Argentina: Facing Up to its Debt Mess

Lex Rieffel

The following is a Letter to the Editor, written in response to their article “The IMF should stand firm against Argentine blackmail”, by Martin Wolf, published January 28, 2004.

Sir, Martin Wolf makes a number of important points about the debt mess in Argentina (“The IMF should stand firm against Argentine blackmail”, January 28). Indeed, the US government and the other leading shareholders of the Group of 10 are to blame for the International Monetary Fund’s excessive exposure to Argentina. Furthermore, the three-year economic recovery programme of the Argentine government is substandard, and making bondholders in effect pay off the IMF’s loans would leave some bad scars on the international financial system.

At the same time, Mr Wolf exaggerates the IMF’s mistake by implying that several of its loans to Argentina were egregious errors. Only the last one was a politically driven blunder. He — along with much of the bondholder community — may also overestimate the ability of the Kirchner government to implement a stronger programme. It may not have sufficient popular and parliamentary support to put into effect the measures required to achieve a fiscal surplus substantially above 3 per cent. The Argentine polity is not “normal”; it is masochistic, given to hurting itself.

Mr Wolf concludes that the IMF should stop rolling over its loans to Argentina if the government is not living up to its commitments to pursue appropriate policies and negotiate with its bondholders in good faith. He is right to predict that Argentina would default rather than pay down its IMF debt, and is on solid ground when he advocates that the “rich countries”, meaning the G-10, which has a voting majority in the IMF, should bear the cost of this default.

Regrettably, Mr Wolf neglects to mention two alternatives to outright default. The more straightforward one is for the G-10 countries to make a grant of between Dollars 10bn and Dollars 12bn to Argentina that would disburse over the next few years strictly to meet payments to the IMF. The more complicated approach is to negotiate an officially sanctioned debt reduction using the model of the heavily indebted poor countries programme for low-income countries that have been the “victims” of excessive lending by the IMF, the World Bank and other multilateral agencies treated as preferred creditors.

A negotiation of this kind would call for the skills of America’s principal heavyweight negotiator — James A. Baker III. Why then has Mr Baker been assigned instead to clear up Iraq’s debt mess, a job that a number of respected US diplomats could handle?