1
CENTER FOR GLOBAL DEVELOPMENT
WHO LOST ARGENTINA?
LESSONS FOR AVOIDING FUTURE FINANCIAL
MELTDOWNS
Friday, March 18, 2005
10:00 a.m. - 11:30 a.m.
Peter G. Peterson Conference Center
Institute for International Economics
1750 Massachusetts Avenue, N.W.
Washington, D.C.
[TRANSCRIPT PREPARED FROM A CD AUDIO RECORDING.]
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
2
A G E N D A
March 18, 2005
AGE
MODERATOR:
Nancy Birdsall, President, Center
for Global Development
3
PRESENTERS:
Paul Blustein, Washington Post
4
Claudio M. Loser, Inter-American Dialogue
10
Liliana Rojas-Suarez, Center for
Global Development
15
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
3
P R O C E E D I N G S
MS. BIRDSALL: Speakers. Liliana is--one, two, three.
We'll start with Paul Blustein, who has just published a book-- there it is-that I recommend to all of you on the IMF and Argentina. It's called and
the Money Kept Rolling In (and Out): Wall Street, the IMF, and the
Bankrupting of Argentina.
All of you will know Paul as a key staff person and
writer/reporter at the Washington Post. He's covered business and
economic issue I was surprised to see for more than 25 years. And I must
say that along with his earlier book called The Chastening: Inside the
Crisis that Rocked the Global Financial System and Humbled the IMF,
which was about the Asian financial crisis of 1997-98.
He has shown I think for Washington readers that we're lucky
to have such great coverage of our key multilateral institutions, the
Bretton Woods institutions, especially when we accompany the fact that
Paul Blustein is there with the recent work of Sebastian Mallaby on the
World Bank. I think we're really privileged readers.
The next speaker will be Claudio Loser, who was head of the
Western Hemisphere Department at the IMF in much of the period that
Paul covers in his book, including during the 2001 Argentine financial
crisis.
Claudio is a native or Argentina, and he is the subject, the
interviewee in a new book now available in Spanish by Ernesto
Tenenbaum, called Enemigos, the subtitle is Argentina and the IMF: An
Impassioned Discussion between a Journalist and One of the Key
Members of the Fund in the 90s--the key member being Claudio Loser
himself.
He is now a visiting research scholar at the InterAmerican
Dialogue.
And then we will turn to Liliana Rojas-Suarez, who's a senior
fellow at the Center for Global Development, and Chair of the Latin
American Shadow Financial Regulatory Committee, which brings together
former ministers of finance from across the region. Liliana is a former
colleague of mine at the InterAmerican Development Bank, where she was
the principal advisor in the Office of the Chief Economist. And in
between her time at the Bank and coming to the Center for Global
Development, among other things, she was a Managing Director and Chief
Economist for Latin America at Deutsche Bank in New York.
So we'll get--oh, one other thing I wanted to say that's kind of
fun is that many of you are no doubt also readers of the Financial Times,
and over the last week or a little bit more each of the members of our
panel today has had some notice or some contribution in the Financial
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
4
Times, including today an article that refers to Claudio's role in this
event, this period that we will be talking about today.
Now the idea is to look forward, not to go backwards and try
to once again analyze what happened in the critical period 2001 and so on,
but to look forward and ask ourselves what are the implications of the
way things evolved between Argentina and the IMF and the private capital
markets for the future and for future--well, I won't try to elaborate more.
I'll leave that to our panelists.
So let us start with--each of you is welcome to go to the
podium if you like or to speak from the table. We'll start with Paul.
MR. BLUSTEIN: Okay. Thanks very much for that kind
introduction, Nancy.
A good summary of what I'll say today would be the title of
my tenth chapter. The title is Don't Cry for Them, Argentina. The "them"
refers to Wall Street or the global financial markets, those are the people
I'm suggesting we don't need to cry for. In that chapter, I argue that the
scale of the disaster in Argentina suggests a number of steps should be
taken to tame or modulate flows of capital across international borders
and to limit the costs of default by governments.
Now, I realize, of course, these aren't exactly popular ideas in
the private financial community and as people from that community see
the list that I'm suggesting, they may feel that I am proposing to inflict
punishment on them that's not unlike the fate that befell Gregory
Rasputin. You remember it was, you know, shot and stabbed and
poisoned and drowned in the river. I'm not sure which, Maybe the Rosco
River [ph], or maybe it was one in St. Petersburg, I'm not sure. But in
any case, you know, it's important to note that Rasputin lived through all
these terrible things that were inflicted on him until they fished him out
the river or something and finished him off.
So I want to make it clear, I'm not proposing to actually kill
global financial markets, although some people in those markets might
suggest that they wouldn't survive some of the things that I'm proposing.
And it's important to point out I have to make a clear and
important caveat here that strictly speaking, I'm not advocating--but
advocating any specific moves at all, because, as I say in the book, before
going through this list of things, I say, quote "the following discussion is
indicative of the scale of ambition that is warranted." And the reason for
that is, you know, I wear two hats. I'm a book author, but I'm also a
newspaper reporter and my book publisher exhorts me to get up on a
soapbox, and, at the end of the book, and say, you know, well, now that
you've read this terrible tragic story, you know, the following things
absolutely must be done or the world is going to go to hell in a
handbasket.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
5
And the editors at the Post don't care much for soap boxes at
all. And if I get up too far on one, they, you know, I might get fired or I
might get sent to Prince William County to cover zoning hearings or
something like that. So if you hear me in the heat of discussion today
sounding like I'm actually advocating something, please kindly regard that
as the rantings of my evil twin, Skippy, because that's not the newspaper
reporter speaking at all. So, anyway, but before explaining my don't cry
for them Argentina, I first want to express heartfelt thanks to the Center
for Global Development for hosting this event and to IIE for providing
these very nice surroundings, this venue. And, Nancy, as I mentioned in
my acknowledgments to the book, was also who read the manuscript and
provided some excellent suggestions for improving it.
And while I'm on this subject--and I promise not to sound
like Hillary Swank at the Oscars--I just need to thank a couple of other
organizations, including the Brookings Institution, which graciously took
me in and called me a Guest Scholar for six months, while I was on book
leave, and the Smith Richardson Foundation provided some support that
made it financially possible for me to do that and the Post let me take the
book leave.
But my debt to the Center for Global Development is not just
logistical. It's intellectual, cause if you remember in 2002, after
Argentina had completely collapsed and there were all sorts of arguments
flying back and forth about what had caused it. And one of these
arguments really grabbed me as the most persuasive and insightful, and
this was Nancy's argument that Argentina had been quote "the spoiled
child of the Washington consensus." For those of you--I'm sure a lot of
people are familiar with the argument she was making at that time that it
was--it was basically because Argentina was regarded as the star pupil of
the IMF by the U.S. government, by the markets, it was allowed by both
Washington and Wall Street to get away with policies that ultimately
proved disastrous.
So as a journalist, I really wanted to tell this story--you
know, how did Washington and Wall Street spoil their star pupil and lead
it down this road to ruin. You know, who were the main actors, the real
people behind this story? What were they thinking and doing at the time?
And, of course, I understood and I'm careful to point this out in the book
that the responsibility for what happened is ultimately Argentina's and the
decisions were those of the Argentine government, and, like governments
in most countries, they were acting under pressure from the body politic
in Argentina.
But taking those--in taking these fateful steps, I argue,
Argentina got a lot of help from the international community. I argue in
the book that Argentina was a--really a particularly egregious case of a
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
6
syndrome that we've seen arise all too often in recent years in emerging
markets, where countries get pumped up. They open their markets and
begin reforming their policies and the international community gets very
enthusiastic about them and the country gets--becomes the darling and
sooner or later everything falls to pieces.
Now why do I say this? Well, I start with the argument that-and this is most prominently associated with Mike Mussa [ph] of the IIE,
that bad fiscal policy was at bottom was the chief factor behind the crisis.
It's not that Argentina was a particularly profligate country
during the 1990s. The deficits were roughly two percent of GDP, and, of
course, that's a number that we might envy in the United States today.
But during the period when Argentina was booming, and I'm especially
thinking of 1996 to 1998, it should have adopted a much more disciplined
policy in retrospect. We can see now, preferably surpluses, because of
the convertibility system that it had: the one peso to one dollar system,
also known as a Currency Board; because after all, when you're not
allowed to increase your money supply and you're not allowed to move
your exchange rate under the rules of the convertibility system, you better
make sure that you have a lot of flexibility in fiscal policy in case the
economy falls into recession. And the best way to do that is to keep fiscal
policy very tight during periods of strong growth, keep the debt to GDP
ratio down so that there will be no worries in the markets if you do fall
into recession and you need to implement tax cuts and spending increases.
