During his August 31st, 2004 ten-hour, self-invited visit to Argentina, IMF Managing Director Rodrigo Rato told President Néstor Kirchner: "At the IMF we have a problem called Argentina ". Kirchner promptly replied: "I have a problem called 15 million poor people", a clear reference to what Kirchner considers the outcome of decades of mistaken IMF policy prescriptions in Argentina.
This frigid exchange is an indicator that the relationship between Argentina and the IMF is not going smoothly. In fact, the three-year agreement with the Fund, signed in September of 2003, is in limbo. In what has become a regular event, the IMF delayed approval of the third quarterly review of the agreement due last July, alleging that Argentina had not complied with certain structural reforms.
In previous reviews, Argentina responded to IMF delays by threatening to default on its $15 billion debt to the institution. This time, however, Argentine officials tried a novel strategy: President Kirchner and Economy Minister Roberto Lavagna decided to unilaterally suspend the agreement until April, 2005 and pay the IMF on schedule the approximately $2 billion due between August and April. While this approach temporarily gets the IMF off Argentina's back, it is by no means a sustainable arrangement. Without the refinancing of capital payments provided by the agreement, Argentina must face impossible debt service payments in the coming years, reaching 8.2% of GDP in 2005. This would be roughly equivalent to 35% of total government spending in 2005, an unthinkable amount given the huge need for government resources required to undo 10 years of IMF-mandated austerity and the magnitude of the social crisis. According to the Argentine government, unemployment is at 19.1%, underemployment is at 15%, 44% of the population is below the poverty line and almost 20% of the population is indigent.
How did Argentina get so deep in the debt cycle? Is there a way out?
Since the onset of the social and economic crisis three years ago, national and international attention focused on Argentina's gargantuan public debt. In December 2001, at the height of the crisis that sealed the fate of Argentina's decade-long experiment with rampant neoliberalism, president-for-a-week Adolfo Rodríguez Saá defaulted on roughly $80 billion of Argentina's debt with private creditors (predominantly individual and institutional bond-holders). However, Rodríguez Saá did not default on Argentina's $30 billion debt to the IFIs.
Argentina's chaotic devaluation in early 2002 resulted in the accumulation of an extra $35 billion in public debt, mostly to bail out banks and private businesses. This "new" debt, added to IFI and defaulted debt brings total public debt to approximately $180 billion, roughly 130% of GDP.
Argentina's emergence from default requires negotiating a swap of the old defaulted bonds for new ones. IMF and creditor pressure resulted in Argentina backtracking from its initial proposal of a 75% capital reduction. The new offer doubled interest rates and reduced the haircut from 75% to about 50%.
The alarming news is that even if a majority of defaulted creditors take the Argentine government's offer, total debt would only shrink by approximately $50 billion dollars, to about $130 billion-a whopping 90% of GDP. Most economists agree that this is still a dangerously unsustainable debt level. Even in the best case scenario of a successful debt restructuring, Argentina's still-huge public debt continues to leave the country on the verge of another major crisis.
The outcome of Argentina's debt saga depends largely on how the current standoff with the IMF is resolved and on the country's substantial debt to the IFIs. Argentina's debt situation cannot be resolved in any meaningful way if it continues under the tutelage of the IMF-forced to continue to implement failed policy prescriptions on the one hand, and to bleed out ifs coffers through IFI debt payments on the other.
The IFIs: Better Off Without Them?
There are at least six good reasons for Argentina to consider leaving the IFIs behind and forge its own future. First, Argentina's explosive debt accumulation and resulting crisis were due, in large part, to the privatization of the social security system foisted upon Argentina by the World Bank (WB) and required by the IMF. The WB is now backtracking from its earlier dogmatic stance on the superiority of market solutions for workers' retirement, acknowledging that a strong state-sponsored program should be the backbone of the retirement system. However, in Argentina the damage is already done.
Second, in spite of the IMF's blunders in Argentina in the 1990s the Fund refuses to admit its mistakes. The so-called Independent Evaluation Office, in reality a branch of the IMF, recently completed a study on the IMF's performance in Argentina. The study lays the blame for the crisis squarely on Argentine government officials, parroting the usual IMF line about Argentina's fiscal profligacy and incomplete structural reforms. The only mistakes the IMF admits to are not having supervised Argentina closely enough and not having paid enough attention to warnings sounded prior to 2001 that the fixed-exchange rate regime was in trouble. Indeed, not only did the IMF ignore clear warnings, but they tripled their loans to Argentina in the months preceding the December 2001 crisis, taking total loans from $5 billion to $15 billion. In sum, the IMF was unprepared for the crisis, prescribed mistaken economic policies and poured money into Argentina to prop up an unviable system.
