A speech by Anne Krueger, Principal Deputy Managing Director of the IMF, on Argentina. It is much less lively than Michael Mussa's book: contrast Krueger's "...we should have focused more closely on the debt dynamics. Indeed, we are now stepping up our work on the analysis and assessment of debt sustainability..." with Mussa's "if, if, if... if my grandmother had wheels, she would be a bus."
More important, I think that there are at least two crucial pages missing from the text of Krueger's speech. How, exactly, did Argentina transform itself from the favored darling of neoliberal reformers and the poster child for the success of the Washington consensus in 1998 into a country that had only one last desperate and slim chance to save itself from macroeconomic disaster at the end of 2000? Surely the policy tightrope you have to walk isn't that narrow and perilous, is it? I mean, the U.S. economy survived eight years of Ronald Reagan, and then two years of President "Read My Lips: No New Taxes" before George W. Bush decided in 1990 that he would rather be a president than a demagogue. (It is true that Alan Greenspan thought--or gave the impression that he thought--that the U.S. was closer to the edge in 1993 than most people believed.)
Why was Argentina's running room for deviations from the best policies so small?
Crisis Prevention and Resolution: Lessons from Argentina
Things began to go seriously awry for Argentina in late 1998 and into 1999. This reflected a number of factors: contagion from the Russian crisis of the previous summer; the collapse of the real plan in Brazil; the mounting debt burden; and the further loosening of fiscal policy as President Menem sought to stay in office, to name but three. By the end of the following year, things had deteriorated significantly. The De La Rua government was in turmoil. And there was open talk of default as Argentina faced a financing requirement in excess of $20bn a year at a time when the market's appetite for Argentine paper had been exhausted by substantial debt issues in 1999 and 2000. When Argentina came to the Fund for help in late 2000, what were the options? The Fund could have refused to lend, on the not unreasonable grounds that the fiscal measures necessary to avoid default had become politically and economically infeasible. This would likely have triggered default and the end of the convertibility plan. The government would have blamed the Fund, rather than "owning" the change of strategy. The authorities clearly remained wedded to their existing strategy and the international community agreed to support a program based on serious fiscal reform. The support was much larger than in a normal Fund program%uFFD1$14bn from us and a total package of $40bn. But this was in line with the other big packages agreed for victims of capital account crises in recent years. In that sense, it satisfied the requirement for the Fund to treat its members equally. There were also reasons for genuine optimism: reserves were still quite healthy; there was hope of lower US interest rates; and spreads (while high at 500-600 basis points) were still manageable.
The package provided only a brief respite. US interest rates did fall, but fiscal targets were missed, undermining confidence and widening spreads. When Domingo Cavallo was appointed Finance Minister in March 2001, he well understood the need for dramatic action on the fiscal front. He recognised that Argentina could no longer borrow or print money, prompting passage of the zero-deficit law. Revenue-raising measures were also put in place, including the financial transactions tax. At the same time, however, market confidence was undermined by the move to the dollar/euro peg, by the removal of Central Bank Governor Pou, and by a costly debt swap. Investors were also unimpressed by the various measures aimed at boosting competitiveness, some of which also undermined the effectiveness of tax administration. The authorities had in effect run out of policy tools, yet their commitment to the convertibility plan and continued debt servicing did not waver. With support from various G7 leaders, Argentina received a fresh loan disbursement. Alas, all too soon it was to prove in vain.
Mr Chairman. Ladies and Gentlemen.
I am delighted to join you here today for this important discussion of Argentina's economic difficulties, and the challenges they pose for policymakers both in the country and at the international financial institutions. Ordinary people in Argentina are paying an enormous price for the current crisis and it is incumbent upon us in the international community to do all we can to help the country recover as quickly as possible—and to help prevent other countries from suffering a similar fate. I hope that the discussions here today can play some small part in that process.
I would like to focus on some of the lessons that Argentina's recent experience holds for the Fund's efforts at crisis prevention and resolution. Observers of financial crises are fond of recalling Tolstoy's famous remark that "all happy families resemble each other; each unhappy family is unhappy in its own way". Argentina is a case in point. It faithfully applied many of the lessons that we thought we had learned from the previous crises of the mid and late 1990s—but a combination of new mistakes and some old ones brought it to grief all the same. Thus, inevitably, we now have a new set of lessons to learn—and some old ones to remember a little better.
Let me begin by sketching out what seems to have gone wrong in Argentina, a subject that other speakers are covering in greater length and detail today. I will then draw out some of the key long-term lessons for the Fund and its members, before concluding with a brief discussion of the immediate challenges Argentina faces and the Fund's role in helping to address them.
Posted by DeLong at July 28, 2002 08:56 AM