So I tell the story in the book of how the IMF failed woefully
at pushing Argentina far enough toward fiscal discipline in the 1990s.
But I found that there was an even more important reason for Argentina'
lack of adequate discipline, and this was the markets. Because even when
the IMF did sound alarms and blow whistles and all that sort of thing, it
couldn't have much of an impact on Argentina, on the government because
the markets were pouring so much money in this was lulling the
authorities in Buenos Aires into complacency.
Now that raises the question why were the markets pouring so
much money in? Well, partly, of course, it was that they believed in the
Argentine miracle, but also I found there were conflicts of interest
involved, because the firms, whose analysts were touting this miracle
were working at some of the same firms that were making millions of
dollars in fees selling Argentine government bonds. Now this is a
phenomenon that's, of course, quite redolent of the scandals that erupted
on Wall Street following the crash of dot.com stocks.
And there was also a bizarre problem stemming from the
system for evaluating money managers--portfolio managers--who were
investing in these bonds, because Argentine bonds constituted such a
large proportion of the emerging markets bond index that most
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
7
professional money managers had to buy large quantities of Argentine
bonds. Now I could explain this--the mathematics of this in more detail if
you're interested, but I'll--in the interest of time, I'll just continue.
Now that's in a very brief nutshell my argument for how the
international community contributed so heavily to setting the stage for the
crisis, even though the decisions were ultimately Argentina's. And the
same was true for the period I argue starting in late 2000, when the crisis
began to intensify, because at that point, the economy was in recession,
falling into a vicious cycle where recession was causing tax revenue to
drop off and that was causing the deficit to rise. The debt to GDP ratio
was starting to get out of hand. Markets were pushing interest rates up,
and that was causing the recession to deepen and so on, and so you had a
vicious cycle.
Now there were people at the time who were making the case
for actions that in retrospect we can see probably would have mitigated
the ultimate outcome. Of course, we can't be sure how things would have
turned out if these measures that they were recommending had been taken,
but given the depth of the pit that Argentina fell into, we can--it seems
reasonable to argue that these steps would have at least led to a less
disastrous slump.
Now the best story I can give to illustrate this, and I promise
to stop wallowing in the past and get on to the future, but I think it's
important to explain my argument about what happened so that I can--you
can have some ideas of where my conclusions are coming from.
I tell this story in the book about how Professor Charles
Calomiris of Columbia came to the Argentine Embassy, which is just a
few blocks from here, and the ambassador, who he met at the time tells
this wonderful story about how he had never heard this word that
Calomiris used. The word was haircut. At least, he had not heard it used
in a financial context. And, of course, the argument was that Argentina
needed to give its bondholders a haircut. It needed to restructure its debt
because its debt had become unsustainable. It was going to default
eventually, and the longer it waited, the worst things were going to be.
Now, of course, as we know, now neither Argentina nor the
IMF followed that advice and instead the IMF issued not just one, but two
rescue loans in 2001, the first for $14 billion, and the second for $8
billion--an additional $8 billion. And one of the more interesting stories
about this is the story of the debate that raged inside the IMF in August
2001, when Horace Curler, who was then the managing director, went
around the room with to staffers and asked everyone to assess the chances
for success, and one of the people present was the person at the end of the
table here, and he was the most optimistic. But what's really striking is
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
8
how pessimistic he was. He said the chances for success, he figured were
about 30 percent.
So now some people recollect that actually the top figure
mentioned at that meeting was 20 percent, but, anyway, I wasn't able to
obtain notes of that particular meeting so I'm going with the higher
number, but you get the idea of the order of magnitude involved.
Now, of course, this all ended in the debacle that we're all so-we all remember so well, you know, the 10-day period when Argentina
had five presidents, and there riots in the streets and more than two dozen
people were killed. And in the end, you know, these loans that the IMF
gave, we can see now only prolonged the agony and added to its
indebtedness. So what should we conclude? Are there broader lessons
here? Or, you know, is Argentina some kind of perfect storm, you know,
a unique situation. And in my book, I have a kind of a sarcastic passage,
where I say well, fear not, you know, markets learn. They really sobered
up after the Argentine crisis and they--now they'll--you know, they'll
never make this mistake again of pouring money so recklessly into
emerging market countries. And my next paragraph begins, unfortunately,
you know, what I have just told you was a laughable fantasy.
And, of course, we all know those of us who follow trends in
emerging markets currently that all you have to do is look at the spreads
on emerging markets bonds to know that once again we're at a time when
investors are throwing money at these countries, and, you know, we don't
know where the fickle finger of fate will point next and which country
will end up getting pumped up to such a vulnerable position that it will
crash, but it certainly seems likely that the fickle finger of fate was going
to point somewhere.
So this makes it very urgent that we take steps both to lessen
the chances for future crises and to manage them better.
So that brings me to my don't cry for them Argentina list.
How much time have I got?
MS. BIRDSALL: About three minutes.
MR. BLUSTEIN: Three minutes. I can do this.
So I argue that again, this is--again this is a list of the scale
of ambition that it is warranted, that we need to tame and modulate
international capital flows, because not only do investors have a natural
tendency to become irrationally exuberant about emerging markets during
good times, but this problem is amplified by the conflicts of interest and
the issue of how bond indexes cause them to put too much money into
some countries.
So we need to take steps, not only to tame these flows, but
also to shift the composition more toward what I call the sort of good
cholesterol kind of capital that is, you know, more stable foreign direct
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
9
investment and equity as opposed to bad cholesterol, by which I mostly
mean debt capital.
So one of the items on my list is a variation of the tax on
cross border investment that was proposed by Ted Truman, also of IIE.
Now Ted wasn't trying to modulate investment. He was just trying to
propose a tax that would raise money for--in an appropriate manner for an
international fund that would be kind of a war chest for major crises. But
I would suggest that this kind of tax could be used to modulate the amount
of capital, particularly debt capital if it were imposed on such a way that
a higher rate were imposed on debt rather than equity.
There's another proposal advanced by Ken Rogoff and Jeremy
Bulow which would change the legal rules applying to international
investment by sort of leveling the playing field between equity and debt.
Rogoff and Bulow argue that the playing field is tilted too much toward
debt because bond holders are protected by the rules in rich countries;
whereas, people who invest in international stock markets are protected
only by the rules in the local markets in which they invest. And he
basically suggests let's change the laws so that bond holders are not
protected. They're only protected--they're not protected by the rules of
New York State or London, but they're--or by the U.K., but they're
protected by the laws in emerging markets the same as equity investors
are.
Now those are the--a couple of the most important items on
my list about how to minimize the chances of crises. I also have some
proposals about how to improve crisis management. And I start with the
argument that's advanced in a paper that was published jointly by the
Bank of Canada and Bank of England. This is a fairly famous paper,
which argues that--argues for imposing debt stand stills and limiting the
size of IMF bailouts.
And as this paper argues, you know, we need--we need some
kind of limits to keep IMF loans from exceeding the normal 300 percent
of quota limits that's applied to those. However, it's clear in looking back
at Argentina that that wouldn't--that that system alone wouldn't have
worked very well, because Argentina was particularly--Economy Minister
Domingo Cavallo was incredibly resistant to the idea of anything that
even smacked of default.
So I propose in the book a sort of a shotgun marriage between
the Bank of Canada, Bank of England proposal with--a proposal that's
advanced by Nouriel Rubini and Brad Setser in a book that they've just
published about--called Bailouts and-Bailins and Bailouts or Bailins--I
think is the title. And I come up with an idea for what I call a take the
plunge loan.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
10
And what do I mean by that? Well, the idea is that the IMF
would be strictly--would be strictly limited from giving really large
rescue loans unless the country was willing to take the plunge, to do the
things that's really necessary to get itself out of a unsustainable position,
because you need--a better way to use large IMF loans is to cushion the
blow for what happens when countries either have to restructure their debt
or devalue their currencies.
And there are other things on my list. I include the SGRM
advanced by Ann Krieger, the Deputy Director of the IMF. As I said, this
is a list of things that people in the markets would regard as something
like what befell Rasputin.
So I'll just wrap up here. I know my times up or perhaps
slightly more than up. But this is what I say--this is a--to give some idea
of the scale of ambition that I think is warranted. I mean, I realize that
these steps that I've mentioned all have drawbacks, and they all have
fierce critics.
But Argentina was really a stunning illustration that there are
I think serious problems in the global financial system. And if we ignore
the lessons of those events, we'll be adding insult to the injury suffered by
the Argentine people, but more importantly we'll be passing up a really
great opportunity to make the system work better in a way that's really
enlightened self interest for the rich countries to spread the benefits of
global capitalism in a wider and more stable fashion.
