Argentina and the IMF

Flag of the Republic of Argentina

While we sit around wringing our hands over the already horrific domestic situation, the rest of the world moves on. One of the interesting stories-in-progress comes from Argentina. The Argentine monetary collapse in 2001 was devastating to the economy and to a large number of Argentine citizens. Their currency was pegged to the U.S. dollar, 1-to-1, but sank to 3-to-1 after the collapse. Simple math tells you that overnight: 1) the cost of virtually all imports at least doubled, 2) anybody lucky enough to be holding U.S. dollars in cash or investments was worth a lot more (domestically, at least), 3) income from exports plunged, and 4) the country's IMF and World Bank debt moved from being a burden to being a massive dead weight. The resulting loan default, naturally, created a firestorm in the global financial community. The fine print to all this, however, is that, in Argentina, like everywhere it seems, the rich got richer and the poor got one hell of a lot poorer. Of course, the sanctimonious world press, smelling blood, rushed in. At least there was some, albeit grudging, admission of IMF culpability but, as one could predict, not for the right reasons.

Floating or sinking?
Feb 11th 2002
From The Economist Global Agenda

WATCHING the inevitable can sometimes be an uncomfortable experience: and so it was for most Argentines when the peso was finally floated on Monday February 11th. As trading got under way, the peso sank (in spite of central bank intervention): not surprising in view of the economic and financial crisis facing Argentina, but still a painful development for citizens watching the value of their assets shrink. For more than ten years, the peso was fixed by law at par with the American dollar. That link was finally abandoned last December. The subsequent temporary dual exchange-rate has now gone as well; and the peso's international value is significantly less than half the level of a few weeks ago.

Painful it may be: but the sharp depreciation of the peso is widely seen as an essential prerequisite of economic recovery. Not that there can be much hope of any early improvement in the lot of the average Argentine. The country is now in its fifth year of recession and unemployment is reckoned to be around 20%, perhaps more. When President Eduardo Duhalde took power on January 1st, he was the country’s fifth president in a fortnight. His task was, initially, to stop the economic and political crisis worsening; and then, to take a grip on the enormous problems facing Latin America’s largest economy.

[...]

After his short-lived dalliance with isolationist talk, Mr Duhalde and his government seem committed to engaging with the IMF. They need the IMF’s help and Mr Remes expressed disappointment on February 6th that the Fund had offered little in the way of public support for the government’s economic plan. But the government is in contact with the Fund, whose officials have been in Buenos Aires. Mr Remes is due in Washington, DC, on February 12th, though the Fund has stressed that, as yet, no talks are planned on specific new loans.

But there is another broader reason for the IMF’s current softly-softly approach. The Fund is acutely conscious that the finger of blame is already pointing at it for failing to prevent the crisis in Argentina. After all, it provided new financial assistance as recently as last August. Some critics have asked why it did not urge more radical reform on Buenos Aires. The IMF is always in a dilemma in such crises. If it provides help to a country whose policies are insufficient, in the Fund’s view, to stabilise the economy, it is failing its duty to member governments and, ultimately, the taxpayers around the world who underwrite its resources. But if it withholds support, it risks driving the target economy into an even deeper slump, for which it will surely get the blame.

More radical reform, indeed! Up to that point, Argentina had been IMF's "poster child," diligently putting in place all of the reforms conditional to the loans. Unfortunately, the self-centered world financial community refused to see that it was the IMF-mandated reforms that caused most of the trouble in the first place.

Note: IMF policy and loan conditions have been creating economic distress in countries around the world for years. I am not anywhere close to being an expert, even an aspiring one, so I won't attempt to get wonkish here. Perhaps the best analysis and most illuminating insights have been set forth by Joseph Stiglitz in his book, Globalization and Its Discontents. The publisher's comment sums up the book rather well.

This powerful, unsettling book gives us a rare glimpse behind the closed doors of global financial institutions by the winner of the 2001 Nobel Prize in Economics. Renowned academic economist Joseph E. Stiglitz served seven years in Washington, as chairman of President Clinton's Council of Economic Advisers and as chief economist at the World Bank. In this book, Stiglitz recounts his experiences in such places as Ethiopia, Thailand, and Russia. He finds repeatedly that the International Monetary Fund puts the interests of its "largest shareholder," the United States, above those of the poorer nations it was designed to serve.

