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January 11, 2005

Argentinean Financial Independence

And here we have Brad Setser musing on one of the ironies of today's international finance:

Brad Setser's Web Log: Should the IMF ever take a haircut?: Argentina’s current President, Nestor Kirchner, has placed a very high premium on the appearance of independence from IMF. To avoid financial dependence on the IMF, Argentina is now running a huge fiscal surplus[, larger than the IMF would have ever demanded]. If countries are willing to adopt stricter policies than the IMF demands to avoid the IMF, then the IMF's direct influence is going to be limited...

The dialogue has been somewhat weird: IMF: "We'll loan you more money so that you can avoid cutting government spending so much..." Kirchner: "No! I'll never be your slave!"

Posted by DeLong at January 11, 2005 10:09 PM

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Brad Delong asks: "Why--given the likelihood of further dollar declines, and given the absence of any compensating interest rate premium on dollar-denominated assets--haven't the holders of these securities tried to dump them?"

My answer: economic suicide.

Some small countries have already started moving from the dollar to the Euro. From this article "Saudi central bank chief sees greater role for euro":

"Data from the International Monetary Fund showed the euro's share in official FX reserves rose to 19.7 per cent in 2003, up from 13.5pc in 1999. The dollar was still dominant, with its share standing at 63.8pc compared with 64.9pc. ... there are signs oil producers are shifting their dollar-denominated deposits, mainly to the euro's advantage."

But if countries like China, Japan or other Asian countries even stopped buying dollars, much less sold their holdings, the US interest rates would rise dramatically, probably leading to a global recession and unacceptably high unemployment for these exporting nations.

As Economist Herb Stein so astutely noted: "If something cannot go on forever, it will stop."

My question is: When will it stop?

Posted by: CalculatedRisk at January 11, 2005 10:34 PM

Come on, Brad, this is a pretty misleading view of IMF conditionality! The Argentine fiscal surplus is a result of the financial transactions tax (opposed by the IMF) and the tariff on luxury imports (also opposed by the IMF). The IMF has not restricted itself to overall comments about Argentina's balance; it has made specific, and suicidal, prescriptions about the way in which Argentina spends its money; in particular they appear to have an ideological horror of food subsidies to the poor and an obsession with privatisation of essential services.

If the IMF had any credibility when it came to promising to lend with minimal conditionality, then maybe your analysis would be correct. As it is, however, Kirchner and Lavagna, probably correctly, suspect that the IMF wants to gain some influence in the restructuring offer to private creditors, so the situation is more like "In return for removing food subsidies and taking a big risk of ending up hanging from a lamppost, we'll give your creditors $13bn".

Posted by: dsquared at January 11, 2005 11:55 PM

Agree completely with dsquared.

Posted by: roublen vesseau at January 12, 2005 12:23 AM

Heh. D^2's analysis of the IMF (that I agree with) brings to mind an incredible and comical image of someone who literally takes the food out of widow's mouths and sells it to give the rich free home entertainment systems.

They have some form of theory or dogma to justify it, I guess, but you can see why so many people hate it. And as for the theory or dogma, I'm convinced that taking the food out of the mouths of the poor is just that, and doesn't actually lead to some of kind of magical self-sufficiency, as though the third-world poor are lazy because they get food subsidies...

Posted by: Mandos at January 12, 2005 12:25 AM

Politically this is a relatively easy move for Kirchner. While in the US we confuse IMF with WTO and World Bank, in Argentina the IMF is widely seen as the imperialist hammer that has brought about much of Argentina's current pain. A healthy amount of spray paint is spent saying nasty things about the 'FMI' on the sides of Argentine buildings, so for Kirchner to specifically violate the wishes of the IMF makes a lot of sense.

Posted by: Saam Barrager at January 12, 2005 03:44 AM

Have to chime in here agreeing with dsquared. The IMF is primarily interested in helping foreign creditors and foreign capital, not Argentina. The measures it is suggesting are essentially suicidal for Argentina, and that's why Kirchner told them to take a hike.

This reflexive respect for the IMF has to stop, since they have very little to be proud of in their record of "helping" poorer nations.

Posted by: Hektor Bim at January 12, 2005 06:29 AM

I have to agree with the commenters from D Squared down.

