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

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Despite Argentina's worsening economic crisis, the International MonetaryFund 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 thecountry's unsustainable debt. But, as the experiences of other crises show,U.S Treasury and IMF officials may yet cave in to mounting institutional andpolitical pressures to lend.

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

Argentina's early 1990s reforms—born out of the failure of pastpolicies—were bold but incomplete. Thus, the Fund is correct to note thatArgentina's problems were mostly created in Argentina. Total governmentspending doubled in that decade, far outpacing economic growth, while thecountry lost interest in reform by the mid-1990s. About the only IMFconditions with which Argentina complied were raising taxes—which are farabove U.S. rates.

Yet the IMF kept lending from the mid-1990s to well past the time when adebt crisis became inevitable. The IMF's bailout doctrine encouragedirresponsible private sector lending to Buenos Aires by creditors who betthat the Fund would give aid as the country further indebted itself. In thescope of one year the IMF approved bailouts of the Argentine government andits creditors to the tune of $48 billion. No wonder most Argentineanscorrectly view the Fund as a benefactor of the privileged elite.

If the IMF were to provide another bailout, it would undercut theaccountability that Buenos Aires should face. As leaders in Congress and inthe Argentine provinces, members of newly installed President EduardoDuhalde's party played a large role in the past decade's dramatic growth ofgovernment. Duhalde himself increased the deficit of the province of BuenosAires 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 currentcrisis on economic openness has been matched by populist policies. Hisdecision to gain control over the peso by devaluing it has created afinancial crisis and "opened the gates to hell," in the words of DanielMaggiolo of the Fundación Libertad in Rosario.

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

Thus the government has rewritten debt contracts between private entities inflagrant violation of contact law and private property rights. Devaluationsoften harm overall economic activity, but rarely do government blundersspill over to the private sector to such a degree. The cost in terms ofArgentina's development prospects will be felt for years to come.

The government's moves have forced banks, still fully accountable for theirliabilities, into effective bankruptcy. To counter that eventuality, it hasfurther frozen bank accounts, bringing the economy to a halt and infuriatingArgentineans. Duhalde is finding out that it's hard to be a populist withoutthe resources necessary to fund populist projects.

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

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

But debt reduction alone won't help Argentina. The country may yet choosedollarization as its best monetary option. Indeed, Buenos Aires still needsto establish a credible currency and a sound economic program. Only thenwill banks find it feasible to borrow credit and restart the economy. Untilthat time, the possibility of banks walking away with complete loses must bekept open. It is the only way to keep Buenos Aires, the IMF, and the banksthemselves honest.