Argentina

["Ian Murray" <seamus2001@xxxxxxxxx>]

IMF, White House Fumble for a Strategy as Argentina Founders


By Paul Blustein
Washington Post Staff Writer
Friday, January 18, 2002; Page A20


They shut their eyes, gritted their teeth and hoped for the best. That, in essence, is what the Bush
administration and the International Monetary Fund did when Argentina defaulted on its debts and
devalued its currency a couple of weeks ago. The reasoning: Giving the Argentine government yet
another international bailout would only postpone its inevitable financial collapse.

Now Washington is confronted with a mess in Argentina, and it is far from clear that the policy
wizards in the IMF and the U.S. government have a strategy that will help keep the country's woes
from deepening and spreading.

Mass demonstrations -- which drove two presidents from office over the past month -- continued this
week in Argentina, with hundreds of marchers taking to the streets daily in Buenos Aires and rock
throwers attacking banks in major cities to protest a freeze on deposits. Confidence in the peso is
evaporating, with the currency sliding yesterday to 2.15 per dollar, less than half the value at
which it was pegged for the past decade.

The government of President Eduardo Duhalde has made several moves that appall Washington's orthodox
economic policymakers, notably its attempt to fix the exchange rate at 1.4 pesos per dollar for
certain transactions while letting the market set the rate for others (a recipe for corrupt
finagling, in the IMF's view). Duhalde has also blamed the U.S.-backed free-market approach for his
nation's troubles and proclaimed it a "broken model," raising the specter that Latin America's
third-largest economy may turn away from globalization and spark a movement toward protectionism in
a region where President Bush had hoped to forge a hemisphere-wide free-trade zone.

The unease that all this is arousing in high Washington councils came through in a speech Bush
delivered Wednesday, in which he exhorted Argentina and other Latin American nations to "strengthen
our commitment to market-based reform, not weaken it" and inveighed against "those who promise
painless protectionism."

Bush dangled a carrot by promising to support new international loans for Argentina that could
"speed the return of growth and prosperity." The price for doing so, he admonished, would be a
commitment by Buenos Aires to adopt a "sound and sustainable economic plan" aimed at restoring
confidence in the nation's finances. But therein lies a huge problem: Such a plan will by necessity
impose fresh jolts of short-term pain, and long-suffering Argentines, who feel betrayed by the
recent plunge in their country's fortunes, have shown themselves ready to rise in revolt.

The IMF is insisting on several reforms, including that Argentina's profligate provincial
governments cut spending, and that the government ensure the viability of the banking system, which
would mean making bank depositors absorb some of the losses arising from the peso's devaluation.

"If we had a vision of an easy road out of this, we'd be putting all our resources into pursuing
it," said one senior IMF economist who spoke on condition of anonymity. "But the situation is
incredibly difficult. The country is smaller, in population terms, than Indonesia [which underwent a
meltdown in 1998 and has never fully recovered], but you could see this as a bigger problem. And we
didn't have any magic solutions in Indonesia."

When speaking for the record, officials in Washington are less pessimistic. John Taylor,
undersecretary of the Treasury for international affairs, said he has "every belief that [Argentine
officials] will be able to come up with some plan" that merits international aid and holds promise
for turning Argentina's economy around.

Thomas Dawson, the IMF's chief spokesman, told reporters yesterday that "the quality and intensity
of discussions have increased" between IMF economists and Argentine officials, and he cited as
particularly welcome the announcement yesterday that Mario Blejer, a former IMF economist, was named
as the new governor of the Argentine central bank. Blejer, who had been the central bank's vice
president, replaced Roque Maccarone, who resigned.

In some respects, Argentina's crisis has been less damaging than some had feared when the IMF stood
by and let the country declare in late December that it could no longer afford to pay interest and
principal on its $141 billion debt. Financial markets in neighboring countries have been little
affected, at least so far, by the sort of "contagion" that roiled markets worldwide after Russia
defaulted on its debt and devalued its currency in August 1998.

That has been a source of comfort to the Treasury, where Taylor and his boss, Treasury Secretary
Paul H. O'Neill, have made clear their determination to use the United States' influence over the
IMF to avoid large bailouts. They have not gone nearly so far as to adopt a no-bailout policy; the
administration backed one for Argentina in August, and two for Turkey over the past year.

But in the latest Argentine crisis, they bet -- apparently correctly -- that the markets would not
be shocked to see that after more than three years of recession, Buenos Aires no longer had a
realistic prospect of servicing its debt or maintaining a high value for the peso, which hurt
exports.

Now that a lesson has been taught that Washington won't always be ready with a bailout to save
bondholders, however, it is clear that the lesson will be costly, at least for Argentina. The sharp
drop in the peso threatens bankruptcy for millions of Argentines who borrowed dollars to finance
their mortgages and small business loans, since the pesos they earn are no longer adequate to repay
those debts.

The Duhalde government has declared that banks will be required to convert many of those loans to
pesos, making them easier to repay, and at the same time it has pledged that people who deposited
dollars will get those deposits back in dollars. But those moves, while appeasing ordinary
Argentines, would likely inflict such massive losses on the banking system as to undermine its
ability to function.

This is one of the reasons why the IMF and the administration are standing back from rushing to
Argentina's assistance -- and why it looks so daunting to concoct a workable plan that won't ignite
more violence in Argentine streets.

"No one expects to be able to fix 10 years' worth of bad policy in 10 days," said Michele Davis, the
chief Treasury spokeswoman. "These are just enormous steps that have to be taken."