Argentina's Economic Recovery:
Four Years After the Meltdown
National Press Club November 30, 2005
co-director of the Center for Economic and Policy Research
former Research Director for the International Monetary Fund and current Senior Fellow at the Institute for International Economics
MUSSA: The Argentine economy has continued with a quite strong economic recovery through 2005, and earlier this year real GDP reached once again the peak level it had in mid-1998. And since then it's up probably another 4 percent, on that order of magnitude. And, overall, other indicators of economic performance have also been quite good, continued quite good, for this year. And I anticipate that next year we will again see the Argentine economy turn in a better than average performance relative to both Argentine history and most of Latin America.
A little bit more on the worrying front among the major economies of Latin America, certainly the three biggest, Argentina has by a significant margin the highest inflation rate; and the inflation rate has been creeping up over recent months and quarters. It's not yet high by Argentine standards but it is moving into double digits at this stage and there seems to be little preferred moral restraint on government spending and perhaps also a little bit more aggressive effort to contain the rise of inflation.
For next year, I anticipate that the Argentine economy will grow. We were saying earlier about three months ago about four percent, I think probably I have to upgrade that now to five. We've had continued fairly strong performance in the past couple of months and there's little evidence yet that the economy's really slowing down, though obviously the recovery has lost some upward momentum from what it was during the early stages of the bounce back from the 4-year recession. If we look to the medium to longer term, then if we're looking out four or five years, I would be more concerned that some of the long-festering problems in Argentina are going to be more of a drag on economic activity.
Clearly they have benefited from not just the bounce back from various deep recessions but also from favorable external developments in terms of the movements of commodity prices and recovery of the world economy. And they've also maintained a very highly competitive exchange rate in real terms, basically pegging the exchange rate to the dollar at around $2.95 or something like that with the exchange rate fluctuating between $2.90 and $3.00 for most of the past two years. That's very much depreciated obviously from the one to one ratio of the convertibility era but inflation has been up much less than the depreciation of the exchange rate so there's been a very large real depreciation which has aided their traded goods sector. Gradually some of that is being eroded away by a higher inflation rate in Argentina than in its main trading partners. But their currency is still, I would say, significantly undervalued and that's providing a boost in the economy.
But over time that will be eroded further and the budget situation will begin to deteriorate over time as some of the backloading of interest payments that is built into first the domestic debt and then much further down the road to the restructured external debt comes more exclusively on budget. The banking and financial system continues to operate and provide short-term liquidity, but the notion of a longer term domestic credit market was basically destroyed in the crisis that led to, in effect, widespread repudiation of domestic debt de facto or de jure. And, when we reach the point where investment in Argentina becomes more dependent on securing outside-of-the-enterprise finance either at home or abroad, then these weaknesses will become more of an issue. They have not been so far because internal financing has been generally been available for Argentine enterprises and the Argentine government has no need to access international credit markets. And the domestic credit market is to a large extent captive of the government so they have not had financing problems up to this point. And I think that that issue is still a few years off but it can't be postponed indefinitely. Let me stop there.
WEISBROT: Thank you. Well I agree with a lot of that actually and I want to go into a little more detail on some of the points. This is from yesterday's paper, The Financial Times, reporting on the resignation of the Finance Minister, Roberto Lavagna, and it said that this was "casting fresh doubts about the sustainability of the economic recovery." And it seems like there's been fresh doubts since the beginning of this recovery, some of them not so fresh anymore. For a long time now people have been kind of trying to bury this economic recovery. There's a nice quote from one of the former heads of the Central Bank there, Alfonso Prat-Gay, and he said that, "People have gone from saying Argentina will hit hyper inflation tomorrow to ok, it didn't happen but it won't last long, this is an Indian summer. Then it became ok, it may not be an Indian summer but there's no investment. Ok, we see some investment but it's mostly construction it's not productive investment and then there's been investment in machinery and equipment, they said well, there's going to be energy bottlenecks. And there was always, it seems like, this recession is always just around the corner."
But the economy has seemed to survive very well now. You have three years at about nine percent growth. Which is actually…I was looking at the data for Latin America, I couldn't find anything exactly like that for the last 25 years. There are some similar episodes in three-year periods that would add up to the same but very few. So I think it's time for everyone to acknowledge that this is a sustained recovery, and it appears to be a robust recovery. By the way, some of the forecasts have been terrible. If you look at the IMF forecast in January of 2003, they were forecasting two and a half percent growth in that year and a 35 percent inflation rate, and it came in at 8.8 percent growth and 3.7 percent inflation. So, clearly people were wrong from the very beginning about this recovery and that's unusual for the IMF as most of you know they're usually off in the other direction. They tend to forecast more higher…higher growth in general in Latin America than actually what comes in.
And so anyway I think this is one of the things I'm going to get to is that people have really been wrong about the whole thing. The crisis and the recovery. But let me just take a quick look at some of the data …you can see here just the seasonally adjusted quarterly growth since the recovery. The recovery began in the second quarter of 2002. That's actually pretty important too, you know. Everyone said that the default was going to be a horrible shock and it was, of course. It was the largest sovereign debt default ever and the economy and banking system collapsed, but the recovery was really remarkably fast. It was only three months after the default that the economy actually declined and then it began to grow, as you can see here in the second quarter of 2002.