MS. BIRDSALL: Thank you very much, Paul. Just a quick
clarification for our audience. The Rubini and Setser idea of a take the
plunge loan is the plunge being either or both of a default and a
devaluation. Right? So maybe Claudio will tell us what he thinks about
that particular proposal.
Claudio, you have the floor.
MR. LOSER: We're waiting for the presentation to come.
Eh? Yes. Almost every new economist, although I am not very new, I am
making use of PowerPoint as a substitute for eloquence. And this is one
of the problems that we economists have once we have a sort of finished
with the argument of using one hand or the other.
If you hear me today and you find my presentation somewhat
obscure, I will blame that to having slept only two hours because of the
birth of my third grandchild this morning at 3:00 a.m.
[Applause.]
MR. LOSER: Thank you very much. Max will be very
happy, and I'll communicate to him about this applause.
Well, I have decided to call this Was Argentina Lost or Was
it Never Found. It probably was never found. And what I'm going to do
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
11
is look at the news, the views, and the clues to this, of course, with a
perspective related to the IMF.
First of all, the news. Very briefly, of course. Today, the
Argentine government has successfully completed or is completing the
debt restructuring exercise and 76 percent of the value of bonds that were
subject to the default have been brought in. But still, $20 billion have not
come in.
President Kirchner in the meantime, although he has been sort
of very successful and maintained the orthodox, and I'll talk a bit that
later on, remains very hostile to the IMF and there have been some
conflicts. But even so, it seems that there will be conversations toward a
program, as I interpret, over the next few months, in spite of the history
and in spite of the rhetoric. So, so much for the news.
Let's start with the views. The first one is how the
Argentines think the Argentina-IMF fight is seen from abroad. You see
the small and saying let me loose. Let me loose. If I catch him, I'll make
him chopped liver, and the IMF has sort of a voluminous presence. It has
nothing to do with ex members of the staff that may have gained too much
weight. But let's leave that aside.
[Laughter.]
DR. LOSER: Now actually the views from abroad are those
that are presented in Paul's excellent book, and, of course, that is one that
presents really in great detail the chronology and what has happened
there. Now this is in terms of looking at things from abroad.
If you want to look at things sort of from the site, from the
scene, and you speak or read Spanish, you can, of course, Enemigos,
which is this book that was written by Ernesto Tenenbaum, in a
conversation over four months with me about Argentina and the IMF. It's
a considerably less rigorous in the presentation, but at least as gossipy as
Paul's book.
[Laughter.]
DR. LOSER: And I won't go into why this is a relevant book
too much except to say that something that my ex-colleagues and friends
in the IMF were not too happy about. I talk about the IMF fulfilling the
role of the Marines. There's a mistake there. In terms of what the
Marines were doing in the first half of the 20th century, when there were
problems with debt collection, or debt problems, in some developing
countries. Talk about the vertical discipline and cohesion of the IMF.
And also talking about intellectual arrogance on our part, which is
something that, again, my friends do not take too lightly, but I think there
is a problem. It is not arrogance in attitude, but a bit in terms of the view
of the world.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
12
Now let's look at other views. Here we have how Argentina
is doing today, coming out of the crisis--and this is very important--after
going into the worst economic crisis in recent history. The conference
level in Argentina, both the confidence in the government and the
confidence in the economy are doing very well, as seen in these charts
that were prepared by the Instituto Torcuato di Tella. I used some
material of Instituto Torcuato di Tella and Miguel Kegel [ph] also in
Buenos Aires.
Now in terms of the clues. Even after more than two years of
strong growth, if we look at the green line, GDP as of the end of last year
as not yet at the level of 1998. So that you really see that
notwithstanding this sharp process of growth, Argentina has not really
come out of the crisis.
Now unemployment has declined markedly since the crisis,
but it remains at a very high level of 16 percent if you take out certain
government programs; a decline of 10 percentage points, but you see that
Argentina still remains in trouble.
Inflation, which was doing well, is starting to increase, and
this again is a problem. And I think the next two charts are very
interesting.
I centered this in the year 2000, level one hundred.
Argentina is the red, and we see that if we look at how it is doing
compared to other countries in Latin America and Latin America overall,
in spite of the sharp growth that you see--this is Argentina and
Venezuela--they are well behind compared to other countries.
And if you look at 1998 as the base where Argentina had
reached its maximum level, you see that Argentina, with its performance,
did much worse than many other countries, many of them also having
followed IMF programs.
Brazil, Chile in its time, Mexico have done very well
compared to Argentina, so one cannot say that the link is directly with the
IMF, as I see it.
Now let's talk about Argentina of the 90s, and, of course,
Paul has mentioned this. The economy grew at a very fast rate. Inflation
declined. The level of investment was about the highest in many, many
decades, as productivity increased. There was a significant process of
modernization. Financial intermediation rose. And foreign direct
investment rose sharply as well. These are all positive things that in
today's Argentina, people try to forget, but should not.
Now the bad is that the process of privatization was marred
with problems of inefficiency and corruption. The reform process was not
carried out fully, particularly in the public sector. The public's finances,
as again Paul said, were not strengthened sufficiently and the fixed
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
13
exchange rate was inconsistent with other policies. And the availability
of foreign capital, which was more a question of the view of the world--it
was not only Argentina and Wall Street; there was a view of the world
about the importance of foreign capital--led to a lot of imprudent lending
and borrowing on the part of Argentina.
And the sad is that, although these were problems that
appeared during the Menem period, these did not necessarily result in a
decline, or a collapse, but a new government in the year 2000, 2001,
didn't have credibility and also had problems externally, and we'll see
that. As debt problems mounted, domestic policies got out of whack and
confidence was lost because of a serious problem in terms of performance.
The IMF withdrew its support after September of 2001, after having given
a lot of money. And there was an ensuing political and economic chaos.
There was a declaration of default. There was a freezing of deposits, and
the government fell and by early 2002, the peso was floating and the
economy was in a free fall. So you see really a very sad process.
Now what I want to talk about now is what was the role of the
IMF in all of this process. The blames, as I hear them are the following:
The IMF has been blamed by many, both to the right and to
the left of the Fund, which is sort of a wide spectrum, as being the sort of
the culprit in Argentina's decline, because Argentina was seen as the
perfect student and that the IMF at the end did not support it at the
moment of need and has not taken the full responsibility for the collapse;
that the IMF was too lax with Argentina during the good times and too
stringent otherwise; that the IMF was really protecting the creditors; that
the IMF really forced the default; and that the IMF has not paid for its
mistakes with Argentina.
Let me try to present the facts. How am I doing? Pretty
badly?
MR. BIRDSALL: No. You have five minutes.
MR. LOSER: Five minutes. Eehh. Okay. The facts as I say
them: I would say that Argentina was, in the eyes of the staff of the IMF,
never the perfect student. And some of us, like myself, may have a bit
more optimistic than others, but there was always quite a bit of criticism
about the policies; that external pressures, from the markets, from
governments, were always applied to the IMF in a world that believes in
the forces of open financial markets, and whenever the IMF made some
criticism the markets did not want to hear that the IMF only provided
financial support in 2001, when nobody else was lending and when there
were serious problems and concerns about leaving convertibility, which
had high costs. We were afraid that it would have high costs, and it
actually--the leaving convertibility had high costs; and that the other
thing is that the IMF did not protect private capital as such.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
14
Now what are the mistakes as I see them? The IMF was not
strong enough, as Paul said, in fighting the fiscal position of the
government and in opposing, although it's very difficult in an
international organization like the Fund, other governments that were
trying to say that the IMF was too harsh. The IMF gave too much benefit
of the doubt to the different governments, even as chances of success
were limited.
The other thing which I think is very important is that the
IMF in practice did not--or we--did not look carefully at the political
process that really indicated that there was no support for the policies that
the government presented. And the other thing which I've come to believe
more and more is that we did not emphasize the importance of strong legal
and judiciary institutions; that we basically said the reforms take place,
and it doesn't matter. The institutions will develop on their own, while
this is really not the case. You really have to have institutions and work
on the institutions for this to work.
