No More for Argentina

Op-ed published in the Financial Times

August 16, 2001

Evaluating Argentina's request for a $6bn-$9bn loan from the International Monetary Fund should not even be a close call. Unless the fund attaches stiff conditions to additional funding, it will be hard to take seriously any further discussion about reforming the fund's lending policies.

Recall that both the Bush administration and Horst Kohler, the fund's managing director, heralded a new IMF-one that would, among other things, reduce the fund's financial involvement in favour of putting more responsibility for poor lending decisions on private sector creditors. After all, these creditors are already compensated for risk in the marketplace with huge interest rate spreads (the current spread on Argentina's bonds is nearly 15 percentage points above US treasuries).

Yet during the past seven months, this "new" approach has provided a $10bn loan extension for Turkey and a new $15bn loan commitment for Brazil. Now Argentina, which received a massive $40bn IMF-led rescue package last December, is asking for more.

The Bush team and Mr Kohler have revised their initial message on IMF lending policies. US Treasury officials now talk of having already made an impact on policies because the recent loan to Turkey did away with bilateral contributions from creditor governments. It also asked for many prior actions.

What they do not say is that the fund's lending to Turkey is set to peak at about 1,400 per cent of Turkey's quota in the IMF-the second largest IMF loan relative to quota. And heavy reliance on prior actions is not unusual given that the two previous programmes collapsed. Mr Kohler is still talking about a lean IMF and, to his credit, is pushing a streamlining of IMF conditionality. But he has apparently ended his quest for smaller IMF-led packages.

Nothing illustrates the futility of the current approach better than the situation in Argentina. It is in crisis because it has an unsustainable debt burden - equal to about 450 per cent of exports - and an overvalued exchange rate. This is the third consecutive year of recession. The country has no effective policy instruments to solve its problems.

Insistence on maintaining the convertibility regime means that it can neither loosen monetary policy nor devalue. The Argentine economy is not flexible enough to restore competitiveness via a downward adjustment of domestic costs and prices alone. Tighter fiscal policy, which has been the main policy instrument so far, is hardly a good recipe by itself for reviving a weak economy. The recent initiative to go to a zero fiscal deficit has been forced on the authorities by double-digit real interest rate spreads and increasing difficulties in rolling over domestic debt obligations. A series of gimmicks, including a cosmetic debt swap, has not lifted confidence.

In Turkey and Brazil the situation is different in some important respects-neither has an overvalued exchange rate and both are following managed floating regimes. But, like Argentina, they share the fragility of heavy debt burdens that are not being dealt with adequately by the latest programmes.
Only the naive are quick to recommend debt restructuring. And devaluation is admittedly more difficult when-as in Argentina-most of the debt is denominated in foreign currency. But anyone who says "never" to these options has to contend with the sorry record of attempts made to substitute a diverse mix of policy sticking-plasters for more fundamental changes in debt sustainability and in competitiveness. If serious debt restructuring is ruled out, all fund support packages have to come up with enough money to close the short-term financing gap-and private creditors and the borrowing country know it.

Real IMF lending reform is about saying "no" to requests for assistance when the basic conditions of debt sustainability and realistic exchange rates are not met. Real reform is not about creating new lending windows or departments in the IMF; nor is it likely that moderate increases in the cost of IMF borrowing will deter politicians gambling for resurrection. If Argentina wants additional fund money, let it make the hard but necessary decisions-on debt restructuring and a new currency regime-that Domingo Cavallo, the economy minister, has avoided so far and that would give the new programme a fighting chance. Otherwise it will just be a case of postponing the inevitable.

You cannot build a reputation on what you are going to do. A tough stance on Argentina's request would show that the reform plans of the fund and the US Treasury are not all hat and no cattle. If, however, the fund and the Treasury write yet another cheque without tackling the fundamental problems, we ought at least to ask for a moratorium on further official pronouncements about the virtues of market discipline and about how this latest IMF rescue could be the last one.