Argentina's collapse after 10 years of policy advice and US$20 billion in loans from the International Monetary Fund offers a lesson to the IMF, investors and analysts say. Sometimes it's best to cut your losses.
The IMF put together US$15 billion in aid in the last 12 months alone to stave off default in Argentina, and that may have made matters worse by prolonging a situation the fund finally said this week is "not sustainable," analysts said.
PHOTO: AP
"There's a limit to how much blood you can take from a stone to pay off foreign creditors," said Nancy Birdsall, a former top official at the Inter-American Development Bank, which itself lent Argentina US$1.4 billion this year to boost the economy.
An IMF decision in August to increase Argentina's credit line by US$8 billion was like pouring "money down a rat hole," she said. The government is defaulting anyway.
A week of street protests over the government's decision to cut wages and freeze bank accounts has left at least 25 people dead and forced President Fernando de la Rua and Economy Minister Domingo Cavallo to step down.
The Peronist party, which is taking over the government, will probably devalue the currency, which for a decade has been fixed one-to-one with the US dollar, analysts said.
While a weaker peso would lower the production costs that make Argentine exports uncompetitive with Brazil, it would also slash savings and wages of workers who earn pesos yet pay mortgages and car loans in dollars.
The IMF's decision to continue lending to the Latin American country has added to the government's burden, a former World Bank official said.
Had the fund accepted earlier that Argentina wasn't going to avert default "there would have been less debt piled up," said Bill Easterly, who left the World Bank this year after criticizing the lender and the IMF for worsening the situation for the world's poor with their economic advice.
Argentina had already borrowed US$23 billion from the bank and the IMF from 1980 to 1998, making it the seventh-largest borrower, Easterly said. Since then, the lenders poured in about US$15 billion more.
The IMF may be ready to agree with US. Treasury Secretary Paul O'Neill and others who say the fund should be more selective in its bailouts.
Earlier this month, the fund said it wouldn't release a US$1.24 billion loan installment for Argentina because the government had failed to meet its budget-deficit pledges.
"O'Neill's philosophy is rather than having four or five chances at bat, once a country has had two or three strikes it's gone," said Jim Orr, executive director of the Bretton Woods Committee, a research group that studies the IMF and World Bank.
"The new management and the new Treasury are tougher minded."
Support for a stronger stand against borrowers also came from President George W. Bush today.
"The IMF made some very tough but very realistic and very necessary demands on the money," Bush told reporters in Washington.
A US congressional commission member that last year called on the IMF to scale back its lending said the fund is taking that advice.
"The days of the IMF bailing out private creditors are over," said Jerome Levinson, a member of the so-called Meltzer Commission that concluded the fund's bailouts often offer little incentive to governments to overhaul failed policies. "Being prepared to risk the international consequences of Argentina's default is a major departure."
In August the IMF agreed to increase Argentina's credit line to US$22 billion, in a bid to give the government another chance to restart growth and win back the confidence of global capital markets by continuing to service its existing obligations.
The accord required the country, already in a three-year recession, to slash spending. That freed up more government revenue for debt payments while dimming prospects for any quick resumption in growth.
The IMF denies responsibility for Argentina's woes.
"That is a question that is very hard," IMF spokesman Thomas Dawson said when asked four times by reporters whether the fund deserves blame. Argentina's economic "program is fundamentally owned by the authorities, which is the ideal."
That failure to assume responsibility makes some economists question whether the IMF will behave differently in the future.
"They don't have any regrets," said Charles Calomiris, a Columbia University economist who served on the same congressional panel as Levinson.
"I don't see any evidence that they think they should have dealt with Argentina differently."
Other investors and analysts said the country's own policies deserve as much blame as the fund.
"Blame the people making the decisions, not the IMF," said Jerome Booth, head of research at Ashmore Investment Management Ltd, which manages more the US$1 billion in emerging market debt.
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