who retired as the IMF's chief economist days after the
August decision, declared it was the worst decision he had seen in his
decade at the fund.
Now that the new government has embraced devaluation and default, many U.S.
economists and policymakers are viewing it as a positive step toward
reviving the Argentine economy and clearing the way for a resumption of IMF
lending. From his ranch in Texas, President Bush made it clear that the
U.S. was willing to consider it.
At the same time, Washington policymakers are likely to remain wary of the
intent of the Peronist government led by President Eduardo Duhalde on
retreating from the global economy at the same time it tries to pry
billions of dollars in fresh loans from the IMF and other foreign lenders.
"He [Duhalde] can make a lot of noise and do a few highly visible things to
deliver on his populist rhetoric -- I think the international community is
prepared to discount that," said Mussa, the former IMF economist. "But if
he's going to go back to the protectionist policies of the past and
renationalize the public utilities and go hog-wild on government spending,
then he won't meet with much cooperation here in Washington."
** IMF PROTESTS **
. GW to Shut Down During IMF Protests
<http://www.washingtonpost.com/wp-dyn/articles/A54264-2001Sep6.html> (The
Washington Post, Sep 7, 2001)
. Globalization's Diverse Foes
<http://www.washingtonpost.com/wp-dyn/articles/A42635-2001Sep4.html> (The
Washington Post, Sep 5, 2001)
. Global Economy's New Guardian
<http://www.washingtonpost.com/wp-dyn/articles/A16237-2001Aug29.html> (The
Washington Post, Aug 30, 2001)
. IMF Protesters Demand Reforms
<http://www.washingtonpost.com/wp-dyn/articles/A10853-2001Aug28.html> (The
Washington Post, Aug 29, 2001)
. U.S. Pledges $16 Million for IMF Security
<http://www.washingtonpost.com/wp-dyn/articles/A54044-2001Aug23.html> (The
Washington Post, Aug 24, 2001)
. Photo Gallery: April 2000 Protests
<http://www.washingtonpost.com/wp-dyn/photo/topstory/G26846-2000Apr16.html>
. Special Report: World Bank/IMF
<http://www.washingtonpost.com/wp-dyn/world/specials/inthenews/wto/>
** GRAPHIC **
. Protest Protection
<http://www.washingtonpost.com/wp-srv/metro/daily/shoulders/01/imf.htm>
** SPECIAL REPORT **
. Full Coverage of U.S. Foreign Aid
<http://www.washingtonpost.com/wp-dyn/world/issues/foreignaid/>
** WEB SPECIALS **
. Global Markets
<http://www.washingtonpost.com/wp-dyn/business/specials/internationalmarkets/index.html>
. International Stocks <http://financial.washingtonpost.com/adr.asp> |
