The International Monetary Fund's latest loan agreement with Argentina was widely seen as a triumph of pragmatism over ideology within the Bush administration, the first U.S. administration to express skepticism about such bailouts. But it may be the opposite. Washington may be helping Argentina dig itself into a deeper hole, just to maintain credibility for a set of policies that have clearly failed.
Argentina's financial situation is similar to that of a heroin addict, only more dire. Its currency is pegged to the U.S. dollar and is overvalued. As investors get more nervous, they exchange their pesos for dollars. To keep the fixed exchange rate, the government borrows more dollars, so as to have enough for all who want to get rid of their pesos.
However, as the government's debt piles up, more people believe that a default and possibly a devaluation of the peso is inevitable. The government also must pay higher interest rates, adding to the cost of its debt. And more investors get out of pesos, or even worse, use borrowed funds to speculate against the currency. Argentina's annual foreign debt service payments are now about as much as, or more than, it can earn from exports. This means there is no way to stop the debt from growing, other than selling off more of the country's assets. Some kind of default--"restructuring" is the polite word in the business press--now appears inevitable.
This month's fix provided a soothing shot to calm the markets--another $8-billion line of credit. But it is unlikely to keep things quiet for long. In the last two months, more than 10% of deposits have been withdrawn from the Argentine banking system.
And the markets aren't exactly steady. Interest rates on Argentine bonds are 14 percentage points higher than comparable U.S. Treasury bonds, historically a very high spread. And Argentina's credit rating, from Moody's Investors Service, has fallen below that of Russia just before its default and devaluation in 1998.
In 1998 and 1999, the IMF prescribed similar loan and austerity packages in Russia and Brazil to prop up overvalued currencies. In both cases the currencies collapsed anyway, and both countries were better off for the devaluation. Economic growth picked up--with Russia registering its highest growth in decades--and the IMF's fears of hyperinflation proved groundless.
The IMF's willingness to squander tens of billions of dollars, postponing the inevitable in Argentina, is not simply ideological. Greed is also a big part of the equation.
Argentina accounts for about a quarter of all "emerging market" bonds. According to Invesco Asset Management, emerging market bonds have provided investors an average annual return of 23.8% over the last 10 years. This is higher than the Standard & Poor's 500 stock index with peak bubble years included. The great fear on Wall Street is that a restructuring of Argentine debt in which bondholders take significant losses will sour the rest of this very lucrative market.
For the public, of course, the argument is that developing countries need this foreign capital to grow. But it is difficult to see how money borrowed at a cost of more than 23% is contributing to any country's economic growth. More likely, it is contributing to a net flow of resources from the developing countries of the south to the rich lenders of the north.
All this would be bad enough if the only costs to countries such as Argentina were the enormous debt service payments drained out of their economies. But it gets worse. Argentina is stuck in a three-year recession with unemployment at more than 16%. The medieval medicine of the IMF and the bond markets--bleeding the patient with "zero deficit" budgets and high interest rates--is keeping Argentina's economy from recovering.
The budget cuts are hitting poor and working people disproportionately, with state salaries, pensions and support for the unemployed all on the chopping block. Those Argentines who can afford it least will be squeezed the most so that the IMF can hide the failure of its policies for a little longer, and Wall Street can protect its flush business in emerging market bonds.
Mark Weisbrot is co-director of the Center for Economic and Policy Research (www.cepr.net) in Washington, D.C
Copyright 2001 Los Angeles Times