Argentine Crisis May Prompt the IMF to Change Its Ways

The collapse of Argentina’s economy despite repeated bailouts could lead to significant changes in the way the International Monetary Fund and its member governments respond to financial crises in the developing world, officials and experts say.

With the IMF signaling it would consider helping Argentina, the longer-term issues from the crisis may make it more difficult for governments to obtain international assistance if they adhere to rigid currency exchange policies such as Argentina’s dollar-peso link, economists say.

Argentina’s travails have sparked greater interest in creating the global equivalent of bankruptcy court to help struggling countries restructure their debts before the bottom falls out of their economies.

At the same time, the IMF and its patrons, including the United States, may be inclined to pull the plug sooner if a country clings to fiscal or monetary policies that appear to be unsustainable over the long haul.

“To some extent, we’re to blame for continuing to loan them money while they were pursuing what was essentially a bankrupt strategy,” said economist Peter Morici of the Economic Strategy Institute, a business-oriented think tank. “For some time now, we knew there was no way out.”

An IMF official who requested anonymity acknowledged that the crisis in Argentina has intensified an internal debate over when the lending institution should go public with criticisms of governments in distress.

“If we blow the whistle, we risk precipitating the crisis we’re trying to avoid. If we say nothing, we lay ourselves open to the accusation that we stood by idly while the train wreck occurred,” the official said. “It’s a dilemma to which there isn’t an easy answer.”

Many economists say Argentine officials, not the IMF, bear most of the blame for the crisis, which prompted violent street protests in which 27 people were killed, the resignation of Fernando de la Rua as president and Argentina’s announcement that it will stop payments on $132 billion in foreign debt.

The interim government of Adolfo Rodriguez Saa has requested patience as it attempts to develop a new economic policy. U.S. and IMF officials say they will give the new government time to work out its problems and are willing to provide assistance if a viable plan is put in place.

The IMF “remains ready to work closely with your government to develop a sustainable solution to Argentina’s economic problems,” Managing Director Horst Kohler said in a letter to the new president.

The IMF, which acts on behalf of 183 member nations, arranged two emergency loan packages totaling $22 billion for De la Rua’s government. But it declined to provide a requested $1.2 billion installment this month, citing Argentina’s inability to abide by the terms of the loan arrangement.

Argentina’s downward spiral reflects two fundamental problems, experts say.

After a debilitating experience with hyperinflation, the country decided 10 years ago to peg its peso to the dollar with a fixed, one-to-one exchange rate. The inflation problem was cured, but the government lost the ability to respond to economic downturns by lowering interest rates or printing more pesos. As the dollar strengthened in recent years, Argentina’s exports became uncompetitive, its economy staggered, and unemployment shot through the roof.

Meanwhile, Buenos Aires and its provinces had begun running up sizable deficits to finance government programs and public employee salaries and pensions. The budget shortfalls forced the government to borrow billions of dollars on international financial markets. When recession struck, revenues fell, interest rates soared, and the government found itself unable to make required debt payments without IMF-arranged emergency loans.

One traditional way to relieve the kind of pressure bearing down on Argentina is to devalue the currency, which would boost exports and thus stimulate economic growth. But the dollar-peso link has become deeply embedded in Argentina’s economy: Most Argentines are paid in pesos, but their debts are denominated in dollars. If the peso is devalued, debt payments will balloon and bankruptcies will multiply.

“It was clear the system wasn’t working anymore, but it was also clear that fixing it had very high costs,” said Brookings Institution economist Carol Graham, a former advisor to the Inter-American Development Bank. “It was a question of when and not whether with Argentina.”

Although the IMF often is accused of forcing reluctant countries to pursue painful austerity programs as a condition of receiving financial assistance, economists say the circumstances were different in Argentina: The IMF provided loans that allowed the government to continue pursuing policies that outside observers already had concluded were unworkable.

“They enabled it to happen,” said Mark Weisbrot, co-director of the liberal Center for Economic and Policy Research.

“It’s what the private creditors wanted. The longer they could postpone the inevitable, the better off they were. If they could postpone it for a year, that’s a whole year of profits and very high interest rates they were getting,” Weisbrot said.

John Williamson, senior fellow at the Institute of International Economics and a former World Bank economist, said Argentina’s experience is likely to make international lenders more wary of export-dependent countries that try to maintain fixed exchange rates.

“In the past, it’s always been taken for granted that that’s a national decision, and the international community would respect it through the IMF,” Williamson said. “It may be that’s going to have to change, because it becomes very difficult when countries dig themselves in the way Argentina did.”

Argentina’s problems have focused attention on a proposal made last month by IMF Deputy Managing Director Anne Krueger to create an internationally accepted process that would allow failing countries to seek legal protection from their creditors while they restructure their debts.

The global bankruptcy proposal has received favorable initial responses from the Bush administration and other IMF member governments. But some international lenders are wary, fearing the system could limit their ability to withdraw funds from countries in crisis situations.

“The question now is whether the IMF and the United States should be a little more understanding of situations where deficits and social spending simply cannot be brought to zero at times of enormous domestic economic difficulty,” said Sherman Katz, an international business expert at the Center for Strategic and International Studies. “I think some thought will be given to striking a new balance.”

Ultimately, however, most experts see no way Argentina will be able to avoid the pain of currency devaluation, fiscal discipline and debt repayment if it wants to continue to engage with the world financial community.

“It’s going to impose huge costs on the Argentine people, and there is no way out of that box,” said Edwin M. Truman, a former U.S. Treasury official who was involved in previous financial bailouts. “They’ll have a deep recession and some busted financial institutions, and the standard of living unfortunately will take a bad hit.

“They will make it, but I think it’s going to be very painful.”