But I have to say the responsibility for the loss remains
squarely with the Argentine government, which may have operated
irresponsibly, but was reflecting the will of the people through a
democratic process that was chaotic but very vibrant; that the foreign and
domestic investors did pay. My calculations are that there were $80
billion that came in during the 90s and $20 billion left, which may be a
high number, but still, there was a lot of money that remained; and that
the rate of return of this investment was at best zero; and that most of the
profits that occurred in the 90s--oops--okay--I lost the image here--but no
problem. I have enough guidance--most of the profits that were taken in-or were obtained in Argentina in the 90s were reinvested, and this I think
is very important, and also that the IMF lent at the time when others
didn't. And this is something that people forget; first of all, that the Fund
comes in where others don't; that the interest rate is certainly not a
reflection of the so-called risk; and that this is really shared by all
countries in the world. And so it is not something where a few
individuals or countries should pay for the cost of lending.
Now very briefly. The aftermath. After this crisis, what has
Argentina been doing? I would say that Argentina has been following a
method of TLC, which is not tender loving care, but toughness, luck, and
conservative policies.
Tough, because Argentina has been tough with the foreign
creditors, although I believe that the result would not have been different
in a negotiation of debt if the relations would have been somewhat more
amicable than they actually were.
Luck, because this government, as the Menem government,
was very lucky. If you look at the first chart to your left, you'll see the
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
15
commodity price index, which was very high through '98 and then
collapsed, and it has been high afterwards. So it's not that the
government of the la Rua or the governments had made mistakes. It's just
that they had a very negative external environment. If they would have
had the same environment as the other governments, it would have been--I
think it would have been a very different story. So that is the luck part.
And the other thing is, although the government does not
want to recognize its conservative or orthodox policies, it has followed
very, very tough fiscal policies. The monetary policy has been a bit less
than perfect recently. But they have had the best record in terms of fiscal
policy in recent years. The line that you see--the green line at top is the
primary surplus, which was around zero from 1994. If you go further
back it is--there was no primary surplus, and it has been growing nicely
and the fiscal deficit has been reduced and even was positive in recent
years.
And so there has been this TLC event. But to finish, I would
say that in the--for the future, success for Argentina is certainly not
guaranteed with or without the Fund. It will require hard work, and this
is a subject of another long conversation, and I would say it's for
Argentina to find or lose more than for the international financial
community. Thank you very much.
[Applause.]
MS. BIRDSALL: Thank you very much, Claudio. You are
only a tiny little bit spoiled, which you deserve being Argentine.
[Laughter.]
MS. BIRDSALL: We now turn to Liliana. Will you be using
PowerPoint also? I think I'm going to go right on down the.
MS. ROJAS-SUAREZ: Okay. I will try to analyze the
Argentinean situation in the context of my own experience, having been
with both the multilateral organizations and at Wall Street. And for that,
what I wan to do is to pose to you today for discussion three questions.
The first one is that whether the current Argentine debt restructuring has
changed the rules of the game in financing negotiations between emerging
market countries and their creditors, and more looking forward.
The second is that what major problems and creative
behaviors towards emerging market, both from multilateral organizations
as well as from the private sector, can be identified. And if so, if we can
identify some problems, what market-oriented solutions can be designed
and implemented.
For a start, let me give you some [inaudible] facts then a
little bit of analytics and then let me go back to the questions.
Some [inaudible] facts. As you know, investors invest in all
kinds of securities. Latin America and emerging market securities in
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
16
general can be classified as having two major risks. The first one--two
major characteristics. The first one is that they are highly risky.
Everybody agrees with that. But because they're risky, the problems or
the probability of losing liquidity at the first sight of problems is always
there.
These two features of emerging market investment imply that
they are treated as junk bonds. When investors make decisions in Wall
Street as to how to compose a portfolio, they do not compare their
portfolio of industrial countries versus emerging markets versus Triple A
corporations. What they see is they look at the low-rate category and then
the put industrial countries and they--the Triple A companies, and then
they look at the risk categories and compare emerging markets and junk
bonds.
As a result of that, you're not going to be surprised to see this
relationship [inaudible] spreads between emerging market bonds and junk
bonds. Okay? So that's how investors perceive emerging markets.
Now because of this high risk quality and because of the
probability of losing liquidity at any time--and I'm coming back to this
issue because it's my major one--what happens is that-oops--I think I-okay--what happens is that there is another feature of emerging market
bonds that we observe and this is that the inflows of capital through bonds
and mostly all kind of securities are [inaudible], meaning that there is a
positive correlation between economic growth and inflows of capital.
Why? Because if I'm telling you that these assets are going to lose
liquidity, what is the most important sign of loss of liquidity? The
economy is not growing, because then you will not generate the liquidity
to pay me back.
Now that's for the [inaudible] facts. Now let me tell you a
little bit about how I see the behavior of multilateral organizations and
markets behaving when assessing emerging markets.
I believe that investors' search for liquidity sometimes can
conflict with multilateral organizations' search for solvency. When the
IMF and other multilateral organizations assess a country's situation and
they do--they did the debt assessment, they are based on pure economics,
which is an inter temporal budget constraint, which basically assumes that
liquidity is not the problem. You can see all kinds of debt assessments
that can be static, can be dynamic, but that never assume that during the
period under analysis, there is going to be a sudden stop of inflows; in
other words, that liquidity that--can catch. That's what multilateral
organizations do.
What do markets do? Markets basically make their decisions
in two principles and rules. Let me tell you first the second one: traders
focus on a reporting system called the end of the day bottom line. What
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
17
does that mean? Paul already talked about the incentive with the bond
structure and all that, but how are bonuses calculated for traders? Well, it
depends on the amount of money you make at the end of the day. There's
actually a formula.
So if you're about to lose, if you are losing that day, your
incentive is to do something--and I'll tell you what you do. But you do
something to bring back your gains or to minimize your losses. That's a
practice in the market.
But there is also--the first one, a rule that comes from
supervisors, and it's called the value at risk methodology. We all have to
agree that it's good to assess risk in market terms, but should we use the
net component or the gross component? Value at risk tells you that if you
have a risk and you cover it up, the only thing that I'm counting against
you for capital accounting is basically your net position. Okay? Those
are two practices used in Wall Street.
Now let me tell you two very different cases of how these two
components of the market workings affect the behavior of emerging
markets. Okay?
One is the case of Mexico after Russia or Brazil after Russia.
Not Mexico Tequila, but Russia.
And the other one is going to be Argentina in a second.
Okay?
But first Mexico after Russia. We all know the story of
Russia. High yields, Investors are attracted to hold that paper, and in
addition to that, I was there in Wall Street, it was very important to know
whether the multilateral organizations were providing support for
financing needs. It was very important.
So investors go long on Russian securities. But the value at
risk catch, and they say, okay, hold on, say the supervisors, you need to
cover up. And they cover up in many ways. But one particular way that
they use is if I told you they are so concerned about liquidity, they want
to be sure that if in any particular situation, the paper, the market for
Russian paper dries, I can make some liquidity somewhere else.
So when I buy Russian paper, I buy all kinds of also liquid
papers. What is the most liquid--what were at the time--the most liquid
papers in the market--Brazil, Mexico, Argentina, and Turkey.
So the moment the market bought Russia, they bought all of
the others too to cover themselves for liquidity risk.
Now, as you know, Russia defaulted. What do you think is
going to happen now? Now the end of the day bottom line practice hits
you. You are losing. So how do you recover? You sell Mexico and
Brazil, in large amounts. Okay.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
18
Now Argentina. Argentina was a completely different story.
Why? No liquidity problems. Yes, the market when they bought
Argentina, they were buying everything else, but the way the long road to
default took such a long time that it allowed large investment corporations
and large investment firms to unload their holdings of Argentina bonds
before they became illiquid.
It was very important to take into account that the IMF was
providing liquidity support. So you can have a situation when a country
can be deemed not sustainable in terms of the debt exercises, but as long
as it is liquid, you keep playing the market. But if I know that it's
unsustainable, and I know that I have a finite time, if I can unload that
security little by little over a long period of time, there is not going to be
contagion to other countries, like it was from Russia, cause I already
unloaded. I own half a liquidity problem.
As a result of that, Argentina's default did not create a
systemic problem in the same way that Russia did. If liquidity is so
important, then what do the markets look when they are looking for
liquidity?
Well, improvements for liquidity. Okay. Large foreign
exchange reserves by the country, even inflexible [inaudible] systems.
Why? Because suppose that suddenly you have a large amortization
payment and I devalue my currency so that I can generate more revenue
by increasing exports. Well, I'm sorry but the revenues for [inaudible]
are going to take much longer than the amortization payments do.
So reserves count regardless--for emerging markets
regardless of the change of regime that you have.
Second, the liquidity coming from the multilateral
organization is all liquidity. And then, and less important, is the private
sector contingent lines of credit, but this is less important.
