Subject: argentina and the IMF -- article in wsj
From: Martin Feldstein (msfeldst@nber.org)
Date: Tue May 28 2002 - 16:43:17 EDT
I am copying below an article that I wrote for today's Wall Street Journal
in which I argue that the IMF should not provide a loan to Argentina even
if Argentina meets conditions specified by the Fund.
Marty
THE WALL STREET JOURNAL
Tuesday, May 28, 2002
COMMENTARY
Argentina Doesn't Need the IMF
By MARTIN FELDSTEIN
The current crisis in Argentina has brought widespread suffering and a
massive economic decline. Officials of the International Monetary Fund are
now in Argentina negotiating the conditions under which they would provide
a major new loan. Since Argentina already owes the IMF $15 billion, more
than five times its "quota" and therefore far above the Fund's normal
borrowing limit, it is reasonable to ask whether a further exception should
be made for Argentina.
Much of the press commentary and policy discussion assumes that Argentina
desperately needs outside funding and that such funds would have a
substantially favorable effect on the outlook for the Argentine economy. I
disagree. I can see no way in which an IMF loan of $10 billion __ the
amount that is widely mooted __ would help Argentina deal with its
fundamental problems or its short_term crisis.
Argentina got into the current crisis because it had an overvalued currency
(the peso was tied one_to_one to the dollar) and excessive budget deficits
financed by borrowing dollars from abroad. The currency overvaluation has
already been eliminated by the collapse of the peso __ now worth about
one_third of its previous value __ and the shift to a floating exchange
rate. While future Argentine governments may continue to run large budget
deficits, there is little risk that foreign lenders will continue to
finance them.
Several reasons for providing a loan to Argentina are put forward by
advocates, including enabling the country to meet its immediate obligations
to creditors and to bolster the reserves of the central bank. True, the IMF
loan would temporarily increase the amount that Argentina could pay to its
private creditors, but it would finance only a very small part of those
obligations and would do nothing to reduce the debt write_down that will
eventually be necessary. As for bolstering reserves, the government has
accepted the idea of a floating exchange rate and should not be encouraged
by an IMF loan to try to preserve the peso's value.
Some advocates of an IMF loan assert that the funds could be used to revive
the banking system. There is no doubt that fixing the banking system is
critical for recovery. Eventually, the government must replace the
substantial bank assets that it destroyed by allowing dollar loans to be
repaid in pesos, or it must permit banks to repay depositors with some form
of longer_term bonds. In either case, an IMF dollar loan is irrelevant
since what the banks need is not dollars but pesos, which the government
can provide without help from the Fund. And Argentina's foreign exchange
reserves and current trade surplus mean that it doesn't need IMF help to
finance imports.
If there is no good economic reason for the IMF to lend money to Argentina,
why is it so eager to do so? One reason is that Argentina has interest and
principal payments of $4.9 billion that are due to the IMF this year. By
withholding that amount from any gross loan that it now makes, the IMF
could maintain the fiction that its borrowers do not default on their
loans. That claim is important to the IMF's ability to get funds from the
U.S. and other industrial governments. Since lending just $5 billion to
Argentina would make this slight of hand obvious, the IMF wants to lend
more. Putting the extra funds into Argentina's central_bank reserves would
also make it easier for Argentina to repay the $4.2 billion that is due to
the Fund in 2003.
A second reason that the IMF favors a loan to Argentina is that it would
break the Fund's traditional policy of requiring debtor countries to reach
an agreement with their creditors before the Fund would extend any new
credit. This policy of "not lending into arrears" increases the leverage of
the creditors in any negotiation. The IMF has been eager to shift the
balance of power in favor of the debtors, as its recent proposals for some
form of international bankruptcy procedure indicates. Giving a loan to
Argentina in the near future would be a step in that direction.
A loan to Argentina would also allow the IMF to impose wide_ranging
conditions on the Argentine government. Many of the policies that the IMF
now demands would be sensible things that the Argentines themselves know
should be done and that they would do even without IMF conditionality.
Making these changes appear to be forced by the IMF only weakens the
public's confidence in the government and increases the risk of
instability. Policies that appear to be accepted under duress would also be
easier for future Argentine governments to undo.
Of course, some of the policies demanded by the IMF would not otherwise be
adopted by the Argentine government. It is not clear, however, that the IMF
proposals are better than what the Argentinians would chose for themselves.
The Fund's policy demands range from constitutional changes in the relation
between the central government and the states to detailed aspects of tax
and spending policy. I have serious doubts about the ability of an IMF team
to select the changes that make the most sense in the context of local
conditions. The Fund's repeated mistakes during the run_up to the crisis
provide no reassurance about the appropriateness of its current advice.
It would be far better for the IMF to be an adviser that must persuade by
its arguments rather than an aid_giver that can demand policy changes in
exchange for financial help. Surely that is the way that Argentina or any
other democratic government deserves to be treated.
Mr. Feldstein, chairman of President Reagan's Council of Economic Advisers,
is an economics professor at Harvard and a member of the Journal's Board of
Contributors.
