Sympathy, but no cash
Apr 22nd 2002
From The Economist Global Agenda
As Argentina’s financial crisis continues to deepen, any hopes that new help might soon be forthcoming from the International Monetary Fund have quickly faded. Argentina will have to deliver concrete reforms first
AP
Remes got lunch
CROCODILE tears. That must be how the Argentine government views the messages of sympathy for the country’s economic and financial plight which emerged from a series of meetings in Washington, DC, at the weekend. The Argentine finance minister, Jorge Remes Lenicov, had hoped that the G7 finance ministers and the International Monetary Fund (IMF) would provide some hard cash. Instead, he got little more than lunch.
Viewed from Buenos Aires, this reluctance to commit new financial support is hard to take. The government of President Eduardo Duhalde inherited a catastrophic collapse of Argentina’s economy and its financial system. Latin America’s third-largest economy was forced to default on its huge public debt (the largest sovereign-debt default in history) and to break a decade-old currency peg with the American dollar. The Argentine peso is now worth less than one third of its value of just a few months ago. The economy is in its fourth year of recession and unemployment is at least 20%, possibly much higher. On April 19th, the day before Mr Remes’s rendezvous with the G7 ministers, the authorities closed all banks indefinitely in a desperate attempt to stop the continuing drain on bank reserves. The banks are unlikely to reopen until emergency legislation has been passed obliging depositors to accept government bonds instead of cash. How can the international community remain unyielding?
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Provided by moreover.com
Sovereign defaults
Apr 4th 2002
Argentina
Feb 13th 2002
Currency regimes
Jan 21st 2002
Argentina
The Ministry of Economy in Argentina posts information on the country's economy. The IMF reports on the latest developments in its dealings with Argentina, and publishes more detailed background information.
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About Global Agenda
The sympathy of senior IMF officials and G7 finance ministers appears genuine. There is recognition of the upheaval that Argentina is now experiencing. But there is also frustration that Argentina still seems unable or unwilling to take the action necessary to reform its economy. Without the changes demanded by the IMF in return for further help, both the Fund and its principal rich-country shareholders take the view that any extra cash they stump up would disappear down a black hole.
There is relatively little difference in opinion between the IMF and the government in Buenos Aires on what ultimately needs to be done. The argument is about whether reform or new assistance should come first. The Argentine government appears to believe that some of the conditions demanded for the provision of new money are unreasonable and unrealistic. In particular, both the government and the IMF recognise the need to curb overspending by provincial governments, although the Fund insists reform is a precondition of further help.
Hanging over the current negotiations is the stinging criticism of many economists: that the IMF should not have bailed out Argentina last August, when it supplied a further $8 billion as part of a deal which should have included reform of public finances. In the event, the package simply postponed Argentina’s default and the de-coupling of its currency from the dollar—a move which economists had said was inevitable. And public finance reform has yet to be tackled effectively.
The IMF’s relatively new first deputy managing director, Anne Krueger, said recently that even with hindsight it is possible to defend the August decision. And other economists have pointed out that it was particularly in the last quarter of last year, as Argentina’s fate became obvious—except to the then government in Buenos Aires—that the risk premium on the country’s debt started to rise sharply above that for other emerging-market economies. This differentiation of risk played an important part in limiting the fall-out from Argentina’s collapse. So far, the contagion that was so apparent in previous emerging-market crises has been noticeably absent in Argentina’s case.
Whatever the merits of the August bail-out, there now seems to be unanimity that any new package should involve unbreakable commitments from Argentina to undertake reforms. That seems to mean delivering those reforms, or at least making a convincing start to them, up front. This is now something Mr Remes will have to reflect on with President Duhalde. The IMF’s managing director, Horst Köhler, said on April 20th that he did not expect further negotiations until the IMF team returns to Buenos Aires next month.
Whatever the merits of the August bail-out, there now seems to be unanimity that any new package should involve unbreakable commitments from Argentina to undertake reforms
The World Bank, meanwhile, is examining the scope for providing humanitarian aid to Argentina to ease the plight of the poorest citizens. And all those involved are trying to draw lessons from the Argentine experience. The G7 has agreed to change the way emerging-market governments issue sovereign debt in order to reduce the risk of default or make them less disruptive. The IMF is working on other far-reaching proposals.
IMF economists have also been examining why Latin American countries seem unusually susceptible to disruptive financial crises. One key finding is that they are less open to trade than many other countries, which makes them more vulnerable to economic shocks. Trade as a proportion of GDP is especially low in Argentina, and the currency-board system of a fixed link with the American dollar only intensified pressure on the economy when the dollar’s value rose. Trying to decide what currency regime is appropriate for emerging-market economies is now a contentious subject among economists.
But for most poor Argentinians, this is academic. None of this work can help the country escape from its present plight. The message to Buenos Aires is clear, if unpalatable: vigorous efforts must be made to put its economic house in order before Argentina can expect any more assistance from the outside world. |