What subtracts from liquidity if I'm in the market making a
decision as to whether to hold Argentina or not? The financing needs of
the country. How much money is it borrowing right now? How much
money it needs and whether if somebody else is providing for that. And
second, of course, what I just told you is that large amortization and
interest payment coming due in the short term.
With this in mind, let me go back to my questions. Now I
gave you the [inaudible] facts and the framework, now my answer should
be responded very quickly.
The first one was: has the Argentina and finalizing with its
debt restructuring changed the rules of the game in financing negotiation
between emerging country, their creditors, and my answer is definitely no,
contrary to what I keep reading in many prestigious newspapers.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
19
Lack of G7, IMF, IFS--no IFS--IFE financial support for debt
restructuring or bailouts--the lack of support is consistent with Argentina
not being a systemic problem. There have not been major difficulties
developing in the international capital market following Argentina
default. That is very consistent with the old workings of the interaction
between the markets and the international organizations.
A major lesson for emerging markets is not that it is now
easier to default and get a good deal from their creditors. That would be a
very silly mistake made by policy makers in emerging markets. That
conclusion would ignore so many things.
First, as I told you, during the time of the debt restructuring
over the last two years, something that has been in abundance in the
international markets has been liquidity.
Second, one would have to be really short sighted to avoid
seeing the long three and painful years of Argentina and the long string of
failed negotiations.
And finally, as Claudio was saying, now that Argentina has
kind of defaulted, gone back out of the default, welcome back Argentina
to being an emerging market. Right? Now it's facing a constraint of
having reached almost its capacity limit and who knows what's going to
happen with inflation.
Second question. What is a major problem after I've told you
in traders' behavior towards emerging market? Okay.
First, in assessing countries' performance and in designing
programs, multilateral organizations methodology--the analysis of debt
sustainability for emerging market does not differ from that in industrial
countries. It's based on inter temporal analysis without considering the
likelihood of sudden liquidity constraints.
In contrast, in market assessment, liquidity rules. This, as I
mentioned to you, reflects partly some regulations and partly some
practices in the market. These differences in approach can certainly and
have certainly hurt emerging markets.
On my last question, can market-oriented solution be
designed and implemented? Yes. Just putting everything together of
what I've been telling you, the solution lies in aligning market objectives
with international organizations' and countries' objectives. Our
recommendations, very quickly, go to all the parties involved.
First, in assessing a country performance, the IMF and the
rest of the multilateral organizations need to price right liquidity-liquidity risk arising from market behavior. We can develop that farther
in the session of questions.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
20
Second, countries need to be aware of the consequences of
having their debt being treated as junk bonds. Let me give you an
example that I believe nobody is thinking about right now.
Many of you have heard of the Sarbanes-Oxley--if I can
pronounce that right--accounting reforms. Right? And that's supposed to
be new accounting reforms for industrial countries in general.
Well, let me tell you that those accounting reforms are right
now affecting the issuance of U.S. junk bonds. Well, if that is happening,
some arbitrage certainly is going to have with emerging markets. Okay.
It's in the interest of policy makers in industrial, it's in their
interest, to revise the undesired consequences of some financial
regulations as they might contribute rather than prevent systemic
problems.
Two prominent examples--I'm about to finish, Nancy. Two
prominent examples of potentially distortionary regulations are: one,
assessing market risk in terms of net rather than gross positions; and
second--and I have not discussed this--is that some components of BASL2
[ph] that increased incentives for short-term lending from industrial
countries to emerging markets.
And this is my last transparency. Clearly, reforms to the
process of restructuring international sovereign debt and all the proposals
that we have seen on the table, including the SDR likes and the
modifications in collective action classes--the famous CACs--are
necessary. But my major point is that any reform that you want to make
to the international financial system can be effective only if we have
measures in place to discourage countries from over borrowing and
creditors form overfeeding. And I strongly believe that pricing liquidity
risk right can go a long way towards achieving that objective. Thanks.
[Applause.]
MR. BLUSTEIN: We can all agree that if the IMF had been
as tough as Nancy, we wouldn't be here today.
MS. BIRDSALL: All right. Well, I think I'd like to have a
little bit of conversation just for five minutes before we turn it over to the
rest of you to pepper our excellent panelists with questions.
Let me start myself by suggesting that Liliana seems to be
saying the market approach could work without new--to much of new
rules--if only the IMF, for example, would see the light about liquidity
risks. This strikes me as surprising in the sense that clearly the IMF must
have been thinking about these issues.
Claudio, on the other hand--no, Paul, on the other hand, is
saying there needs to be some serious changes in the rules in the
collective interest, including of the people of Argentina.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
21
Paul, what do you think of what Liliana is saying based on
what you learned in doing your book? Is she right? Was the market-were the IFIs naive in failing to undertake sufficient analysis of--to put
themselves in the shoes of the markets. Let's put it that way. Or is it a
more fundamental structural issue?
MR. BLUSTEIN: Are you referring to the period in,
particularly in sort of mid-2001?
MS. BIRDSALL: Yes.
MR. BLUSTEIN: Yeah.
MS. BIRDSALL: Well, all along. The period, say, post 98
as liquidity risk clearly was increasing in Argentina, without the systemic
implications that-MR. BLUSTEIN: That's a very interesting question. I think
the--I can't say that I--any of my reporting has turned up evidence of that,
but there's a sort of a post-facto justification for why the IMF lent in
August of 2001--and I cite it from my book--John Taylor, the
Undersecretary of Treasury, makes this argument that, while in retrospect
by lending, we avoided contagion because the markets had more time to
adjust to the likelihood of default and I suppose it may be true that that
loan did minimize the risk of contagion. I'd be very interested in Liliana
if she thinks that it was necessary to have a second augmentation of the-you know, the August of 2001 augmentation of the IMF loan to have
avoided contagion in 2001, because my answer to this justification is, as I
said, is sort of a post-facto justification that the Treasury makes; that
well, isn't this wonderful. I mean, you know, yes, we came, of course, the
Bush Administration came to office saying we, you know, we don't want
to have big bailouts. They create more hazard. They're bad things for all
kinds of reasons. But, you know, in retrospect this loan was a swell idea
because, you know, if we hadn't given it, there might have been terrible
contagion.
My answer to that is I guess is two-fold. First of all, I
seriously question whether there was that much risk of contagion at that
time.. But the second point is, I mean, is this what the IMF is going--I
mean, this isn't much consolation for the people of Argentina. They get
stuck with an extra five or six billion dollars in debt and, you know, for a
country whose GDP fell from $300 billion to a little over $100 billion
during--as a result of the crisis--you know, that's not an insignificant
amount of money. So I'd be very interested in sort of shifting the
question over to Liliana to ask if she thinks, since she was in the market
at that time, whether the contagion risk really was all that high, because
after all, you know, when you talk to people these days, you know, they'll
say, well, in hindsight, you know, it was a very slow motion train wreck.
We all knew it was going to end in default. I'm not sure that they knew
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
22
quite as much then as they say they knew now. But certainly, there were
a lot of rather dire predictions at that time.
MS. BIRDSALL: Let me ask you, Liliana to hold your
answer, and we'll leave that our there for a minute, just because I want to
introduce another kind of issue and ask Claudio about this.
Claudio, you said the IMF did not pay the cost of spoiling
Argentina in so many words.
MR. LOSER: That's accusation.
MS. BIRDSALL: That was an accusation. In part, because it
wasn't tough enough in good times. But I think the other thing you said
that we don't hear as much about is that it ignored the deep politics of
what was going on, presumably having to do with relations between the
provinces and the central government, but also having to do with the risks
associated with weak judicial institutions, lack of contract honoring, and
maybe a little bit of a distributional issue. Who was losing and--who did
gain and who did lose over the period of time prior to the crisis and after
the crisis. Can you just say a word about what you mean when you refer
to these politics. Are you referring to distributional issues? Are you
referring to lack of contract enforcement, to judges being thrown out or
bribed? What do you mean exactly? Or these governors having no
accountability for their spending and having a lot of political power?
MR. LOSER: Yeah. The main issue really is one of related
to the interests of the political groups withing Argentina in the sense that
there was a central government, the IMF deals--because that's the way it
should be--deals with a central government and the central government
says this is what we are going to do. And the issue was more not
understanding that the provincial governments had a power of their own;
that Congress was divided; that there was a very strong majority
opposition in Congress; and that the possibilities of a credible
implementation of policies was not there. I mean, basic--what I think is
that we--I would say we there--in the Fund we consider, and we've always
considered the principle that good policies are good politics, and this is
really something that is not the case. And Argentina shows this very,
very clearly and I've seen it in other countries as well; that people,
because of a number of issues, have a dynamic in their political process
that is much more complex, and it's not a nuisance like frequently the IMF
considers. The IMF says when the politics is a nuisance, it has to be
solved by the domestic political process. And this is--it's true that it has
to be solved domestically, but it is something that has to be understood as
something of equal value. Maybe we don't like it, but it's of equal value
in terms of how reality operates.