Third, the IMF's management of the Argentine crisis (since December 2001) has been plagued with errors in diagnosis, macroeconomic projections, and policy prescriptions. In an unprecedented document published in early July, the Argentine government described in detail IMF mistakes. The government's paper highlights the extent of IMF cluelessness and inability to deal with the crisis. The document also details IMF meddling in national affairs far outside its official mandate, such as demanding modifications to the bankruptcy code and the repeal of a law that allowed for the prosecution of white-collar crime.
Fourth, the IMF continues to act in a highly contradictory way. On the one hand, it acts as a lobbyist for defaulted private creditors, demanding that Argentina raise its debt-restructuring offer and insisting that the government pay off its debt to the IFIs. On the other hand, the IMF has also insisted that Argentina eliminate export and financial transaction taxes, which together account for one third of the government's revenue, because it claims these taxes "distort" the price structure. So as the IMF pressures for significantly higher payments to creditors, it also demands measures that would deeply cut government revenue. Meanwhile, Argentina's millions of poor and unemployed don't even enter into the IMF's equation.
Fifth, since the December 2001 crisis, Argentina has made net payments to the IFIs to the tune of $8.2 billion. During the worst economic crisis of its history, rather than receiving fresh loans from the IFIs and applying scarce resources to alleviate poverty, generate employment and kick-start the economy, Argentina was instead sending its revenues to the IFIs.
Finally, the IFIs have not only prescribed mistaken and harmful policies and made bad loans, but they also claim "preferred creditor" status, expecting to cash in ahead of all other creditors. In other words, contrary to the laws of the market they so vehemently promote, they are accountable to no one nor will they pay for their mistakes.
The huge social and economic costs of IFI mistakes have Argentines asking: why should IFIs not pay for their mistakes, much like private creditors pay for bad investments? And how does Argentina benefit by maintaining its links to these institutions?
Which Way Now?
Come April 2005, Argentina will have to decide what its relationship to the IMF will be. Will the agreement signed in 2003 be restored? Assuming a successful defaulted debt restructuring, Argentina's debt sustainability will still not be guaranteed, especially if it must pay off the IFIs. What are the options?
The most desirable - and least likely - option is debt forgiveness along the lines proposed by the Jubilee Network. However, Argentina does not fit the IMF's "heavily indebted poor country" definition that is needed to qualify for debt cancellation. Furthermore, it appears that the IMF wants to make an exemplary case of Argentina for having defaulted on its debt, making debt forgiveness even less probable.
The least desirable option is a restoration of the currently suspended agreement. Despite the Argentine government's combative rhetoric, when push comes to shove Argentine officials have caved in to the IFIs in the past and may well continue to do so. The only benefit of a renewed agreement with the IMF would be a roll-over of capital payments. The drawbacks would be adoption of IMF conditionality and mistaken policy prescriptions with huge human and economic costs. There would be a political cost as well. Given the government's detailed and public exposure of IMF blunders and their damaging consequences, how will it justify a renewed relationship with the Fund? If this option is chosen by Argentine officials, they should at least demand that IFIs submit to the accountability framework recently proposed by the Center for Economic and Policy Research. Such a framework would make IFI economists accountable for their economic projections and policy prescription outcomes.
A third option is to default to the IFIs and force a debt restructuring. The advantages would be considerable: freeing up resources for development and regaining sovereignty over policy design and implementation. The price to pay is not as clear. The cost mentioned most often is the interruption of access to international credit markets, which Argentina has not had since 2001 and has still emerged from the crisis. Furthermore, Argentina has large primary fiscal and trade surpluses, and therefore the country has been mostly self-financing. Another cost often mentioned is the interruption of foreign investment. This is unlikely, since foreign investors care more about profit opportunities and a predictable investment climate than about IMF agreements. The political costs are more of an unknown. A successful break with the IFIs is an example that the G-7 and the IFIs themselves would like to avoid. It is not clear to what extent they would go to do so.
The road ahead for Argentina is bumpy. However, increasingly it looks like Argentina would be better off traveling without the IFIs. One thing is clear, as Rato said, the IMF has "a problem called Argentina". Being the stone in the shoe of the IMF gives Argentina considerable leverage. It should use that leverage to finally break dependence on bad IFI policies.Alan B. Cibils is an Argentina-based Senior Research Associate at the Center for Economic and Policy Research in Washington, DC and a Research Associate at the Centro Interdisciplinario para el Estudio de Políticas Públicas (Interdisciplinary Center for Public Policy Studies-CIEPP) in Buenos Aires. He is a frequent contributor for the IRC Americas Program and can be reached at firstname.lastname@example.org.