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March 09, 2005

Paul Blustein on Stan Fischer and Company

Paul Blustein on Stan Fischer and company:

p. 136: Throughout July... borrowing rates for the government of about 19 to 22 percent.... At the time of Taylor's August 3 visit, reserves totaled $20.4 billion, down from $28.8 billion at the beginning of July.... [T]he de la Rua government was seeking [an augmentation of] aid from the IMF.... Once again, the hope was that a large infusion of money from the Fund would restore calm... and give the government time to address credibly its long-term debt problem.

The Argentine government was offering a monumental quid pro quo--the zero-deficit law.... Convertibility was a legal restriction on the government's ability to print money. Now the government... was putting a legal restriction on its ability to spend....

[W]ith unemployment above 16 percent, questions abounded over whether the government could implement such a policy for long.... [T]he intensified austerity seemed likely to generate a popular revolt--if not in the streets, then in congressional and provincial elections that were looming....

The IMF's stance was that it would back the zero-deficit policy, provided this was truly where the Argentine body politic wished to go.... [T]he managing director admonished Cavallo that he must demonstrate broad political support for it.... By the end of July... both houses of Congress had indeed approved the policy, "so I as in a position to tell Kohler, 'Look, we have demonstrated what you requested'," Cavallo recalled....

[T]he Argentine government could not borrow at affordable rates, so it had no other choice, as Cavallo and his top aides repeatedly emphasized. No other choice, that is, except for default and/or devaluation.... "The Fund said, 'What you're doing [the zero deficit] is not politically sustainable'," recalled Federico Sturzenegger, who was secretary for economic policy at the Economy Minitry. "We told them, 'What is not politically sustainable is the alternative'."...

For three weeks in the second week of August [2001], a pitched battle ensued about the proposal for the additional $8 billion loan.... As Jack Boorman... put it later: "Argentina had a terrible history of credit culture, and it had done a terrific job of signaling to the public [in the 1990s] that it was not going to dishonor contracts. One was loath to give that up." On the other hand... the debt was so burdensome, the interest cost so high, the economy so weak, and the government's ability to achieve the necessary spending restraint more so questionable, that the odds were clearly against....

The most positive assessments... came... from Claudio Loser, as well as Tomas Reichmann. Remarkably, though, the highest probability they attached to success was 30 percent.... Reichmann recalled... "As an institution, we cannot be seen as the ones who pulled the plug on a country the legislators and executive branch are making such efforts, so long as there is a chance the situation will work out--especially given the horrendous costs of the alternative."...

Spearheading the opposition... were... Ken Rogoff... and... Carmen Reinhart. The chances of success, Rogoff said, were essentially zero. Rebutting those who were worried that the Fund would be blamed for Argentina's collapse... Rogoff and Reinhart emphasized that augmenting the program would impose a substantial encumbrance on Argentina's taxpayers. As Reinhart observed later: "These aren't grants; these are loans," which, coming from the IMF, are far more costly to default on than private credits. "And increasing them adds to Argentina's repayment burden."...

One immensely influential participant... Stan Fischer stayed silent.... Fischer favored giving Argentina an augmented loan. Staffers recall him as saying that hen a country was willing to go to such extraordinary lengths to secure IMF support, the Fund had to go the one last mile....

I find the pro-augmentation faction within the IMF hard to understand. They needed to change expectations, but the IMF was simply not able to operate on a large enough scale to do so. As Mussa said, the $8 billion would have done Argentina much more good after an abandonment of the peg than it did when committed before the abandonment of the peg.


Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).

Posted by DeLong at March 9, 2005 05:57 PM