In terms of the overall recovery and its robustness you can see that manufacturing has been a good part of the recovery, in step with the GDP. I'm just going to go through a couple of these. Industrial activity also has grown at least as fast as…actually a little faster than GDP, by 11.9 percent annually, and so it's been a pretty robust recovery. Even investment, which some people have raised worries about, you can see investment has been pretty good as well. The left-hand graph, you can see the kind of growth that we've seen in the past. It's about 20 percent of GDP, which is reasonable.
Manufacturing capacity utilization is still only around 75 percent. You don't seem to have the weaknesses that you've had before in the economy, the great imbalances of the past, if you take a look here, I've just got it on an Excel sheet, here's the national budget balance. So you can see three years in surplus. This is not the primary surplus. The primary surplus is at four percent, coming in about four percent this year. Two point two percent for the overall surplus of GDP, so this is pretty healthy still, and the trade balance as a percentage of GDP is now still 7.1 percent so …no sign of economic imbalance here that they would be worried about. One thing that Michael mentioned was the inflation rate. That's about 10 percent.
You can see that on a month to month basis here…so you can see the increase in inflation here over the last year and it's been about 10 percent this year. There's an upward trend but it's not huge, there's no reason to think it's out of control. I agree with Michael there's nothing you can see that would bring it down right away but nothing also that would make you think it would get out of control. I think Kirchner is a fiscal conservative from his days as governor of Santa Cruz and he's not likely to do anything that is going to… he has some political ambitions as well for himself and his party and I don't see any reason that all this would be falling apart any time soon. So it looks pretty good.
Now in terms of what kinds of lessons we can draw from this, I think first of all…the first lesson is that the experts…most of the experts were wrong, especially the IMF…of course anything I say about the IMF doesn't apply to Michael if it was after 2001 and most of this is actually, so the experts were really wrong. They were wrong about the default, before, during, and after. The whole thing. I think, you know, the IMF's official line of April 2002 even was saying, "In our view the failures in fiscal policy constitute the root cause of the current crisis." And I think that was a wrong analysis. I think it was the convertibility system. The country was stuck in a trap that they really had to get out of, including debt, the overvalued currency, and all the external shocks they'd been through beginning with the Mexican peso crisis.
AUDIENCE: Why do you think convertibility collapsed?
WEISBROT: I think it was completely unavoidable.
AUDIENCE: The reason for the collapse, wasn't it fiscal policy?
WEISBROT: No I don't believe that, and I don't think you could even make a very good case at all that any fiscal policies could have saved that system. And in fact if you look at the budget… the primary budget surplus from 1993 to 2001 their spending during that period …actually declined as a share of GDP. But if you look at the whole period there was…what happened to them, the whole budget deficit they had, which was never really that big, was a result of two things. One was the external shocks kept affecting the convertibility system. Their interest payments kept going up and up because investors lost confidence in the system. They had higher and higher interest rates, more and more borrowing. Then they got of course the current account deficit which you can see in this…well, you can see some of this story right here, just from '98, you know, here's their primary surplus every year you can see. And what happens is their interest rates…their interest payments keep going up here. That's the big…that was the deficit. It all came from that.
MUSSA: They were doing some Enron accounting in their government budget, so…Don't believe those numbers.
WEISBROT: Well if we want to get into the accounting, there's one other thing I think you want to take into account. And that is the entire deficit that we're talking about can actually be accounted for, from 1994 to 2001, by the loss of revenue and foregone interest from the privatization of the social security system. That's one of the reasons why we didn't do it here. So if you're going to say that it's a fiscal problem, that was the fiscal problem. But I would argue that it isn't really a fiscal problem. That system was just completely unviable at the time. So they were wrong about that, I think they were wrong about the policy advice that they gave throughout this long recession from 1998 to 2002.
And here's a country, you know, again, they ended up with a record sovereign default, about two thirds of the debt they defaulted on that they took a hard line with the creditors. They refused a lot of the IMF conditions which everybody thought would also lead to disaster…the fiscal and monetary austerity more that was prescribed during this time. And bankruptcy law reform, other things that the Fund was promoting, utility price increases. A whole list of conditions, and I think the government turned out to be right on a number of things. Really, all the things where they disagreed with the experts and with the Fund. All the main points. For one thing, if you want to look at some of the things they got right, their exchange rate policy. The stable, competitive exchange rate has played a major role in their recovery.
And you can see, and in fact, that was a result, a lot of it, of their intervention in the exchange markets. This is the real exchange rate so it's adjusted for inflation and you can see here on the right hand side, I would prefer the one deflated by the CPI, you can see that they made sure that the exchange rate did not appreciate, and also against the Brazilian currency as well which was even more important. The Euro as well . . . and it was largely their exchange rate intervention, which I want to show here for just a second. And this is another policy, by the way, which the Fund in their new negotiations to roll over the remaining capital payments is saying they should abandon. But you can see all the interventions since 2002 and it was a very deliberate policy.