MS. BIRDSALL: Okay. Well, this is really interesting,
because I think I heard Claudio say that the IMF has been at least on
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
23
paper naive about politics, and I heard Liliana say that the IMF has been
about the way markets operate. I'm sure we have people in the audience
who, having spent time in the IMF, might have a different view.
Liliana, I promise I'll go back to you. But let's go–
[CD CHANGE.]
MR. Cline
: Leading. An I think in particular that the
jury is very much out on whether the approach to the restructuring will be
good for Argentina in the long-term or bad for Argentina and good for the
capital markets or bad. Let me make a few points. Forgive me. I have
seven points. I'll try to be–
MS. BIRDSALL: No way. Pick a couple.
MR. Cline
: Can I have three minutes. Okay. First,
IMF lax on fiscal. Don't forget that in 1998, the IMF was roundly
criticized for being too tough on East Asia on the fiscal.
Here's Argentina with a two percent deficit. It would have
taken a lot of additional insight I think to really lower the boom. Luck?
Yes. Don't forget that right after Argentina defaulted, the Euro finally
moved up against the dollar. That was one of the major problems with
fixed exchange rates.
Second. Politics. Politics was crucial. De la Rua was widely
regarded as basically getting more and more disengaged. The provincial
governors were going their own direction. There were payments to people
to go out on the streets in the riots. This was politics in a shambles. That
was the ultimate cause, I would say of the collapse. And it seems to me
that the lesson is if you're going to make large lender of last resort loans,
you better have confidence in the politics.
Third. Wrong lesson. We should cut capital flows because
they're unsafe. Just look at the spreads. Well, those spreads are down
because U.S. interest rates are still near historic lows. Look at the
volumes. Liliana's own chart showed that capital flows, net private
capital flows, to Latin America have gone to zero. Wrong lesson there.
Far below 1996. We need capital flows for development.
Another wrong lesson. Get rid of lender of last resort and
limit the IMF to 300 percent of quota. Well, if you do that, then Brazil
would be in default. Would that be great idea? Turkey would be in
default. Would that be a great idea?
Again, I would say the main lesson is make your lender of
last resort contingent on a good evaluation of political sustainability.
Another wrong lesson I would submit--or partially wrong,
anyway--the whole problem was greedy Wall Street. Well, if the problem
was greedy Wall Street, then why aren't all of the emerging markets in
default.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
24
Another wrong conclusion. This was a successful
restructuring. Well, was it? The market I think believes that Argentina
could easily have paid 50 cents on the dollar, in real terms, instead of 30
or 25 cents. If you go carefully through their own model on their web site
and make reasonable assumptions, you can demonstrate that. But it's the
attitude was a political posturing of really being tough on the creditors.
I think that asking for a 70 cent haircut, which is HPC terms,
is historically inconsistent with Argentina's underlying economic position
and strength. It seems to me that Argentina will face the record of bad
faith to the market for some time, and it seems to me that there are also
questions about the implications for emerging markets. When the
calculations of recovery, given default are made, they will have to
increase the likelihood of large losses, so that's going to reduce the flows.
Countries such as Mexico and Brazil have shown their concern for the
adverse implications on them by signing the Code of Conduct, which
Argentina very explicitly ignored and had to because its behavior was
inconsistent with it.
Has Argentina had rapid growth? I think Claudio is perfectly
right to emphasize that this is basically not back to where they were in
1998.
And finally, on the implication, yes; that the SDRM would
have helped. Don't forget that the SDRM's purpose was to organize the
creditors. Argentina showed that's not a problem. The creditors were
perfectly organized. What Argentina showed as a problem of getting
negotiations and good faith.
MS. BIRDSALL: Okay. Well, this is really interesting,
because now we've heard that not only is the IMF confused about markets
and confused about politics, but it was even confused about the relevance
of fiscal austerity in different settings. So, because it seemed to be too
austere, too much--too demanding on fiscal side in East Asia, it decided
not to do so in Argentina.
Luckily, we have three former and current staff of the IMF on
my list. But I'm going to ask each of them to take less time, since there
are three of them than did Bill.
The first is Vito Tanzi. Do introduce yourself properly.
MR. TANZI: Well, maybe I should have twice the time
because I was at IMF, but then I was a Deputy Minister in the Italian
government immediately after. So I won't receive both things from both
perspectives.
I want to be very short. You know, on the IMF side, I think
that nobody has talked about governance within the IMF. And what I'm
going to say is not going to please various people.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
25
But around 98, you know, I found myself in a very weird
situation. I was one--the most senior director in the Fund. I had been a
director since 1980. I was certainly an authority on the fiscal issues.
You know, I was very well known in Argentina, and I was directing a very
large department, one of the largest. And I find myself cut out from
decision making. You know, very often, meetings were called, and I was
not invited. When I started complaining about what was going on--by the
way, it just happened like this. You know.
And so after a while, I ceased to even to go to some of these
meetings. I sent junior people and I refuse to send--to sign [inaudible].
You know, normally somebody a the division chief level, start sending
[inaudible].
So the first question I want to raise whether governance
within the IMF has change to make sure that the critics are kept and not
kept out of decision making process, you know.
The other thing--I want to now move very quickly to my other
job that I had--when I left the Fund, I joined the Berlusconi government
in May 2001. So at that time, the Fund was still involved with Argentina.
And pretty soon, you know, I find out that a lot of Italians were lending
money. As it turned out that 450,000 Italians had to send money--had
invested money in Argentine bonds.
MS. BIRDSALL: The famous retail investors?
MR. TANZI: Yeah. At the beginning, I didn't worry. I knew
three people where they invested money. One was Regis Parventa [ph]
who was president of one of the large banks in Italy. He had been
minister, so I said no problem. He knows what he's doing. The other one
was the wife of the minister, of Tremonti. I said, you know, they are very
rich. They know what they are doing. The third one was the head of a
commission, of the budget commission in parliament, and I said, well. So
I didn't worry. And then the crisis came.
MS. BIRDSALL: Okay. But hurry along, Vito.
MR. TANZI: Yeah. Yeah. I'll be very quick. You know,
well, in by--you know, by the end of the year what was happening is that
the Fund was still lending money. Italians were still buying bonds. The
managing director of the Fund was making speeches saying that the
program is doing okay. And these poor guys in Italy, they are not the
people in the financial market in New York that Liliana is talking about.
These are people--after I discovered afterward that most of them were
ignorant people and had invested all their savings in this, believing that
they were buying something that had value.
So the final question to conclude: does the Fund have
responsibilities vis a vis these kind of people? All the discussion up to
now has been the relationship with the trader in New York. But the guy
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
26
in Gaeta in Italy, who has saved all his money, you know, that's invested
in this, what responsibility does the Fund have vis a vis these people
when they send signals to the world that things are going okay, should
they worry about implications for this kind of person? Thank you very
much.
MS. BIRDSALL: Okay. Let's go to Charlie Blitzer [ph].
MR. BLITZER: Thank you, Nancy, and thank you to the
panel.
MS. BIRDSALL: Introduce yourself, please.
MR. BLITZER: I'm Charles Blitzer from the International
Capital Markets at the Fund, and previously the private sector.
I think it's important when looking at the past, and even more
important what the implications are going forward that we avoid
compressing things too much in avoiding some of the real world texture
that exists and in particular I'm concerned about the overuse of the word
Wall Street.
Vito brought up one example, but the fact is that what can
traditionally be called Wall Street firms or large global institutional
investors probably never had even as much as 25 percent of the Argentine
debt. There were Argentine institutions. There was Argentine retail,
which might have had a quarter and at least a quarter was in the hands not
just of Italians, but Europeans generally as well as Japanese.
So we shouldn't overemphasize the role of Wall Street and
underemphasize the broader role of the financial sector as whole.
And it's quite true, the Fund has looked very carefully at its
role. We publish things. We're taking some actions. It would be very
welcomed if the broad financial sector did the same thing. How to go
forward from here, particularly in terms of selling to retail.
Second, Paul mentions the role of analysts. It would be
incorrect to say that the analysts had a single view on Argentina, either in
this period before the crisis, or after the crisis. In my experience, the
most worried economists about Argentina were from the private sector, as
well as the least worried. And that should be I think acknowledged.
