An IMF Plan for Argentina: Debt Reduction, Not a Bailout

January 23, 2002 • Commentary

Despite Argentina’s worsening economic crisis, the International Monetary Fund has so far resisted calls for a bailout worth at least $15 billion. The Fund apparently realizes that such “aid” will at best only add to the country’s unsustainable debt. But, as the experiences of other crises show, U.S Treasury and IMF officials may yet cave in to mounting institutional and political pressures to lend.

That would be a mistake. Argentina is not, as some have suggested, a case of a country that adopted free‐​market measures imposed from Washington and that now deserves its rescue. A bailout of Argentina would reduce accountability and the prospects for improved economic performance.

Argentina’s early 1990s reforms—born out of the failure of past policies—were bold but incomplete. Thus, the Fund is correct to note that Argentina’s problems were mostly created in Argentina. Total government spending doubled in that decade, far outpacing economic growth, while the country lost interest in reform by the mid‐​1990s. About the only IMF conditions with which Argentina complied were raising taxes—which are far above U.S. rates.

Yet the IMF kept lending from the mid‐​1990s to well past the time when a debt crisis became inevitable. The IMF’s bailout doctrine encouraged irresponsible private sector lending to Buenos Aires by creditors who bet that the Fund would give aid as the country further indebted itself. In the scope of one year the IMF approved bailouts of the Argentine government and its creditors to the tune of $48 billion. No wonder most Argentineans correctly view the Fund as a benefactor of the privileged elite.

If the IMF were to provide another bailout, it would undercut the accountability that Buenos Aires should face. As leaders in Congress and in the Argentine provinces, members of newly installed President Eduardo Duhalde’s party played a large role in the past decade’s dramatic growth of government. Duhalde himself increased the deficit of the province of Buenos Aires more than tenfold by the time he left the governor’s office in 1999.

Nor would IMF aid help the economy. Duhalde’s rhetoric blaming the current crisis on economic openness has been matched by populist policies. His decision to gain control over the peso by devaluing it has created a financial crisis and “opened the gates to hell,” in the words of Daniel Maggiolo of the Fundación Libertad in Rosario.

In a country where debts are overwhelmingly owed in dollars, devaluation implies widespread bankruptcy. But Duhalde has sought to avoid that mess by creating another. With a new law that allows Argentineans not to fully pay back their loans and utility bills, the president has attempted to shift the costs of the devaluation on to banks and many foreign companies.

Thus the government has rewritten debt contracts between private entities in flagrant violation of contact law and private property rights. Devaluations often harm overall economic activity, but rarely do government blunders spill over to the private sector to such a degree. The cost in terms of Argentina’s development prospects will be felt for years to come.

The government’s moves have forced banks, still fully accountable for their liabilities, into effective bankruptcy. To counter that eventuality, it has further frozen bank accounts, bringing the economy to a halt and infuriating Argentineans. Duhalde is finding out that it’s hard to be a populist without the resources necessary to fund populist projects.

The IMF should not step in to fill that void. Doing so will only risk a repeat of failed bailouts, such as those in Indonesia and Russia, where the recipient governments also showed little interest in serious reforms. Even the classic argument in favor of bailouts—that they are necessary to prevent contagion and halt a systemic international financial crisis—is absent. Since Argentina’s is a chronicle of a crisis foretold, it has not surprised markets around the world.

If it should not provide a bailout, what can the IMF do? The Fund should be held accountable for its lending. It should accept losses on its own exposure in Argentina, just as it is now urging private creditors to do in upcoming debt renegotiations. Such a reduction could be substantial because Argentina owes the IMF $14 billion, mostly due this year and next.

But debt reduction alone won’t help Argentina. The country may yet choose dollarization as its best monetary option. Indeed, Buenos Aires still needs to establish a credible currency and a sound economic program. Only then will banks find it feasible to borrow credit and restart the economy. Until that time, the possibility of banks walking away with complete loses must be kept open. It is the only way to keep Buenos Aires, the IMF, and the banks themselves honest.

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