And I think they got the monetary policy right also, the low interest rates and that worked primarily through the exchange rate in an economy like Argentina, which as Michael pointed out doesn't have a lot of credit as a percentage of the economy anyway. So it really was important that the Central Bank and the treasury took the exchange rate very seriously as part of their policy for economic recovery. I think freezing the utility rates also kept prices and inflation down during the recovery. Remember we didn't get the high inflation or hyper-inflation or anything. I think that was another thing that the Fund was wrong about, not only there but in Brazil and Russia and other places where you had large devaluations. The hyper-inflation, the threat of hyper-inflation, turned out to be grossly exaggerated. And so, I think also, their hard bargaining with the creditors allowed them to clear off a lot of debt. So that was important. One more policy I would list is the export tax, and that was…that provided most of the government's revenue that restored the fiscal balance between 2002 and 2004 was the export tax, and that's another thing which was opposed by the IMF. And so those are policies…no, not everything the IMF said was wrong, obviously it's good to have a primary surplus, but the Fund was fighting for a much bigger one and one that would have, I think, possibly slowed the economy. And why should the, you know, why should they Fund a huge primary surplus just to pay off the creditors? And I think…
MUSSA: Yes, why should people pay their debts? (laughter)
AUDIENCE: If you'd loan me 200 bucks after this breakfast, that would be fantastic.
WEISBROT: Well, you know, I think they had a choice to make. They chose to have this kind of recovery, which is sustained and robust.
MUSSA: They chose to shove much of the cost of their economic disaster off on the foreigners.
WEISBROT: Capitalism works that way, sometimes people makes bad loans and they lose. A lot of these people was getting very high returns because there was risk, and it might…
MUSSA: But Argentines have lent money to their own government. They got paid, on average, 50 to 60 cents on the dollar. Some of them lost more than that, some of them actually made out like bandits. Those who borrowed money in dollars and then repaid in pesos or didn't repay at all did very well in many instances. Foreign creditors have got now, on average, about 20 cents on the dollar and foreign owners of utilities and other companies have been basically expropriated. And that expropriation in total amounts to about 40 percent of normal Argentine GDP. So, yes, if you go out and rob foreigners to that extent you can shield domestic residents from some of the costs. But that's something that the Argentines did. The Mexicans did not do that. They, too, had a sharp recession in '94 and '95 and a quite spectacular recovery. Argentina is really unique amongst the Latin American countries in recent times in terms of shoving its enormous burden off onto the foreigners and then, running around the country, Kirchner can agree with all Argentines, "Yes, the foreigners should pay. We shouldn't."
WEISBROT: Well, this is one of the places where we could disagree.
MUSSA: Yes, obviously.
WEISBROT: I think they suffered enough. I mean, four years of depression, with 22 percent unemployment by the end of it and half the country below the poverty line. I think they paid a big enough price for their mistakes. It wasn't just their government's mistakes…
MUSSA: It was primarily their government's policies. Argentina is a sovereign country, they made their decisions…
WEISBROT: I would argue for a joint responsibility because, you know, if Russia comes to the IMF and says, "We want a $40 billion loan to re-nationalize all our industries," they don't get that loan. So the IMF was giving that money because they approved the policies. You can't have it both ways, you know. If they didn't approve the policies, then they don't loan the money. That brings me to my next point here which…
MUSSA: You should get your facts straight.
WEISBROT: Really, there are a lot of lessons about this in what the role of the IMF is. Because many people think that the IMF is really a lender of last resort, and if you look at what happened in 2002, here was a country that really was pretty desperate, the banking system collapsed, severe depression for four years, a recession then depression. And the IMF did not provide a single dollar for all of 2002. This recovery was completely without any outside help, and it was even more than that. The IMF actually drained $4 billion, or four percent of GDP net, out of the economy during 2002. And so the economy recovered in spite of that. And you can see this, it's been quite a bit during the whole recovery if you want to see the amount that went out to the international financial institutions in the last four years. It's a total of over $14 billion, so that makes the recovery, I think, even more remarkable but it also says something about what the Fund was really doing there. I think it behaved much more like a -- and you may agree with this is what they should do -- but what they did do was to push the country to get more for their foreign creditors. And that's why they pushed for the higher primary surpluses…
WEISBROT:…and everything else, the higher utility prices and all that. So, you know, we might have different values or different value judgments on what's good or bad but I think we agree on the objective situation, that Argentina was able to have this robust recovery because they pursued the policies that they pursued. And I want to end this part just by saying -- and by the way, the IMF is now demanding the same kinds of things -- and so I think you are going to see another big confrontation, very likely, because there's $3 billion due next year and they're going to have to, they're going to want to roll it over. And here, you know, the IMF is pressing for a solution for the remaining bond holders that didn't take the debt swap, and for utility price increases again. And a floating exchange rate, which I think would be very dangerous for the recovery.
And the question, of course, becomes for the government, should they listen to the IMF? And, you know, they did something also that all the experts would have said was suicide. They actually defaulted, technically, to the IMF in September of 2003 which is something that nobody other than a failed state like, you know, Congo or Iraq has ever done. And they came out, again, quite well after that. So, again, I think the government has to think very seriously whether it needs to listen to the IMF on these demands and whether they want the risk. . . That to me is a much bigger risk to their recovery than the resignation of Lavagna.
And finally I just want to make one general point because I have to make my annual appeal here …I've talked about policy mistakes here, this is just one country and every country has a different story. But I want to say that I think one of the reasons why it's worth looking at this closely is you have had an enormous economic failure in Latin America over the last 25 years as you can see from this graph*, and if you go into the 21st century here it's still only a little over one percent growth now for the first half of the decade on a per capita basis. So this is a terrible, unprecedented economic failure and we're going to talk about this actually at the next press breakfast for those who are interested in it.