Third point is in terms of the outflows which occurred in
2001, the reality is bond holders had bonds, and were very limited in their
ability to inflict pain on the balance of payments. The hemorrhage which
actually occurred was domestic depositors and domestic capital flight and
that deserves more weight than we've heard today.
And finally, I think the Fund is doing a better job and more
intensive job of looking at how markets really work. We spend a lot of
time looking at liquidity issue in various senses of that word in terms of
global financial stability. And I would recommend our twice-year
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
27
publication, the Global Financial Stability Report, which does go through
a lot of the issues which Liliana raised. Thank you.
MS. BIRDSALL: Jack Borman [ph]. Do introduce yourself,
Jack.
MR. BORMAN: Jack Borman. I was Director of Policy at
the Fund in that episode during the summer of 2001.
Two comments if I may. Claudio's point on politics I think is
a particularly interesting one. But he will recall I think that in the
context of those endless meetings that we had in August of 2001 around
the managing director's conference table a proposal was made which
recognized exactly this political problem. And the proposal was to get
signatures from each of the provincial governors to statements that
indicated their commitment to the realities of the budget. And, in fact,
this proposal was taken to Domingo Cavallo, who as I recall through
ownership back in our face and said that given the hostility of the
Argentine public to the IMF--and he was correct in this--going to that
level of interference in domestic politics would be unacceptable. And he
said leave the politics to me.
But I would say we were not unaware of that problem. We
were incapable rather, because of the ownership issue and because of
other issues of dealing with it.
The second comment I would make goes rather to more recent
times, and that is the role of the Fund vis a vis the markets and private
creditors and the authorities in an negotiation and a work out of this kind.
The Fund has traditionally laid out medium-term scenarios
that at least provide a corridor of what the official community thinks is
possible in terms of the capacity of the country to service its debt post a
rescheduling, which has itself then implications for what the terms of that
rescheduling in general terms might be.
The Fund stood away from that. It never presented a
medium-term scenario in the context of the September 2003 program. It
never involved itself in that question.
What do--particularly Liliana--what do you think about that
passive posture of the Fund and what its implications might be in future
cases of this nature?
MS. BIRDSALL: Thank you, Jack. Just to translate that
question to make sure everyone understands it. I think Jack is asking
whether the Fund should have a taken a more clear public position, if not
on the size of the haircut, a position on the issues that would bear on the
size of the haircut. I think John Williamson [ph]--did you? What I'm
doing is you can see is I'm going to take all the questions and comments
and then go back to the panelists to pick and chose.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
28
So we do have a few more hands, if everyone could be as
short as possible.
MR. WILLIAMSON: Yeah. I'm John Williamson. I'm a
Senior Fellow at the Institute for International Economics.
I was surprised to hear Paul Blustein worrying about the
capital--the revival of capital inflows to emerging markets at the present
time. It seems to me this is really a case of fighting the last war.
There is no--virtually the only significant emerging market
that has a current account deficit at the moment is Mexico. Now in
principle, I suppose it is true that a country could also get into trouble on
account of borrowing and then allowing capital outflows, and some part of
the inflows being used to finance capital outflows. But most of it is being
used to build up reserves. And as long at that continues, I can't see that
this is any particular danger. The big unsustainability in the world about
which we should be worrying is quite different. It affects a big country,
which is actually not very far from here.
[Laughter.]
MS. BIRDSALL: Yes. Please.
MR. DUNN: Robert Dunn from the Department of
Economics, GW.
A comment with regard to the role of private commercial
banks and investment banks here. It is stunning to me how little
institutional memory there was given the losses that were absorbed in the
1980s in Latin America, including Argentina. A mere decade later,
they're either lending or talking others into lending in the same places as
if this had never happened.
I suspect the reason for this is the way the investment bankers
and the loan officers are paid, namely bonuses at the end of the year based
on loans made and fees collected this year, without reference to whether
or not the loans are ultimately repaid, with the bankers planning on
leaving and going to another bank, another job before trouble arises. This
creates an enormous principal agent problem with regard to these loan
officers and investment bankers acting on behalf of their stockholders and
clients.
A way around this perhaps is that the Federal or the SEC or
both could adopt rules which say the following:
All such bonuses are paid into an escrow account. You don't
get the money unless or until the loan is repaid. And that would change
the incentive structure facing the investment bankers and the commercial
bankers rather sharply.
You get the money when and if it's repaid, and if it isn't
repaid, the money goes back to your ex employer.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
29
MS. BIRDSALL: I'm sure the next World Bank President
will be trying to figure out the same problem. How to make the staff
accountable 10 years later for the bad loans they made. I have a feeling
that in both cases, it's a kind of hapless, hopeless exercise.
Okay. I see a hand back here. I can' see your face. Oh,
Mike Mussa. Very short, Mike. You wrote the whole book on it. So.
MR. MUSSA: Regarding the past, read Paul's book.
MS. BIRDSALL: Michael Mussa, Institute for International
Economics.
MR. MUSSA: Read Paul's book. It really is an excellent
comprehensive treatment of what happened in Argentina, by somebody
who didn't have a dog in the fight. And I think it's particularly valuable
for that reason.
Looking forward is what we're supposed to be doing in this
discussion. Let me make two brief remarks.
One what do we learn from Argentina about big packages and
how to manage them?
The first thing that we learn is don't look only at Argentina.
You need to look at Brazil and Korea and Thailand and the rest of them
and draw the right conclusions from the comprehensive set of instances. I
think what we learn particularly from Argentina and this is in Paul's book
it was the failure to have a clear plan B and a clear decision in December
2000 that once that program began to go seriously off track, the
Argentines needed to be told that's it. And we need to do a restructuring
and reconsider the convertibility plan. That I think was the central
failure. In contrast, in Brazil, in the 98 program was a very clear
understanding. There was a first [inaudible] of support, and if they
couldn't make it, then we were not going to continue to support the
exchange rate peg.
And it's very important when you're doing large scale lending
to a country which is high risk to have a clear cut off point where
everybody agrees in advance, no, this far and no farther. And that was I
think a critical failure in Argentina.
I would say the situation was made substantially worse by the
United States Treasury, for which incompetence is too polite a word.
[Applause.]
MS. BIRDSALL: Come to a conclusion. Another
conclusion.
MR.
: Second.
MR. MUSSA: What I think we learned most from Argentina,
potentially, regarding how to handle the problem of restructuring is that
that poses, as Bill Klein put it, the very clear question what do you do
when the problem is not recalcitrant creditors, but a recalcitrant debtor.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
30
The external creditors of Argentina, in the present debt
restructuring, will get about 10 cents on the dollar, because 40 percent of
the debt that was restructured was held by Argentine institutions. Only
half of the external debt was actually restructured. The Argentines have
said we repudiate the remaining half that has not been restructured.
And for the half--$20 billion or so that was actually held by
foreigners, they're getting maybe 20 cents on the dollar in terms of
principals in arrears.
So Argentina is running away from its obligations to its
external creditors, bit time, even more so it looks than Iraq at this stage.
And I agree--don't agree with Bill entirely--that they could have paid 50
cents on the dollar to all their external creditors, but they could have done
a lot better than they have in the present restructuring.
And I think Jack is perfectly right in raising the issue of in
view of its lending into arrears policy, which is still the officially stated
policy of the Fund. Did not the Fund have an absolute responsibility to
say what is a reasonable corridor within with restructuring should occur,
because this is not been a haircut. It has not been a scalping. It has been
a beheading of external private credit.
[Laughter.]
MS. BIRDSALL: All right. Well, I'm sorry to say that we've
run out of time. I know there were some other hands. We will take five
or ten more minutes going past 11:30 a.m--well, five more minutes to hear
from the three panelists and I invited the audience, if you need to go, to
please feel comfortable to go. I hope those of you who are interested in
hearing what our panelists have to say will stay. And what I'd like to do
is beg them to try to refrain from reanalyzing the past--who was blamed
for what--but to focus a little bit on a set of issues that came up, given
that there have been costs to the retail investors in Italy. There have been
tremendous costs to the people of Argentina.
The question is how to avoid this kind of really catastrophe in
the future, and is it a matter of undertaking certain reforms in the markets
of the kind that Paul referred to, among other thing, and or changing the
IMF to be less politically naive, to be quicker on its feet. Or is it also a
matter of addressing, in a collective sense, the structural issue by
changing some of the fundamental rules that govern relations between
emerging markets and both the Wall Street style markets and the iffys
around the SDRM, around Paul's 300 percent, around working harder to
make the IMF a lender of last resort.
What is the implication of Argentina not for the markets
given that there wasn't contagion in the general sense, but for making the
world a better place for those who tend to be the losers in the end. It's
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
31
going to be the middle class and the poor, both in Argentina and as this
example suggests in places like Italy.
