The Miami Herald, August 19, 2003
Knight-Ridder/Tribune Information Services - August 13, 2003
There is an old adage about borrowing: if you owe the bank $50,000 and can't pay it, you have a problem; but if you owe the bank $50 million, then the bank has a problem. This may well describe the situation facing Argentina and the IMF, as they try to conclude negotiations for a new agreement this month.
The pressure on both sides will be intense, and the outcome could have a serious impact on future economic policy in Latin America and developing countries generally. Argentina owes $14.3 billion to the IMF, $8.5 billion to the World Bank, and $8 billion to the Inter-American Development Bank -- respectively, about 14, 8, and 20 percent of these institutions' portfolios. If Argentina defaults to them, it could jeopardize their AAA credit rating. In other words, the banks have a problem.
Aside from the risk of a lower credit rating, which is probably remote for the IMF, these lenders could lose enormous political power in the case of a default. The big three generally negotiate as a block, and with the IMF as leader. This gives them a creditors' cartel which is very powerful and allows them to impose a whole set of economic conditions on borrowing governments -- often harmful and sometimes disastrous, as in the case of Argentina in recent years.
These official or "preferred creditors" have a trump card that private lenders don't have: if a country defaults to the IMF or World Bank, they can be cut off from all kinds of credit, even the export credits necessary to carry on day-to-day international trade. That is why very few countries have ever defaulted to these institutions, and those that have done so have generally been "failed" or "pariah" states such as Iraq, Congo, or Afghanistan. And that is why Argentina has been careful so far to make its payments to the IMF and World Bank, even while presiding over the largest sovereign debt default in history.
But if Argentine President Kirchner calls the IMF's bluff this time, it's not clear that -- as a political matter -- the Fund would be able to inflict more punishment than it has already meted out to Argentina. Unlike Brazil, whose economy is currently sagging under the weight of an IMF-sponsored austerity plan, Argentines have already suffered through the depths of a crushing economic collapse. The depression pushed more than half the population below the official poverty line, and a fifth of the labor force into unemployment.
Most of Argentina (and the world) knows quite well that the IMF played a major role in bringing about this disaster, and in making it worse by advocating high interest rates and government budget cuts (the opposite of what our own government has done since our economy slipped into recession in 2001). So Kirchner should have a lot of public support for refusing any agreement that imposes further suffering or threatens to abort the economy's nascent recovery.
"Argentina has already proven that it can live without an IMF agreement," said Kirchner, and he is right. The IMF gave the country nothing but grief from August 2001 to January 2003, and then signed an agreement that only allowed Argentina to maintain its payments to official creditors -- in other words, no new resources. But the country is running a large trade surplus and therefore doesn't necessarily need financial resources from abroad. The economy grew by 5.4 percent for the year ending with the first quarter of 2003.
The current agreement expires at the end of this month, and Argentina owes more than $6 billion to the official creditors by the end of the year. The Fund could use the threat of default on these payments to force an unsustainable settlement on the $76 billion of defaulted debt owed to private creditors.
This would be especially dangerous. If Argentina agrees to pay too much of the defaulted debt, it could be condemned to an indefinite period of austerity and stagnation -- limping along from one crisis to the next, while bondholders fret whether the government can continuously punish its citizens enough to extract increasing government budget surpluses.
Meanwhile, the Fund has had the bad taste to insist on punishing price increases for the privatized, foreign-owned utility companies, and foreclosures on homes bought by ordinary citizens who were bankrupted when the IMF-sponsored exchange rate regime collapsed. Let's hope that the Argentine government can hold its ground -- it certainly has a mandate to do so.