But I think I'm going to end with an appeal to reporters. You know, we did a Nexis search recently and there were only 25 articles over the last five years even mentioning it actually and 16 of those were from CEPR, and I think this is a very important background fact for those who are going to be covering the dozen or so elections that are going to take place in Latin America over the next year. To me it's kind of like the stories that covered the riots in France. I mean, most of them mentioned that there was a high unemployment rate among the people who were engaged in the disturbances and I think this is kind of a background fact that really should be in there in almost every article about Latin American politics and economics. And even if you believe, or if you choose to believe, that the policy reforms of the last 25 years had absolutely nothing to do with this, it's still a very important piece of background information. And now I'll stop there. Thank you.
AUDIENCE (Andrew Balls, Financial Times): My conclusion from your summary is, if you have a very deep recession, you can have a recovery. If you don't pay debts back, then there's a short-term benefit . . . there's a long-term benefit, too. I mean, that's the conclusion. So the question…that's my conclusion.
WEISBROT: Well, that's not what I said.
AB: That's what I said. You did say. . .
WEISBROT: No, I went through about four or five policies that I think were very important to the recovery. You may think they all…
AB: So if you have a very deep recession you can have a recovery if you do good bad policy or bad policy if you don't pay your debts there is a…
WEISBROT: Why do you insist that their policy choices had nothing to do with the recovery? The exchange rate policy, the interest rate policy. Do you think Brazil is going to grow with 18 percent overnight interest rates, in the next few years?
AB: I think you'd have to, in the analysis, look at the recession which went before. You don't want to go back into that. Anyway, here's a question. Some very respectable economists think that it's a very good idea for countries to follow Argentina's example and default on their debts and the very good policies, and they should just wipe out the debts. We see that in present circumstances the investors come back quickly. So, just, I'd like to see your answer on, is there a market of countries who just not pay their debts?
WEISBROT: I think there's a very strong argument that it has to be considered as an option in cases where the prolonged economic effects of an unpayable debt burden are hurting the economy and are going to hurt the economy. And I think Argentina is a very good example of that. I can imagine a package that could have been arranged at the end of 2001 that would have kept them with this debt and I think they would not have had this kind of recovery and I think would have suffered for it, both because of the debt burden and secondarily-maybe not even secondarily, maybe even more importantly-because of the policy conditions that would have been attached to their continued debt load. So, yeah, I think that it's a lesson for a lot of developing countries. Not that default is a good idea, I don't recommend default because…
AB: Why not?
WEISBROT: There are huge risks and costs.
AB: Why not countries where the debt isn't a problem?
WEISBROT: Because the costs could be…Look, in that those months that they defaulted they still, the economy shrank by five and a half percent. And they had already gone through a lot of the adjustment. But there's a big risk. And their financial system collapsed, you don't want to do that if you don't have to. But it should be a rational choice. Countries should choose, should consider that option, and they have to also have I think the bargaining power with at their multi-lateral creditors and be able to say, "Look, if you're not going to let us grow, we do have the option of default. Yeah. I think that should be an important lesson.
AUDIENCE: Then take the examples of Brazil and Turkey in the medium and then the long term. Do you think they should follow this Argentine route?
WEISBROT: Well, I think in Brazil's case, it's a tough call. The last few years their growth has not been very good. They had one good year last year, this one's kind of mediocre. Brazil has a long-term problem. They've grown about half percent per capita for 25 years, and they used to be the fastest growing, or one of the fastest growing countries in the world. If they'd continued to grow at their pre-1980 rate, they would have European living standards there. So the question is, it's a very important question you're asking: at what point do you say, "These policies have failed and we've got to try something else?" That's the overall question, the debt is just part of it. Because it's an instrument-in Argentina's case, in many countries, a very powerful instrument-by which these multi-lateral institutions and the financial markets as well -- I don't want to put all the blame on the international financial institutions -- but this is a means by which they impose a set of policies that may not be best for a particular country and, by the way, I'm not saying that the policies that worked in Argentina would work elsewhere. . .
MUSSA: My turn.
MUSSA: Brazil and Turkey had very large public debts. Still do. They had crises in the same period as Argentina. They avoided default both domestically and internationally. It's true that Brazil has not enjoyed the spectacular growth rate that Argentina has. But they also didn't have the spectacular collapse between the middle of '98 and the middle of 2000. If we look at the Argentine growth rate over the last decade, compare that with the Brazilian growth rate, taking into account the down as well as the up, then Argentina does not come off particularly well. And it is a common experience in countries that have experienced these deep economic crises. Mexico I mentioned before, Korea, Thailand, even Indonesia. Russia had a brief, fairly sharp recession and then were bailed out by the surge in world oil prices as they came back in 2001. I mean, you get this pattern of the down and then the up and Argentina has benefited from that.
Now, I think some of the policies have helped in the recovery. I think it's a mistake to say, well, you know, all the policies of the Argentine government under Duhalde and Kirchner have been bad and wrong. I know I told my colleagues that, well, you know, if Franklin Roosevelt had come to the IMF with his New Deal program in April of 1933 they would have rejected it outright as completely unacceptable. Nevertheless, whatever may have been the substantive contribution of the program, the recovery of confidence, which the New Deal program surely aided, was very instrumental in the spectacular recovery of the US economy from March of 1933 through the end of 1936. You saw about a 30 percent rise in the US real GDP after a 25 percent drop in the three preceding years.
