What’s At Stake in Argentina

September 05, 2001

Mark Weisbrot
Los Angeles Times, September 5, 2001

Knight-Ridder/Tribune Media Services, September 4, 2001 

Read the IMF’s response below

The IMF’s latest loan agreement with Argentina was widely seen as a triumph of pragmatism over ideology within the Bush Administration, which is the first US administration to express skepticism about such bailouts.  But it may be just the opposite: Washington may be helping Argentina dig itself into a deeper hole, just to maintain credibility for a set of policies that have clearly failed.

Argentina’s financial situation is similar to that of a heroin addict, only more dire. Its currency is pegged to the US dollar, and it is overvalued. As more investors come to believe this, they exchange their pesos for dollars. In order to keep the fixed exchange rate, the government borrows more dollars, so as to have enough on hand for all who want to get rid of their pesos.

But as the government’s debt piles up, more people believe that a default, and possibly a devaluation of the peso, is inevitable. The government must pay higher interest rates, adding to the cost of its debt. And more investors get out of pesos, or even worse, use borrowed funds in order to speculate against the currency.

Argentina has already reached the point where its annual debt service payments are about as much as, or more than, it can earn from exports. This means there is no way to stop the debt from growing, other than selling off more of the country’s assets. Some kind of default — “restructuring” is the polite word in the business press — now appears inevitable.

Last week’s fix provided a soothing shot of heroin to calm the markets — another $8 billion line of credit. But it is unlikely to keep things quiet for long. In just the last couple of months, more than 10 percent of deposits have been withdrawn from the Argentine banking system.

And the markets aren’t exactly calm. Interest rates on Argentine bonds are14 percentage points higher than comparable US Treasuries, historically a very high spread.  The bonds are trading at 75 cents or less on the dollar. And Argentina’s credit rating, from Moody’s Investors’ service, has fallen below that of Russia just prior to its default and devaluation in 1998.

We have seen this story before. In 1998 and 1999, the IMF prescribed similar packages of loans and austerity in Russia and Brazil, in order to prop up overvalued currencies. In both cases the currencies collapsed anyway, and both countries were better off for the devaluation. Economic growth picked up — with Russia registering its highest growth in decades — and the IMF’s fears of hyperinflation proved groundless.

The IMF’s willingness to squander tens of billions of dollars postponing the inevitable in Argentina is not simply ideological. Greed is also a big part of the equation.

Argentina accounts for about a quarter of all the “emerging market” bonds in the world. Over the last 10 years, emerging market bonds have provided investors an average annual return of 23.8 percent. This is higher than the S & P 500 stock index with peak bubble years included. The great fear among Wall Street firms is that a restructuring of Argentine debt in which bondholders take significant losses will sour the rest of this very lucrative market.

For the public, of course, the argument is that developing countries need this foreign capital in order to grow. But it is difficult to see how money borrowed at a cost of more than 23% is contributing to any country’s economic growth. More likely, it is contributing to a net flow of resources from the developing countries of the South to the rich lenders of the North.

All this would be bad enough if it were a zero sum game — that is, if the only cost to countries like Argentina were the enormous debt service payments drained out of their economy. But it gets worse. Argentina is stuck in a three-year recession, with unemployment at more than 16 percent. The medieval medicine of the IMF and the bond markets — bleeding the patient with “zero deficit” budgets and high interest rates — is keeping Argentina’s economy from recovering.

The budget cuts are hitting poor and working people disproportionately, with state salaries, pensions, and support for the unemployed all being slashed. Those Argentines who can afford it least will be squeezed the most, so that the IMF can hide the abject failure of its policies for a little bit longer, and Wall Street can protect its flush business in “emerging market” bonds.

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C.

Response from the International Monetary Fund, Los Angeles Times, September 15, 2001:

IMF Loan Agreement Good for Argentina

We differ strongly with Mark Weisbrot’s characterization of Argentina’s latest loan agreement with the International Monetary Fund as “helping Argentina dig itself into a deeper hole” (” ‘Helpers’ Such as IMF Make a Junkie of Argentina,” Commentary, Sept. 5). It is his prescription of default and devaluation that would see Argentina digging itself deeper.

Yes, there are risks in the new program, but Argentina’s recipe for reform is the right one, well deserving of strong international support. And the new agreement has already begun to restore confidence domestically. Argentine depositors have not only stopped withdrawing money from the banks but have begun to return money to the financial system.

Weisbrot is wrong for a number of reasons. First, Argentina’s currency board enjoys widespread support in the country. And given Argentina’s highly dollarized economy–most debts of firms and households are denominated in dollars–a devaluation would have a devastating impact on companies’ balance sheets, with a likelihood of large-scale bankruptcies and unemployment.

Second, Argentina has no other option than a zero-deficit policy because of its loss of access to financial markets. This reality would hold even if there were a devaluation or an involuntary debt restructuring; in fact, experience shows that the latter would result in loss of access for several years.

Third, the government is taking steps to protect the poor by safeguarding key social programs, strengthening the social safety net and limiting cuts in wages and pensions. Argentina’s program–as crafted by Argentina and not the IMF–will build on the country’s good record of economic transformation over the last decade.

Thomas C. Dawson
Director, External Relations
IMF, Washington

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