Argentina : Still huff, puff and pay?

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Still huff, puff and pay?

Aug 23rd 2001 From The Economist Global Agenda

The International Monetary Fund says it is ready to provide Argentina with a further $8 billion-worth of loans. But does the deal, which comes after ten days of negotiations, do more than buy the beleaguered Argentine government a little more time?

THE deal announced between the International Monetary Fund (IMF) and Argentina on August 21st was supposed to restore some confidence in the country’s prospects, but it is already coming under fire from critics. The negotiations have kept all concerned, and not least Argentines themselves, on tenterhooks. The Argentine team of officials arrived in Washington, DC, 11 days earlier, outwardly confident that they would persuade the IMF to provide further financial support. Argentina is struggling to cope with the effects of three years of recession, a drain on domestic bank deposits and an unsustainable public-debt burden. The government wanted outside help to implement its new zero budget-deficit law aimed at getting a grip on the country’s public finances, already crippled by a debt of $128 billion.

But as the days passed, it became clear that the talks were not progressing smoothly. The American government, it was said, was unhappy about another big IMF bail-out. It wanted tough conditions in return for more money. On the face of it, the Americans got what they wanted: as part of the deal that was finally agreed, Argentina has committed itself to “strengthening fiscal adjustment” and to ensuring that this adjustment is sustainable over the medium term. But is the deal as tough as it first appears? And will it work?

The chorus of those saying no to both questions is growing louder as people assess what has been agreed. There is general agreement that the new tranche of IMF support will buy Argentina more time. The price of Argentine bonds soared at the start of trading on August 22nd, as the risk premium attached to Argentine debt shrank in the wake of the announcement. But doubts are growing about how much difference the new deal will make.

America’s attitude has been crucial, and a team from the American Treasury was closely involved in many of the detailed negotiations. While the talks were still going on last week, Paul O’Neill, the treasury secretary, said that the aim was to “find a way to create a sustainable Argentina, not just one that continues to consume the money of the plumbers and carpenters in the United States who make $50,000 a year and wonder what in the world we’re doing with their money.” Such comments didn’t go down well in Argentina, and they led to speculation that the United States would not back any new package.

That speculation was given a further fillip by the way the talks dragged on and by a statement issued by G7 finance ministers on August 19th, which suggested that other industrial countries now shared America’s concerns. The statement talked again about the need for a deal that delivered sustainable growth in Argentina. The IMF’s executive board issued a remarkably similar statement the following day.

AP O'Neill: Reluctant saviour Hence, when a deal was eventually announced, there were high hopes that it would be an effective one. The IMF is prepared to increase Argentina’s standby credit by $5 billion as soon as the deal is formally approved by its board, possibly in early September. A further $3 billion will be made available if the country engages in voluntary debt-restructuring talks with its creditors. The Argentine government has firmly committed itself to implementing the zero-deficit law. And it has also undertaken to reform the central government’s revenue-sharing arrangements with the provinces.

On the face of it, perhaps, a success for the new, tougher approach to IMF support-packages favoured by the Bush team at the American Treasury. But it is significant that, already, two credit-rating agencies, Moody’s and Fitch, have said that the deal will not change their view of the outlook for Argentina.

One of the problems is the lack of detail so far on how the voluntary debt-restructuring might work. It seems that this is largely to be left up to Argentina to decide. Domingo Cavallo, the economy minister, said on August 22nd that the IMF had not attached new conditions to the fresh money.

There are also doubts about how much progress the Argentine government can make in reforming its financial relationship with the provincial governments, given the lack of enthusiasm many of them have for the changes already implemented. And the deal provides for no change on the convertibility issue—Argentina’s ten-year-old fixed link with the American dollar. Indeed, one of the aims of the negotiations, as far as Argentina was concerned, was to help it preserve this link.

Applying some make-up

But many economists believe that, for any long-term economic progress to be made, Argentina will have to devalue and engage in substantial debt restructuring. The lack of progress in this area is one principal reason why Morris Goldstein, a senior IMF staff member for 25 years and now with the Washington-based Institute for International Economics, is unimpressed with the new package. He says it was “more cosmetic than real”, and that the deal is far too timid to work.

Mr Goldstein believes that the deal shows that Mr O’Neill and his Treasury colleagues are, as yet, not serious about embracing far-reaching reform of the way the IMF bails out countries in trouble. If Mr Goldstein’s analysis is right, then Argentina has only bought a little more time to try to solve its problems; and Mr O’Neill’s big test is still to come.

http://www.economist.com/agenda/PrinterFriendly.cfm?Story_ID=750433

-- Martin Thompson (mthom1927@aol.com), September 03, 2001

Answers

Normally I agree with the Bush administration on just about everything. But, in this case, I disagree. The only hope for Argentina, as I see it, is to decouple their peso from the dollar, and let the devil take the hind most. Let 'er flip, and hope for ups. More austerity, on top of this dismal situation cannot help. What Argentina needs now is liquidity, liquidity, and more liquidity. Dangereous strategy, to be sure. But, their situation is so desperate that hi-risk stategies are called for.

-- JackW (jpayne@webtv.net), September 03, 2001.

I must agree. There is no other choice. Only other major economic power that has its currency pegged to the dollar is Hong Kong. Their economy is strong enough to withstand strains against it. Argentina cannot. Therefore, a divorce from the dollar is their only hope.

-- Wellesley (wellesley@freeport.net), September 03, 2001.

Here we go with doubting Thomases again. Why don't we have faith in Alan Greenspan? He will fix everything.

-- Polly-Anna (polly-anna@webser.net), September 03, 2001.

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