But Turkey and Brazil avoided the downturn. Turkey had a recession where they tightened their policies, pushing their primary surplus up to above six percent of the GDP. They've had now three very good years of economic growth-almost as good as Argentina without the big recession to start it off. And, I think it needs to be recognized that, in Brazil, much of the debt, government debt, is very large. Much of the debt-most of it, in fact-is held domestically, by other Brazilians. If they did a debt default and restructuring it would be enormously disruptive of the domestic economy. Now, I think you can do that when you have an economic catastrophe as Argentina did. They said, "We're going to throw out the rulebook and re-do everything." Which is basically what Argentina did, because they defaulted on domestic debt as well as the international that they were forced to structure.
And then, as part of it also, they issued a lot of debt. The figures for 2002 say they were running a primary surplus of very substantial magnitude and even an overall budget surplus. Well, how is it possible to run an overall budget surplus and see the debt of the government go up by over 30 percent of the GDP? Answer: you do a lot of things off budget. So, the debt goes up even though you're running an overall surplus. What are you doing? You're printing a lot of new debt to retire the funny moneys, to pay off, to re-capitalize the banks, and so, a lot of that was done by the Argentine government. That's why we've got an Argentine government debt which was 55 percent of GDP before the crisis and is now over 150 percent of GDP. You know, they restructured the dollar denominated stuff so a lot of what happened was they pumped out a lot of new peso debt to liquefy the banking system and pay off the paper currencies that had been issued by the central government and the provinces and so forth. Well, if you do that, and if you want those newly issued domestic securities to have any credibility at all, you need to say well, we've got some way to finance the interest when it ultimately comes due since much of it is back-loaded.
So, what you do is, one you say, well, write down the foreign debt by 85 percent or so. Diminish that part of our obligations and that will give some credibility of value to all of the domestic debt we've issued in order to satisfy various domestic claims on the government. Now, was that a bad policy? Well, I believe that an important part of that, at least, was necessary and contributed positively to the stabilization. The question really is, how far do you go? You know, Argentina's situation at the end of 2001, beginning of 2002, I think there was no alternative but a very substantial debt restructuring and a write-down in the value of external as well as domestic claims. But what the Argentine government has done is, I think, put an extraordinarily large part of that burden on foreigners because they don't vote, and shield as much as possible domestic residents because they do. And that is not desirable for the international community to stand back and applaud that type of action. My own view is that international creditors should have been treated on a pari pasu basis with domestic creditors of the Argentine government with a similar percentage write-down in effective value of their claims on the Argentine state. And I think that should be the general rule in such operations. Especially when the Argentine government issues securities in the United States subject to the laws of the United States. If they pull an Enron, which is what they did, then I would put those guys in jail just like Mr. Fastow is in jail. If they want access to our capital markets then that type of behavior is something we should not stand for. And, it's not that a restructuring was unnecessary or unwise or should not have been supported by the international community. A restructuring was necessary, it should have been supported. The question was, were the terms and conditions ultimately reasonably fair between domestic claimants and international claimants?
After all, people lent the money to Argentina, they used it for various domestic purposes, it was not money that was pressed upon them so they could buy US arms or Soviet arms or other things of that kind. And, I think one should have a much more positive attitude toward Brazil and Turkey, that have been able to manage their affairs without an enormously costly default both domestically and internationally. Not to criticize everything the Argentine government did in the period of recovery or to support everything that the international community or the IMF was recommending. Very difficult choices had to be made in a very difficult situation and somebody needed to get hurt and they needed to distribute the hurt around. And any government in the type of crisis that Argentina faced needed to do that. But I think that Duhalde in particular and, later, Kirchner, pushed beyond the reasonable limit. I would say yes to the benefit of Argentine citizens but at an unduly large cost to external investors who needed to take substantial losses but have been asked to take much larger a share of loss than domestic Argentines who, after all, elected the governments both before and after the crisis.
AUDIENCE (Mark Drajem, Bloomberg News): And why not put the burden on the foreigners. I mean, if you're Kirchner, that's the…
MUSSA: Well…Kirchner may applaud it. Argentines may applaud it. I don't think I should applaud it.
WEISBROT: But I can.
MUSSA: Well, you know, obviously this is a free country, so he can applaud it if he wants to. Whether the international community should do so…I mean, after all, the movement of capital through various mechanisms internationally is something that has important benefits and if the rules of the game are the Enron rules then moreover we're going to all stand back and say, you know, what Lay and Fastow and so forth did was just fine, but then our capital markets are not going to function well.
WEISBROT: Well, maybe the current rules aren't so great either. I think that's what I would like to put back in the equation here. First of all, just to make something clear here, this is often confused, people think that the depression that Argentina went through, which was a terrible depression from 1998 to 2002 was the result of the default. And that was before the default. Only three months of that period were after the default. So that's what you have to consider as the cost of the default, those three months of decline. And the actual GDP decline was actually less than Mexico suffered in their peso crisis. So it's very important to take that into account, that they suffered, I would argue, those four years and they had huge losses of GDP, which was over, I think, 23, 24 percent during that period was suffered, I would argue, unnecessarily, because they should have gotten out earlier.
AUDIENCE: They should have defaulted four years earlier?
WEISBROT: Yeah. Or at least gotten out of it -- they might have been able to have gotten out of it and be without the default then but they should have gotten out of it, yeah. It was policy mistakes and that's what we keep coming back to this. . .
AUDIENCE: I'm really interested to find out, I mean we can all disagree on whether it's right or not that Argentina hasn't dealt with this correctly but I'm interested to hear what Mike has to say, if it's something that Argentina should deal with, can it get away, you know, in the future with all this creeping and its problems lying ahead, putting off payments?