Under the conditions of IMF loan agreements (the money comes from investors - major banks, countries and investment groups - Citi, HSBC, the U.S. Treasury, pension funds in various countries, etc.), when loans get risky enough to be called, the lenders are the first to get their money back. (Stories of lines of armored trucks lined up in front of the Argentine central bank after the collapse, transporting money out of the country, still circulate among Buenos Aires taxi drivers.) This sad scene has been replicated numerous times in other countries and is perhaps the most distressing symptom of historically bad IMF policy. Needless to say, sanctioned looting of this sort does not go over well with the local folk. (And we here in the U.S. are always so very puzzled about why we are so disliked around the world.)

Many countries when faced with similar economic crises have attempted to continue to toe the IMF line which, as Stiglitz points out, puts the interests of the lenders above the welfare of the country's citizens. When Argentina, under tremendous pressure, devalued the peso and defaulted on its loans, there were dire predictions and some threats as well.

Argentina's imploding banks
Should I stay or should I go?
Jan 17th 2002 | BUENOS AIRES
From The Economist print edition

FURIOUS at the continuing freeze of their savings, Argentines attacked bank branches—notably foreign-owned ones—this week. The freeze was imposed last month, after the country's deepening crisis had triggered a run on the banks. After violent protests had brought down two presidents, the present one, Eduardo Duhalde, decreed that, while all deposits denominated in dollars (as most are) would be refunded in dollars, loans of under $100,000 would be converted to pesos at the exchange rate of one-for-one that Argentina had maintained since 1991. Since the peso was devalued immediately afterwards, the banks are sure to suffer huge losses from this, on top of those caused by the government and many private borrowers defaulting.

Ah, but it was the foreign banks that the Economist was most concerned about.

No wonder that foreign banks are thinking of abandoning their Argentine subsidiaries, leaving the country to its fate. Faced with the extinction of the financial system, Mr Duhalde's economic team was this week bargaining desperately to persuade the banks to stay and even to inject fresh capital. The banks have already been promised compensation, to be financed by a tax on oil exports, but the $700m a year that this might raise seems unlikely to be anywhere near enough.

[...]

Although some foreign banks, such as America's Citibank, now part of Citigroup, have been in Argentina for decades, others were attracted more recently by the country's liberalising reforms in the 1990s. They are certainly big enough to withstand losing their entire investment in Argentina. Some analysts reckon that HSBC of Britain might have to take a charge of more than $1 billion, or over one-tenth of annual pre-tax profits, if it decides to stay and recapitalise its Argentine subsidiary. Two Spanish banks, Santander Central Hispano (SCH) and Banco Bilbao Vizcaya Argentaria (BBVA), have committed themselves more heavily. They stand to lose $1.5 billion and $750m, respectively, if they leave. If they stay, they would need to inject several billion dollars more between them. But even this would not seriously dent their capital.

If they listened to their shareholders, though, foreign banks might well pull out. Peter Shaw, an analyst at Fitch, a credit-rating agency, says that banks' institutional shareholders are furious at the way Argentina is treating them; they will take a lot of convincing that the banks should risk throwing fresh money after bad. On the other hand, if banks withdraw—especially if Argentine depositors are not fully repaid—they risk denting their international reputations, especially in other Latin American countries, notably Brazil and Mexico, where they have big operations.

You can see where the sympathies of the financial community fell and they WEREN'T with the Argentine people who were now struggling just to feed their families and keep current with the rent.

The repercussions of this move have been most interesting, particularly in that Argentina has not succumbed to the disaster scenarios of either the IMF or the global financial community. Last year (2004), Argentina's economy grew by a brisk 9% and foreign investment has begun to flow back in. Current account balances and cash on hand grew dramatically to the point where, it was speculated, enough existed to pay off the loans outright with some left over. Being no fools, however, the Argentine government decided not to do that. Instead, they went to the global financial market earlier this year and offered investors a bond swap. In return for the bonds that were rendered worthless by the default, the Argentine government would issue new bonds worth roughly one-third of the original bond value. Needless to say, the shit hit the fan. Investors around the world, particularly those in Italy and the U.S. were outraged not only at the proposed "haircut" but also at what they felt was the unbridled arrogance of the Argentine government. All too rarely did media coverage include the fact that "vulture investors" had already picked up many of the bonds for pennies on the dollar. A coalition of investors in the U.S. decided to litigate. (Why are we not surprised?)

(from the BBC)
Argentina plays 'chicken' with IMF
Monday, 8 March, 2004

A key date in Argentina's sometimes tense relationship with the International Monetary Fund is 9 March.

Then, the country is due to make a repayment of $3bn under an earlier IMF loan. And there have been suggestions from Buenos Aires that they might refuse to pay.

[...]

The principal concern is Argentina's relations with its private foreign creditors. When the crisis came to a head around Christmas 2001, Argentina announced the suspension of payments on its debts, or bonds. The bondholders haven't received a cent since.

