by Edwin M. Truman, Peterson Institute for International Economics
Letter to the editor in the Financial Times
February 9, 2004
© The Financial Times Limited.
Sir, Too much of your recent coverage of and subsequent debate about Argentina has been retrospective. Let's move forward. Time is running out for Argentina, the International Monetary Fund and the international financial system.
Two years ago, a series of misguided decisions by its political leadership plunged Argentina into economic and financial chaos. Greater stability and a resumption of growth have been achieved over the past 18 months. However, the international financial community is frustrated by Argentina's slow progress in renegotiating utility rates, reconstructing the banking system and, in particular, regularising its external debt payments.
The slow progress has undercut the credibility and authority of the IMF, in the process calling into question the unwritten ground rules of international finance. The management of the IMF should shift its focus from process to substance. Preferably with the support of the Group of Seven nations, which have systemic responsibilities, the IMF should adopt a proactive two-part, offensive-defensive strategy to address promptly a dangerous situation. On offence, the IMF should provide the Argentine authorities with its bottom-line judgment on what would be an acceptable rescheduling of Argentina's external debt. On defence, the IMF should update its policies to deal with substantial arrears to it by one of its biggest borrowers.
The IMF ultimately will be required to pronounce on Argentina's formal debt offer. The sooner it communicates its judgment on what will receive a pass to the Argentine authorities, the better. Bringing Argentina and its creditors to the table to discuss a deal whose broad parameters the IMF has specified would address a type of collective action problem. It would promote substantive engagement and help to bridge the gap between the IMF's current rhetorical requirement of "good faith" negotiations and the bondholders' articulated concerns about "fairness".
On the need for a defensive strategy, it is widely perceived that the Argentine authorities have used the threat of arrears to force IMF endorsement of their economic and financial policies. An IMF arrears initiative, coupled with similar initiatives in the World Bank and Inter-American Development Bank, would signal that any leverage has been lost. In case of Argentine recalcitrance to use its reserves to repay its IMF obligations, the strategy would demonstrate to the world that Argentina thereby would be imposing a burden on the entire membership of the international financial institutions.
For the past two years, the international financial community has been right, on balance, to give the Argentine authorities the overwhelming benefit of the doubt as they sought to deal with Argentina's serious economic and financial problems. including its unsustainable external debt. Despite false starts and dissents, on the whole Argentine authorities have got what they wanted. Now they must get serious, and the IMF should do more than just say no.
Paper: What Next for Argentina? February 2004
Congressional Testimony: Statement to the Senate Banking Subcommittee on International Trade and Finance
March 10, 2004
Revised March 22, 2004
Speech: Did the Washington Consensus Fail? November 6, 2002
Op-ed: No More for Argentina August 16, 2001