MUSSA: Well, we still have about $20 billion of face value in external debt that is not being restructured, and the attitude of the Argentine government dealing with that has remained a bit murky. At one stage they had effectively repudiated it, then they backed off of that statement and what I think will happen in the end is that we will have another offer to restructure that stuff on essentially the same terms as what has already been done, which offered payments of about 20 cents on the dollar of principal and accumulated interest arrears. About 30 cents on the dollar of principle. But we're not there yet as the Argentine government has not moved on that issue. I think one of the questions in the IMF negotiations is what type…how they're going to approach that problem.
I disagree a bit on the utility prices. I think that the inflationary surge was repressed, in part by keeping a variety of prices down through artificial means. But we know that there have been increasing problems in Argentina about investment and reliability and availability of supply of electricity and other essential products and that's been, and continues to be, an issue of contention between the government and the utilities. So there's been a cost there, and that problem's going to need to be addressed over time because with the increases in rates…even with the increases in rates that have been agreed with the utilities now, I think it's not profitable to invest to even maintain, let alone expand those types of facilities in Argentina. Now, did it help at the height of the crisis avert a hyper inflation? Probably so. Does it make sense to continue with the policy in present circumstances to repress inflation through control of utility prices? I think not - I think that those prices should be relaxed. Similarly, the highly competitive exchange rate has helped the economy recover, but it's not been without cost or consequence. One of the reasons why the inflation rate has been rising is because of the monetary consequences of exchange market intervention, and an appreciation of the currency would, in addition to easing that…
MUSSA: I think they're going to get away with very much of the write down that they put through on the debt that is restructured. I think they will have to extend it ultimately to the part that remains un-restructured. That's my guess (inaudible).
AUDIENCE: A question here. It seems that Argentina has been (inaudible) Can they get away with it by going to Venezuela?
MUSSA: They've got plenty of reserves. I mean, if they have to pay off all of the debt from the IMF out of reserves, then the other IFI's you add that on top, then they'd have a real problem. I think that that is unlikely. They will over time, in any event, need to pay down their IMF exposure. The issue is whether it's going to be over the next three years or over the next decade. But the IDB, I think, is very likely to roll over at least much of the credit that is outstanding to the Argentine government and I suspect the World Bank will be in a similar mode. Now, if the Argentines repudiate the external private credit that hasn't been restructured, and say "We're never going to pay anything," then that's going to be a problem I think in terms of continued IDB and World Bank lending. I mean, if Mr. Chavez, who should be accumulating reserves at a prodigious rate, wants to buy some Argentine debt, that would make it even easier for the Argentines to tell the Fund to, "Go away, we don't need you." But I think they've got enough resources of their own that certainly for another year they can just pay the Fund and take it out of their reserves, which are still growing, because they're still running a current account surplus. It's been shrinking, but it's still there.
WEISBROT: I think it's a good question. You know, there's going to be some bargaining taking place with the Fund. I think Argentina's in a very good position to say, "Well, we want a rollover and we're not going to necessarily accept recessionary conditions." Or what we consider to be - there's debate over whether they're recessionary or not. But that's what happened in 2002, they didn't reach an agreement even when they were really desperate for that whole year and you can argue about whether it's because the Fund kept moving the goalposts or whether the Argentine government wasn't willing to agree with anything that they felt would, in fact, choke off the recovery. But I think they're in a position where they can say very strongly, you know, "We're going to determine out own policy, and we're going to try to continue to keep this recovery going. And if you don't want to roll over this debt, well, you know, we don't have to pay you either." I mean, after all, there's…
MUSSA: I don't think people say that.
WEISBROT: Well, I think the threat will be there. If the IMF gets stubborn enough about it and insists on things that they think are really going to hurt them, that threat is still there. And I also think, there's been a big change in the IMF's power in the last seven, years or so, probably because of Argentina, probably because of what happened, because they showed that they could, in fact, stand up to the Fund, default, and grow very rapidly. Three years of nine percent growth, I want to emphasize that, I mean, we talk about inflation, ok -- so Brazil has got maybe two percentage points less inflation than Argentina right now? Two or three? I mean, I really don't think that's worth sacrificing your economy, I'm sorry, you know. And this is 25 years that Brazil has sacrificed its economy.
MUSSA: But Argentina has not grown faster than Brazil.
WEISBROT: Yeah, well, for the last three years…
MUSSA: You've got a spectacular recovery…you're taking too much credit…
AUDIENCE: My question is, in the new economy, is anything going to change?
AUDIENCE: The new economy (inaudible). Do you think anything is going to change?
MUSSA: I think that not until we get through the election in my view. I think that Kirchner and (inaudible) are in election mode and that the government budget is going to see some expansion on the expenditure side. I think they'll keep monetary policy quite accommodative and resist exchange rate appreciation pressure if there is any. I think that whether it's there or not may be sensitive to what people see as the political realities. After the presidential election and so forth, then it's certainly possible that there will be some adjustment of policy. The utility issue and investment in that sector is something that does need to be addressed, and I think that the bank and financial system also needs to be addressed over time. I criticized my colleagues on the Fund for pressing on that issue in the context of 2002, 2003. I said, "Look, it is not an immediate problem." I said, "Credit markets have been destroyed for the foreseeable future. If there isn't any long term credit, what's the point of pressing on this issue at this time." But if our perspective is the next five years or the next ten years, then I think putting off these issues for that span of time is not in Argentina's best interest, regardless of what the Fund has to say about it.