[...]

Finance Minister Roberto Lavagna and Finance Secretary Guillermo Nielsen presented a proposal [at the 2003 IMF and World Bank annual meetings in Dubai] that bondholders should accept new terms that amount to loss - or haircut as it's called in financial circles - of 75 cents in every dollar they owed.

[...]

The creditors say that since that opening offer, Argentina has not budged. And that, they argue, is not negotiating in good faith.

But who are these bondholders? There are investment funds. Some of them are sometimes pejoratively called vulture investors, who buy the bonds of companies or countries in financial distress.

They buy them very cheap with a view to making a large profit when some of the money owed is finally paid.

But there are also hundreds of thousands of private individuals involved.

[...]

[T]hey didn't think it was particularly risky.

[...]

Ralph Stone of the New York law firm Shalov Stone and Bonner is trying to sue Argentina.

He says his clients are just trying to enforce the contractual rights that Argentina has already agreed to that enabled it to borrow their money in the first place.

[...]

In the meantime, Argentina continues a game of financial chicken with the IMF. If it does miss that payment due on Tuesday, it could further delay Argentina's rehabilitation in international financial circles.

Many countries with IMF loans were watching Argentina carefully to see if they were going to get away with thumbing its nose at the powerful global financial establishment. The bond swap offer ended February 25 and, in spite of the sneering prognostications of financial soothsayers, was roundly hailed as a success with 76% of the original bonds tendered for swap. Kirchner and Lavagna were elated. Financial markets, however, were not amused.

(from the Financial Times)
Argentina sets a dangerous precedent
Published: March 7 2005 03:00 | Last updated: March 7 2005

Argentina gambled, and the gamble paid off. By bullying private creditors into accepting a pitiful settlement on its $100bn (£52bn) debt restructuring it has rewritten the rules of the game in emerging market finance. It proved that debtor countries have a lot of power in their dealings with bondholders. This increases the risk involved in lending to emerging markets and should push up interest rates on emerging market debt.

Argentina and the International Monetary Fund now have to decide where to go next. The fund should make it clear that it will resume lending to Argentina only under strict conditions. Argentina should quit gambling while it is ahead and make its peace with the international financial system. Without normalisation of financial relations abroad and structural reforms at home, its triumph will prove short lived.

The IMF, however, was diplomatic and perhaps even a trifle warm in its response.

Transcript of a Press Briefing by Thomas C. Dawson
Director, External Relations Department
International Monetary Fund
March 3, 2005
Washington, D.C.

I would reiterate what I have said on a number of occasions, that Argentina has established a strong macroeconomic performance recently, and this leads us to the view that this presents an important opportunity for Argentina to move forward since there is a lot of work remaining for the country ahead to achieve a sustainable growth path in the years ahead. And we are committed to continuing to work closely with the authorities in the period ahead.

That initial euphoria has now taken a somber turn. Why? The litigation process in the U.S., of course. With 24% of bondholders who represent over $20B of the debt (excluding interest) still sitting out there, questions remain "as to whether this allows the government to leave all holdouts empty-handed or whether these holdouts are not both obliged and entitled to follow the majority." (See today's full Buenos Aires Herald editorial.)

The Financial Times weighed in last week.

(from the Financial Times)
Argentina $100bn debt swap in doubt
By Adam Thomson in Buenos Aires
Published: March 30 2005 19:41 | Last updated: March 30 2005

Argentina’s plans to seal its record $100bn debt restructuring on Friday have been thrown into doubt after a US judge handed a reprieve to creditors seeking to “attach” – or seize – the defaulted bonds.

Late Tuesday, Judge Thomas Griesa of New York’s Southern District court ruled in favour of the Argentine government’s demands to lift a preliminary freeze granted to creditors last week on $7bn of the defaulted bonds.

But, as the Herald points out in the same editorial, "[T]he bond swap cannot move for now as the result of injunctions in New York courts (despite the favourable wording of the ruling of Judge Thomas Griesa). Clearly the vulture funds knew what they were doing when they decided to opt for litigation (at a modest legal cost so far) rather than accept a two-thirds haircut even if the government was confident of having no overseas assets vulnerable to seizure."

Meanwhile, even though I am far from having the money to do it, I am still helping a couple of familes in Buenos Aires whose working-age adults cannot either find jobs or make enough money working to meet their month-to-month food and rent expenses. I'm no saint, I'm not trying to break my arm patting myself on the back and I'm sure not doing it out of guilt. I do believe, however, that we, in this privileged country of ours, ought to be a lot more aware of how we impact good people elsewhere.

Stay tuned.

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