The Times has an interesting article today about Argentina's bondholders and a proposed debt swap (http://www.nytimes.com/2005/01/12/business/worldbusiness/12debt.html?adxnnl=1&adxnnlx=1105539891-5Kfwy1bZOEk/EmnoMQ7+xw)

As Lavagna said recently, "Nobody can collect from a country that is not growing." Bondholders take a risk (a fact my 401K adminstrator is always quick to remind me whenever I complain about the roller coaster ride it's taking) and while this may have some impact on future investments in the country, Kirchner's obligation is to his citizens and not the IMF.

Posted by: Randy Paul at January 12, 2005 06:30 AM

May I remind you that one of the reasons Argentina is running a fiscal surplus is because they are not paying their debt? The dialogue is more like this IMF: "I'll loan you some money to pay your debt if you pay your creditors more of their debt" Kirchner: "NO, I'll pay my creditors what I decide".

Posted by: Carlos at January 12, 2005 07:19 AM

Is irony the word for this? Isn't it just one country finding the leverage and the guts to repudiate a failed prescription for a common economic/political problem?

Posted by: sm at January 12, 2005 07:28 AM

PS to the IMF, Grover, Alan, et al: feeding and clothing the poor may not be a bed investment. Might even be life saving.

Posted by: ken melvin at January 12, 2005 08:56 AM

The dialogue has been somewhat weird: IMF: "We'll loan you more money so that you can avoid cutting government spending so much..." Kirchner: "No! I'll never be your slave!"

I simply don't see why you consider this weird, Brad.
Is this some sort of "Economists have lost touch with normal human emotions thing"?
History and every day life are replete with examples of people and societies who are willing to accept small or large amounts of economic pain rather than accept humiliation and control.

Or perhaps, to put it in economist terms, the disutility that people associate with humiliation and lack of control is perhaps substantially higher than you believe it to be.

Posted by: Maynard Handley at January 12, 2005 05:53 PM

Here is an article on the World Bank's interference in an employer of last resort (ELR) program that has put 2 million Argentinians to work in the public sector.


"By most measures, the program has been a tremendous success, providing jobs to 2 million workers or about 5% of the population, and about 13% of the labor force. Argentina's experience allows us to assess the viability of ELR programs and to respond to critics.... Given the design of the program, which is targeted toward providing community services and infrastructure to raise the quality of life in poor neighborhoods, it is not likely that Argentina’s dollar earnings will be increased significantly by the program. Hence, the government’s ability to repay the World Bank loan is not likely to be directly increased by the Jefes program. This seems to raise the only significant concern about the program’s long run viability. In point of fact, the World Bank foreign currency loan was not required because program participants are paid in pesos. It appears that both Argentina and the World Bank recognized this, and that the real purpose of the loan was to allow Argentina to continue to service its outstanding dollar debts. We believe that such loans amount to a Ponzi scheme that only increases the likelihood that Argentina will have to default on its dollar debts."

Posted by: Winslow R. at January 12, 2005 07:26 PM

Though the lack of sympathy to creditors on this comment board does not bode well for continued financing of the American debt. . .

The surprise to me is that Argentina does not seem to have paid a price in terms of being able to conduct business, etc. Turns out many investors/businessmen don't particularly care if previous investors got screwed. Call it the Donald Trump principle.

Posted by: roublen vesseau at January 12, 2005 08:26 PM

Pretty sure Stiglitz agrees with dsquared too......

Posted by: Jason McCullough at January 12, 2005 09:11 PM


A lot of the creditors got excessively greedy and loaned money to a government in trouble. They got burned - that's what risk is all about. People had known for years that the pegged peso was unsustainable, and that the IMF was making things worse, and they went ahead and loaned money anyway. Caveat emptor.

It's the American way - read up on nineteenth century American defaults (especially by the states) some time.

Posted by: Hektor Bim at January 13, 2005 06:02 AM

It works the other way too; Thailand has never, ever defaulted on a debt, following on from the Kingdom of Siam which also never defaulted on any debt. Thailand is even refusing the Paris Club's offer of a debt moratorium to cope with the tsunami, because they are that serious about never defaulting on a debt.

You would need a microscope to see what all this commitment and hardship has bought them in the capital markets. Argentine and Mexican bonds have regularly traded at lower spreads than Thai.

Posted by: dsquared at January 13, 2005 05:15 PM

[another comment spam makes it through]

Posted by: at January 18, 2005 03:36 AM

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