AUDIENCE: Do you think Argentina is going to talk to the IMF before the presidential elections or after them? And if Argentina really needs a program with the IMF (inaudible)?
MUSSA: I don't think that Argentina really does need a program with the IMF at this time. They have still a current account surplus, they have quite substantial reserves and are accumulating reserves, their external debt is not a pressing problem at this stage, despite the issue that's in abeyance on the restructuring of the debt that's still outstanding. But there's no need to address that in the immediate future. They've been making some progress with the utilities and so forth. I don't think they need an IMF arrangement. The issue is rescheduling the principle payments that are due to the IMF which are, I don't know, $3 billion next year or whatever it is, but they've got, I don't know, $20 billion reserves, something like that, so they can afford to pay the IMF the $3 billion out of the $20 billion of reserves they've got. And they're accumulating reserves, at least a billion or two a year still, so they're not in any kind of immediate cash crunch. Now, you know, a decision by the Argentine government that, "We're not going to pay the IMF anything, either interest or principal, unless you…if we don't like your policy prescription," then that's going to be an even more serious problem, because that will stop any recycling of IDB and World Bank lending. It's one thing not to agree with the program of the IMF, for you to say, "Well, we can pay you, we don't need the money." It's another thing to say, "We're not going to pay the IMF," and become an outlaw of the financial community. That would not be a step that would be in Argentina's own interest.
And there's no reason to take it. They've got plenty of money and more money is coming in, so paying the IMF is not a problem. Now, if they have to pay each year for the next three or four years, then it's a more substantial amount of money and there will be a continued incentive to find some type of accommodation. I think there's also an incentive on the IMF's side to reach some type of accommodation as well, if the Argentine government is prepared to take a more constructive line on what it's prepared to do with the remaining external debt. I think not until after the election. And be somewhat more forthcoming on the utilities issue where they've made some progress but there's still an important part of it that remains outstanding. Then the macroeconomic issues of inflation control and the budget. And I think the IMF is right at this stage that the Argentine economy has recovered substantially, if not entirely, from the deep recession. The inflation rate is moving upward, and they should be devoting a little more policy attention to containing the inflationary increase before it gets out of hand. I think they're not…they're very reluctant to do that before the election. So, I think it's going to be tough to reach an agreement over the next six months to a year. But if they paid the IMF over that period I think the prospects of reaching some type of accommodation a year further on are more substantial. I wouldn't rule out completely some modest agreement that would involve something less than a rollover on all of the principal payments.
AUDIENCE: There's something I don't understand here. There's always reserves. Why is he…why is Kirchner being so tough on the IMF? I mean, he brought it up with Bush as one of the main sort of themes that when he sat down with Bush…
MUSSA: He believes in himself. …Of course there are a lot of things people believe in that ain't so. But I think he also understands that it's very popular domestically to blame foreigners and in particular the IMF for Argentina's difficulties. And this is not unique to Argentina. In Korea, they refer to the '98 crisis as "The IMF Crisis." But the Koreans dug themselves into an enormous hole, I mean the IMF finally came in at the end, clearly was not responsible for the disaster in Koreas. One can argue about Argentina, where they were deeply involved with the Argentine government throughout the nineties. But in Korea…
WEISBROT: You can argue about a lot of the conditions they imposed.
AUDIENCE: Can the USA blame China? (laughter)
MUSSA: Well, the Chinese have not been…For one thing, the economy has been performing pretty well in China, so there's not really an issue of…
WEISBROT: You know, this isn't all about blame. First of all there were real policy…I mean, you want to be Nixonesque about it you can say, "Mistakes were made." But these were serious policy mistakes. They had an enormous impact. And, secondly, it's not over, because they're still bargaining on what the conditions are going to be on any rollover, and this government is not going to accept…
MUSSA: But what's not true is the IMF is largely responsible for those policies. The convertibility plan was adopted by Cavallo over the objections of the IMF.
WEISBROT: When they really object to something, they don't loan money, as in 2002, when the country was flat on its back and they didn't get a dime. That's the difference between objecting to and approving of a policy.
MUSSA: Just a minute. I mean, when the convertibility plan was adopted, in 1990 -- and you said it wasn't the fiscal deficit, it wasn't the convertibility plan which was the central problem that ultimately created the crisis in Argentina at the end of the '90's. That was a decision of the Argentine government, not of the Fund. It was not done under pressure from the Fund, it was not even done with…
WEISBROT: And it worked for a few years, too.
MUSSA: It did indeed. But to now stand back and say, "Well, the crisis in Argentina, in your interpretation, largely related to the convertibility plan was primarily, substantially the responsibility of the Fund, that's nonsense.
WEISBROT: Well, the Fund's own internal review found that they were responsible for…
MUSSA: I wrote my own book about it and I think it's very clear that they say, and I say, "Look, the principle responsibility rests with the Argentine…"
WEISBROT: Well, they always say that, you know? That's how it works, right?
MUSSA: Well, because it's true…
WEISBROT: When things go bad it's the government's fault. That's how it works.
MUSSA: Yes! Well, indeed.
WEISBROT: The IMF doesn't lend…I just don't think they sign off on these programs if they don't approve the policies. So, they signed off throughout that whole…
AUDIENCE: I think the IMF admitted that in 2002 they probably shouldn't have lent that money.
