Q: Anne Krueger became acting managing director of the International Monetary Fund last week after Horst Koehler resigned to run for president in Germany. How will the change in leadership affect the IMF’s relationship with Argentina? Will Krueger, as expected, take a harder line with the government of President Nestor Kirchner? What are your predictions for a second review this month of Argentina’s $13.3 billion loan agreement with the IMF?
A: Anne Krueger’s assumption as acting head of the International Monetary Fund will not change the fact that the IMF is primarily a political institution, not an economic one. Last fall, the IMF approved a new loan to Argentina in the absence of policy progress and after the country had defaulted on IMF debt. That occurred because of pressure from the U.S. Treasury Department despite objections from IMF staff and management. Dr. Krueger can be expected to be a tougher negotiator, but we can also expect the G-7, and the United States in particular, to still make the big decisions affecting IMF lending.
The crisis in Argentina highlights the backwardness of international lending to emerging markets. By making debt repayments to the IMF and other official lending institutions senior to repayments to private sector creditors, a perverse set of incentives is created. Official creditors, who “always get paid back” and whose lending is based on political considerations, face little or no accountability in the market, thereby reducing their discipline and that of their clients. On the other hand, private creditors, who have an incentive to lend only if credible reforms are actually forthcoming, are in effect forced to subsidize official sector irresponsibility.
An Argentinean default on the IMF might do some good to the international financial system, though it would do little to help Argentina. It would be far better if Argentina began dealing seriously with its private creditors and told the IMF that its loans were no longer a priority — a prospect that is unlikely to happen given the perverse incentives the IMF has set up.