Credit card debt works the same way. Ring up too much credit and your rating goes kaput. The credit card companies then up the interest rates and YOU ARE SCREWED.

Brad, do you teach students life lessons about credit cards? It would be worth at least 1 lecture. I would bet every student in your class gets at least 7 credit card applications per week. Go Figure.

Why not blame all the idiots who thought that the currency peg could be maintained even when it required budget surpluses that were historically impossible?. I mean, if Bush suggested tomorrow a Social Security privatization scheme that counted on the government having a budget surplus every year for the next 75 years, rain or shine, would you buy it? Argentina had never had that kind of budget surpluses, not even close, and there was no reason to think that would change. It was precisely because the IMF pretended not to know this and that the financial markets chose to forget it, that the policy was implemented. It was the religious belief of the market in the policies what created the boom, not the policies themselves. What Brazil did right was to keep its economy undollarized, which in turn enabled them to let the real float as soon as it was neccesary.
In Argentina, where most people borrows in dollars, a devaluation has much more serious consequences. They should have let the peso float by early 2001, but after 9 years of hearing praises to convertibility it probably looked like a risky play. Not a lot of people was asking Argentina to devaluate at that time, if I remember well.

Back in November 2001, I spent a couple of fun-filled days following demonstrators around Ottawa during an IMF/World Bank/G20 meeting. A pair of student journalists who gave me a ride up had press passes to get into the meeting itself. I later found out from them that the Argentina item on the IMF agenda boiled down to "we're out of ideas and willing to entertain any half-baked scheme to get the government and ourselves out of this hole." This was one month before the implosion, when foreign property owners and capital holders pulled everything and ran while Jose Citizen couldn't withdraw five pesos from the bank.

If you've seen "The Take" or "The Fourth World War", you might remember the video of formerly middle-class Argentinians smashing ATM screens with their shoes in frustration.

A central part of Argentine policy during the 1990s was a successful effort to reduce nominal (and, of course, real) wages, accompanied by high unemployment. Take a look at figures here:

http://www.econstats.com/IMF/IFS_Arg1_67R__.htm

It's not a pretty picture and you can't just blame it on the 1995 recession. So let's not forget the very high human cost at which the Argentine gov't "halted inflation." Might we rethink the assertion that the only thing that Argentina's gov't did wrong was to let debt rise too quickly?

Note that the only way to justify the high unemployment and declining wages at the time was to argue that the groudwork was being laid for future growth. But that was a crock, given the way policy had been set up. To be clear that I'm noat arguing ex post, in Septebmer 1997 I posted to the PKT list: "I have the impression Argentina is running current account deficits in the neighborhood of $10 billion a year, roughly 3%
of GDP. If foreigners are unwilling to finance this deficit indefintely it will become necessary in time to raise exports and/or lower imports. What are the prospects for doing this? Given that the evolution of relative prices in Argentina in
recent years has favored the nontraded sector, how likely is this? Will FDI close the gap? Productivity? No other Latin American country in recent years has been experienced the level of real currency appreciation that Argentina has and been able to maintain a peg."

While I am no means an economist, I was living in Argentina from 1998-2002 and did my first documentary on the crisis, so I have a fair understanding of the economic, political and social crisis. (Many incorrectly still refer to the "economic crisis" in Argentina, as if that was all it was)

Anyway, I appreciated the comments of Colin, especially:
"So let's not forget the very high human cost at which the Argentine gov't "halted inflation." Might we rethink the assertion that the only thing that Argentina's gov't did wrong was to let debt rise too quickly?"

Brad says that part of what they did right was privatize industry. Certainly some of that had to happen, but the way privatization was carried out contributed greatly to the debt. I had some Argentine economists tell me the income from the oil company was vital but the government sold it to YPF, in a move that most consider "suspicious"

And it is common knowledge that a 15% kickback was paid to the government in any deal, so everything was privatized. Menem was unbelievably corrupt and everyone knew that.

also, from what i understand, part of the condition for IMF assistance was to clamp down on corruption, but this was ignored as long as Menem remained its post boy for the Washington consensus. (i believe he was the host or guest of honor or something at some IMF meeting in 97)

I would have a serious problem with giving the IMF credit for Turkey. Their continued economic survival has at least as much to do with ignoring IMF advice as following it.

And it is common knowledge that a 15% kickback was paid to the government in any deal, so everything was privatized. Menem was unbelievably corrupt and everyone knew that.

Hrm... Greg Palast once used the term "briberization" in reference to this practice, apparently normal at the time in IMF-inspired privatizations.

Prof DeLong- I think Atrio's post concerning moral hazard deserves a response from you. Maybe the point seems too obvious to you to rate a comment, but he's obviously right.

Argentine debt would have remained at unworrisome levels had the government not tinkered with its formerly government-run pension scheme . . . moving those obligations from off-books to realised debt led to impossible budget arithmatic. Interestingly, countries that keep those obligations off books (but obviosly still govt obligations) get investment grade ratings and are the darlings of the EM bond market, yet those who "do the right thing" and make those obligations public, get punished mercilessly.

I would add that in 1997, Argentina enjoyed domestic interest rates that verged on US levels and international ones that competed favorably with Mexico. I was one of the few who opined that that would have been the perfect time to ditch the currency peg - but they missed the opp bcse they thought all was going so great ....

Ah, the storm of Asia and Russia was yet to teach them the bitter lessons of poor policy

"And, remember, the IMF has two successes--Brazil and Turkey--to count alongside one disastrous failure--Argentina--so far in this millennium."

Methinks Brad skews the sample a little too much by making 2000 the cutoff date. It can be argued that there was a _substantial_ moral hazard IMF effect before August 1998, and that IMF successes in Mexico and East Asia (in debt repayment terms, of course) gave U.S. financiers a false sense of security. But Russia proved that there are some governments that are too corrupt--and Argentina that there are some that are too incompetent--to be bailed out by standard IMF procedures.

That the moral hazard effect doesn't exist today, and that a much lower proportion of capital is going to emerging markets today than in the 1990's, is in my opinion proof of the IMF's failure as debt collector/moral hazard promoter. Jeff Sachs is correct in saying that the IMF needs to be rescued from its role as a debt collection agency for the rich countries, but doing so entails creating international default procedures in which a substantial amount of "haircuts" (debt write-downs) are institutionalized, Argentina-style.