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IMF may have ignored signs of Argentina's ills

Vito Tanzi, then director of fiscal affairs at the IMF, was invited to Buenos Aires in 1992 to assess Argentina's financial strength.

His conclusion: The national deficit was out of control, he said.

That assessment, never made public, didn't stop the IMF from offering US$18 billion in loans to the Latin American country during the next decade, backing the government as it ran up US$132 billion in debt to the point where its economy is in ruins.

"Once you're in the game, it begins to affect your judgment," Tanzi said of the IMF's continued lending, in an interview from Rome, where he's now Italy's deputy economy minister. "There is always some wishful thinking" that the economy will turn around.

As Argentina's new president, Eduardo Duhalde, threatens to repudiate some IMF free-market prescriptions for "destroying" the middle class, critics say the fund was guilty of supporting the country with loans long after it was clear the government was insolvent.

They also criticize the IMF for waiting until last month to tell investors that Argentina's "mix of fiscal policy, debt and the exchange rate regime is not sustainable," as the fund's chief economist Kenneth Rogoff said on Dec. 18.

"The IMF and World Bank bought into a program without coming up with answers when things went wrong," said Bill Easterly, a former World Bank economist. "They have to be careful not to support programs that aren't going to hold together."

IMF spokesman William Murray said the lender wouldn't comment on its policy advice to Argentina now, saying the fund was interested in helping the country emerge from its problems.

For the IMF, which influences the policies of a third of the world's economies through its loan programs, Argentina's collapse is fueling charges that its economic advice and multibillion-dollar bailouts of developing nations don't work.

Everyone from Republicans in the US Congress to former World Bank Chief Economist Joseph Stiglitz criticized the fund for its handling of borrowers such as Russia, which defaulted on its debt weeks after getting a new IMF loan in 1998, and Indonesia, whose government fell after protests over fuel-price increases.

The most prominent critic has been US Treasury Secretary Paul O'Neill, who in August said the IMF needed to help "create a sustainable Argentina, not just one that continues to consume the money of the plumbers and carpenters of the United States." The IMF too often is "associated with failure," O'Neill said at the time, just before the US bowed to pressure and backed US$8 billion in new aid for Argentina. The US is the IMF's largest shareholder, with three times the voting weight as the next biggest members, Japan and Germany, on the executive board.

Argentina received more loans from the IMF and World Bank intended to overhaul its economy than any other country since the mid-1980s, said Easterly, the former bank official. Still, it enters the new year with more than 18 percent unemployment, plummeting per capita income and a three-year recession that may be deepening.

Argentina tied its peso to the dollar in 1991, as part of an IMF-supported program, in an effort to tame inflation that peaked at almost 5,000 percent. That ushered in four years of growth of more than 8 percent a year and attracted US$32 billion of foreign investment.

Tanzi said even as the economy was surging, it was clear the budget deficit wasn't sustainable. The government was masking the red ink through one-time sales of state-owned companies, he said.

"The data was hiding how large the deficit was," he said.

That meant as the economy cooled, the deficit would rebound to its earlier levels.

IMF officials say they warned Argentine policy makers about the deficits, but their concerns went unheeded.

To be certain, many analysts blame Argentina's leaders for not doing enough to curb spending and corruption, and they blame investors for ignoring signs of trouble.

Some say that rather than the IMF forcing the government to accept its advice, it was Argentina that was calling the shots, convincing the fund to overlook its economic mismanagement in return for more loans.

Peter Petas, managing director of CreditSights Inc., a New York-based research firm, says the government in Buenos Aires played the IMF so obviously that it prompted an Argentine board game, called The Eternal Debt: Who is Capable of Beating the IMF? Every few months the IMF would review the progress of Argentina, waive conditions the country didn't meet, and approve the next loan installment, said Petas, who was chief emerging-markets strategist at Deutsche Bank Securities from 1997 to 2000.

"The IMF kept perpetuating this notion that Argentina was doing all it was supposed to do," Petas said. Instead, he says, for the past two years, it has been clear the country has been insolvent.

There are signs the IMF is listening to its detractors.

During the past 18 months, the fund's director, Horst Koehler, has spoken of cutting off countries that don't follow sound policies and of the need for governments to make their own decisions, advising them to take "ownership" of their IMF programs.

Harvard University economist Jeffrey Sachs, says the IMF helped Argentina emerge from its hyperinflation of the 1980s and only ran up against its limits this year.

"The fund can be criticized for backing a program that had a weak chance of success, but this is a lesser sin" than imposing draconian spending cuts, Sachs said. And those spending reductions were ordered by the government, not the IMF, he said.

Even the US$8 billion in additional aid the IMF offered in August was intended to send a message that the fund was backing away because it was so clearly inadequate, Sachs said.

"The package said to Argentina: We don't believe this will work, and neither should you," he said.
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