MUSSA: Wait a minute. The IMF admitted (inaudible). You have to read my book on that issue since…(laughter) The last disbursement was a stupidity. One can argue about the program at the beginning of 2001 as well. But, as we've both agreed, by that stage, Argentina was, as the former President Bush put it, "already in deep doo-doo." That it was not the IMF program in 2001 that provided the main foundation for the crisis. That was built in, cooked into the recipe years in advance of that. We can disagree about the extent to which the fiscal issue was a problem or the relative contribution of the convertibility plan. But the economy began to encounter considerable difficulties around the middle of 1998, never found a way to extract itself from that. The big IMF lending did not occur until early 2001. There were programs throughout the entire period, and as I say in my book, I think the IMF needs to be criticized for not taking a more aggressive stance against some of the fiscal laxity of the Argentine government when they could have done something about it in the earlier part of the '90's. By the time you get past 1998, the economy's very weak. Then, having a tight fiscal policy is politically very difficult and economically counterproductive, and they were in a tight position then. But, as I said, the foundations for the crisis were laid much earlier, and those were policy choices of the Argentine government, to which the Fund probably should have objected a little more forcefully. But to say, as President Kirchner likes to maintain, that the difficulties in Argentina were largely made abroad and primarily manufactured at IMF headquarters, that's just nonsense.
MODERATOR: Why don't we hear from Mark on this and then let's, you know, break up and talk informally.
WEISBROT: Well, you know, I'd just say that those four years, the IMF had a major role in those four years. I don't think this idea that the Argentine government tells the IMF what to do through that period, I just don't buy that.
AUDIENCE: Which period?
WEISBROT: The 1990's. The whole period of the depression, from mid-1998 or even before that, you know, a little bit before that. They were stuck with a system that was not viable and they should have gotten out of it and the IMF, because they tolerated-this is where we just disagree-I don't think any fiscal austerity would have saved them then or even in '97 or '96. No budget surpluses would have saved them from the collapse of that system and so the IMF played a major role in maintaining that system through that depression until it really collapsed on its own. So I'm not going to exaggerate it and say the Argentine government had nothing to do with it. It was -- they could have also done what they eventually did: tell the IMF to get lost. Right? But they in fact have joint responsibility. I think it's very hard to draw any other conclusion.
MUSSA: The Argentine government pursued the policies it did, including in the period of '98 through 2001 at their choice and, indeed, insistence. And this was wrongly supported by the Argentine people. No one…there was no popular support at all, let alone within the government, for getting rid of the convertibility plan. That was just not all.
WEISBROT: (short statement, inaudible)
MUSSA: What you're suggesting is that the Fund should have come out in 1998 and said, "We have concluded the convertibility plan, contrary to the strongly-held views of the Argentine government and of the Argentine people, we have concluded that the convertibility plan is not viable." Create a crisis in international financial markets that would have forced depreciation of the peso. Now, I agree, an earlier crisis probably would have been less severe…
WEISBROT: Twenty-three percent of GDP? I mean, would they have lost more than that?
MUSSA: My question is, who has the responsibility to make those decisions? Should the IMF…Even if I had believed that as economic counsel, should I have gone public as (inaudible) did in 2000.
WEISBROT: So you're trying to say they were lobbying very hard privately for this?
MUSSA: No, no, no, no. You have a sovereign government. They make policy choices and decisions with, hopefully, the support of their people. They made those choices, and to say the IMF was largely, substantially responsible is just nonsense.
WEISBROT: Well, you see 2002 -- that pretty much settles it, right? There was the country, was completely collapsed, and the IMF was quite stubborn for the entire year about not lending money and actually draining it out at a time when -
AUDIENCE: You should address Mike's point. You shouldn't say that. You should address Mike's point, which is, do you think the IMF should have come out and said about a sovereign government, the currency, regime, the whole…
WEISBROT: Yeah, they do things like that all the time…
AUDIENCE: I'm not asking you…
WEISBROT: Yes. Ok? Yes. (inaudible) They would have been better off, I think it's pretty clear.
MUSSA: I did privately tell Sir (inaudible) in August of 1992 at the G7 Deputies' Meeting, and Mr. DeSota, the Italian representative, that we had concluded that the pegs of their currencies within the ERM were probably not viable. By that stage, the crisis was already well underway and, indeed, within three weeks the ERM blew up. But it would have been extraordinarily presumptuous of the IMF to say in 1990 to then-Chancellor John Major, "Your decision to join the ERM is a mistake." I thought it was a mistake at the time, of course I was not at the IMF at the time, but there are some decisions that are, legitimately, the policy decisions of the government and they need to take responsibility for those decisions. And that responsibility is passed to their successors. To say you are a sovereign government and sovereignty is continuous means that the government of Argentina, presently headed by Mr. Kirchner, needs to take responsibility for the decisions the government of Argentina led earlier by (inaudible) made. And to pass that off and say, "Ah, it's the foreigners and particularly the IMF," that is an act of crudeness in responsibility and I think, my personal view is, that the international community should tell Mr. Kirchner to get on. That this type of rhetoric from national political leaders should not go unchallenged.
MODERATOR: One more comment from Mark, just to round it up, and then…
WEISBROT: This isn't an economic disagreement, this is
just a value judgment, you know, of who should pay the price for these kinds of
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