Questioning the Fund in Washington

Gorojovsky Gorojovsky at
Sat Dec 22 13:50:04 MST 2001

Argentina's Chaos Raises New Doubts on Monetary Fund

December 22, 2001 


WASHINGTON, Dec. 21 - The deadly riots in Argentina, the collapse of
its government and another multibillion dollar bailout gone awry have
raised fresh questions about the effectiveness of the International
Monetary Fund and the financial policies of the United States, the
fund's leading shareholder. 

Latin American and European government leaders today joined protesters in 
Buenos Aires, Wall Street traders and financial experts in putting at least 
part of the blame for Argentina's problems on the lending
agency and the Clinton and Bush administrations. 

Some say the monetary fund showed callousness by failing to give new
aid to Argentina early this month, as the country's economic program,
designed with I.M.F. approval, was forcing painful austerity measures
on its citizens. Others say the fund made the opposite mistake, repeatedly 
offering loans to Argentina despite indications that the country's policies had 
become unworkable, delaying the day of reckoning. 

These criticisms, even if contradictory, increase pressure on the
I.M.F. and the Bush administration to articulate a clear policy toward
financial rescue efforts, which often come under fire even when they
are judged successful. 

Treasury Secretary Paul H. O'Neill came into office publicly
denouncing multibillion dollar bailouts, saying that either they fail
outright or they allow foreign governments to get away with bad
policymaking and investors to get away with bad bets. 

In practice, however, the Bush administration has yet to take a clear
stance on such bailouts and has made international financial policy a
low priority. 

Peru's finance minister, Pedro Pablo Kuczynski, complained today that
the fund bungled its dealings with Argentina by adopting inconsistent
policies that were at turns passive and inflexible. "The fund is
partly to blame for this because the fund did not sound the alarm in
time and then took a very hard line when things were incredibly
difficult," he told Peruvian radio. 

Hubert Védrine, the French foreign minister, assailed the I.M.F. for
abandoning a longtime client and imposing "demands that have been
excessive or at the wrong time." The French, who like the United States are 
significant fund shareholders, have called on the lending agency to step up its 
involvement to help Argentina recover. 

After some hand-wringing about jeopardizing the money of American
"plumbers and carpenters," Mr. O'Neill supported a multibillion loan
for Argentina in August. He has also backed two large rescue packages
for Turkey, a strategic ally that has faced tough financial problems. 

When Argentina's crisis worsened in recent weeks, Bush administration
officials did not take a firm position, allowing the I.M.F. to make
the call on withholding additional loans, people involved in the
fund's deliberations said. 

Even the harshest critics of the I.M.F. put most of the blame for
Argentina's current plight on a succession of governments in Buenos
Aires. But many say the monetary fund should have called government
officials to account sooner. 

Argentina adopted a strict fixed- currency regime and overhauled its
banks in the early 1990's. It tamed inflation and became, for a spell,
a glowing economic success story. 

But subsequent governments allowed spending to grow out of control,
building up a foreign debt that became impossible to maintain.
Argentina also fell into a deep recession four years ago. The
government beseeched the I.M.F. for help to stay solvent as it tried
to work through its problems. 

Backed by both the Clinton and Bush administrations, the I.M.F. twice
came to the rescue, beginning late last year. 

The idea was to help the country defend its fixed currency, which had
become a political touchstone, while avoiding default on $132 billion
in foreign debt, allowing it to continue good relations with foreign

The terms of the aid program were wrenching. The government agreed to slash 
spending during a deep recession to increase the chances of
making debt payments on schedule. 

"If Argentina got its core economic policies right, it would have
avoided this problem," said Charles Calomiris, a finance and economics
professor at Columbia University who has been sounding the alarm about 
Argentina for months. "But the I.M.F. and both the Clinton and Bush 
administrations let them stay in denial. They all wanted the problem to fall on 
someone else's watch." 

It is always a tough call to cut off aid, Mr. Calomiris said. But he
argued that by delaying, the fund helped Argentina dig itself into a
deeper hole. 

"If you do not show leadership and make it happen early, then you face
a catastrophe," he said. 

Michael Mussa, the I.M.F.'s chief economist until last spring, said
the fund was justified in providing aid to Argentina late last year. 

But he said that he disagreed with the decision by the fund and the
Bush administration to continue the aid program in August, when he
said the situation in Argentina had likely deteriorated beyond repair.

"The fund made a mistake in not saying no in August," Mr.
Mussa said. "The situation might have been more controllable then." 

The difficulty, of course, is that such calls are much easier to make
in hindsight. Mr. Mussa acknowledged that even when the political and
economic situation in Argentina was more stable, a move to delay debt
payments or devalue the currency ran the risk of rattling financial
markets and even causing a financial implosion in the region. 

In contrast, by watching Argentina wrestle with its finances over a
period of months, financial markets anticipated the possibility of a
default. The chances of contagion are now viewed as minimal. 

Moreover, it is difficult to place blame for Argentina's economic
program squarely on the fund when much of the policy was designed by
Argentina itself, sometimes over the objections of the fund's

At an August meeting at I.M.F. headquarters, fund officials told
Domingo Cavallo, Argentina's economy minister, that the country would
be better off delaying debt payments. 

Argentina, however, was determined to pay its debts in full and keep
its fixed currency in place, fulfilling what it viewed as a promise to
its citizens and creditors who had been told for years that pesos were
as good as dollars. It outlined strict fiscal policies that it claimed
would allow it to meet its obligations. 

But by December, as Mr. Cavallo resorted to freezing bank accounts and
raiding pension funds to find enough hard currency to make debt
payments, collapse looked imminent.

The fund decided to suspend aid for a program that appeared to have
little chance of success. 

Though there were unique elements, Argentina's demise seems certain to add to 
the doubts about the wisdom of bailouts, doubts that have grown in recent 
years. Nearly every major financial rescue effort, including those in Mexico, 
Thailand, Indonesia, South Korea, Russia and Brazil, has come under intense 
scrutiny from the left and the right, albeit
for widely varying reasons. 

Fund officials say privately that they cannot avoid financial bailouts
altogether. The lesson of Argentina, they say, is that they need to
find a way to say no before the people they are supposed to be helping
take to the streets.

Néstor Miguel Gorojovsky
gorojovsky at

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