So let's go--let's give Paul the first word, since he may have
the largest audience, and he is the star of the show, with his new book,
and then turn to Claudio and Liliana.
MR. BLUSTEIN: Well, I think you should go with me first
just because I was attacked the most. But well, I've long dreaded the
moment when I would have to confront Bill Klein, because I knew--I
anticipated some of the things that he would say. Almost as I was writing
the book, I want you to know, Bill, I was sort of channeling this moment.
First of all, I mean, I endorse the first point you made that,
you know, this was a very tough moment for the IMF in 1998, because
they were getting it from both sides. They were getting it--well, they
were getting it from one side in 1998, from people who were blasting
them for being too tight on fiscal policy and that did, you know,
exacerbate the problem.
But I want to address a very important point you raise about
Brazil and Turkey, and, you know, well suppose there were absolute
limits on IMF loans of the sort that I mentioned. And I--you know,
because of time constraints, I didn't get into all the details of what I'm
suggesting. But I--in the mechanism that I sort of spell out in the book, I
create a giant loophole for myself.
I say well there should be strict limits on IMF lending unless
you go--the IMF goes through a fairly rigorous process to convince itself
that, in fact, the problem it is dealing with is really a liquidity problem.
Now, I know that everyone will scoff and say, well, yes, but how do you
differentiate between liquidity and solvency problems, because obviously
it's a continuum. It's not a bright line.
And that's why I--so what I do is I propose a series of
procedures that the Fund needs to go through, and I confess that when I've
discussed this set of procedures with people at the Fund, they've--I've
gotten a fair amount of derision about that it's completely unworkable and
it's contrary to the way the fund normally works, and I won't go into all
the details now.
But suffice it to say that my--I guess my response to that is
well, yeah, but the alternative is that, you know, we keep having the sorts
of problems that we've been having.
Now to come back to Brazil and Turkey. I mean, I think it's
fair to say that in 2002, if a--the sort of thing that I'm talking about had
been in place, it's quite possible that the IMF, you know, after going
through a rigorous examination, would have said, well, you know, we're
really not--we can't be entirely sure that this is a liquidity problem, and,
therefore, we are not going to lend enough to keep the country from going
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
32
in default. And I guess my answer to that would be well, if so, then so be
it. I'm not entirely convinced that Brazil wouldn't be better off, maybe
not today, but at least in the long run if it had been forced to do
something like what I call a take the plunge loan, where it had
restructured its debt and the IMF had lent generously to cushion the blow
of that type of step.
I grant you that, you know, one can spin all sorts of what if
scenarios to suggest that no, they would be a lot worse off today. But I
guess, as I said, I have to accept the fact that--I'm not suggesting my
proposal for how to reform the system is completely perfect and without
flaws.
So I guess that's sort of the main point that I felt I needed to
address. I apologize for not addressing numerous other points, particularly
Charles' about the--all the retail investors. But I'll--in the interest of
time, I'll--or cowardice, I'll.
MS. BIRDSALL: Well done, Paul. Brazil is a country that
has to have big fiscal--primary fiscal surplus for a long time, and it also
has a big social debt.
Claudio, does the Fund have responsibility when it sends the
wrong signal?
MR. LOSER: Yes. The issue is how does this responsibility
become reflected then when things go wrong, because what we are talking
about is not moral punishment, but what we are talking about is financial
compensation to those that were--that made the wrong decisions based on
probably misinformation, and there it becomes a very--then it becomes a
much more complicated issue, because we can say the fund has the
responsibility. But what does that mean? That there will be a tax
imposed on every country in the Fund on the basis of its quota? Will it be
on the basis of the creditor positions?
And I think that in practice, when there is a loss on the part
of investors, this is actually absorbed in significant part by the tax
system, if the tax system works well, which is not always the case. And I
wouldn't be able to say that is the case in Italy. Where the losses are
reflected in the balance sheets and these are write offs that then result in
lower taxes.
But in terms of saying okay, we'll have the--those countries-the governments of those countries that did not invest in Argentina pay a
share on these mistakes is really a serious problem I think.
MS. BIRDSALL: Thanks, Claudio. Liliana, and perhaps
unfairly I characterize your position as all we need to do is make sure that
the Fund understands that liquidity is the issue for the markets.
MS. ROJAS-SUAREZ: Very unfairly. Yes.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
33
MS. BIRDSALL: Very unfairly. So why don't you try in
your closing remarks to, in addition to saying anything you want in
answer to the earlier questions, on the big reforms, the structural reforms,
the SDRM idea and so on, answer the question that Jack Borman raised.
Should in the future the Fund, after the crisis or after the
default, be much more public and visible about the nature of the sacrifice
that is warranted from the people of Argentina versus the sacrifice that's
warranted from the creditors.
MS. ROJAS-SUAREZ: Let me with the questions and then
with an overall statement.
First, Vito, a question that we need to ask ourselves is how
did it happen: How come we're talking about old Italians and old
Europeans holding this particular kind of debt, and we did not talk about
them holding Brazilian debt or Russian debt. How did it happen?
And it happened again because of the rules of pension funds
investing in different kids of risk assets. What happened in this particular
occasion is there was so much liquidity in the market that there was what
is called appetite for risk in the pension funds, and because, from my
perspective what is measured is the net risk as opposed to the gross risk,
there was a niche in those pension funds to absorb that kind of securities.
Now what happened is that during all the period of Argentina,
while the big--Wall Street, by the way, is a big name, as somebody said,
but really technically it only refers to what is called the sales side,
meaning those that play the bonds and then sell it to the long-term
investors, like pension funds or insurance companies. While Wall Street
was unloading those bonds, they were transferred to the buy side, which is
the pension funds.
In Europe, because there was. Okay. So my point here is
that these regulations about the ability of pension funds to diversify
reason, to have a portfolio that gives itself a return has a lot to do with
actually the U.S. being able to transfer the risk to Europe--the U.S.
financial market able to transfer the risk to Europe.
Therefore, as far a conclusion, we need to align
internationally the kind of regulatory incentives for large pension funds
and investment companies and securities to take risks.
Second. Jack Borman's question. Should the Fund have been
involved in anyway with the haircut? Honestly, I think the answer is a
definite yes. I cannot understand how could you have an institution that
is a participant in being a major creditor--it's a major creditor--money is
fungible--if I pay one, I don't pay the other. So all creditors are involved
in the same problem. If you give me a haircut, well that means that you're
not giving somebody else a haircut. So I think that it's not irresponsible
is not the question. I don't see it that way.
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666
34
I think that the major problem is this lack of coordination
between and let the markets alone for a second only because it's difficult
to tell the markets what to do.
But what we can do is to change the regulations and
supervisory rules that give incentives for markets to perform. And so
there is a lot of work to do there. So the answer is yes.
Now on a final remark. To me the trick, the bottom line, the
issue of any successful permanent debt restructuring procedure is to avoid
overfeeding.
Clearly, the problem of Argentina and many others has been
too much lending. Right. So now but when lending overfeeding
manifests, that's why I brought the issue of liquidity--is because it is
unanticipated a stop of liquidity that creates systemic crises.
Russia was an unanticipated shortage of liquidity crisis.
Argentina kept fueling liquidity, no systemic crisis. Now chose and this
is a very unfair choice. Should we have a systemic crisis a la Russia or
should we avoid the systemic crisis and let Argentina die? Well, I don't
want to chose. I think both are totally wrong. I think the problem is that
there was overfeeding since the very beginning, and, therefore, my
solutions and my recommendations is you don't need to have on policy.
You have to have many policies, but one of them is definitely for
countries to know that you are going to be subject to the performance of
junk bonds, which are completely subject to the amount of liquidity in
they system.
If you are a government, if you are policy making and you are
issuing bonds, it would be totally stupid and sorry--my apologies for the
world--I'm still being a lady even if I'm using that--but I believe that it's
completely stupid for a government to place an enormous amount of bonds
in the market when the issue of liquidity can cut it out at any second with
no news.
[Applause.]
MS. BIRDSALL: Thank you very much. Well, it might be
politically smart, even if it's financially stupid.
Listen. I recommend--if you want a sense of the real world
texture that someone mentioned, a sense that this is a lot about judgment
calls that are tough; and that decisions are complicated, read Paul's
wonderful book. I think in the end, you'll go back to what Robert Rubin
said too long ago, we need some serious reform of the international
financial architecture that we all live with.
Thank you, all. Thank you to the panelists and to all of you.
[END OF TAPED RECORDING.]
- - -
MILLER REPORTING CO., INC.
735 8th STREET, S.E.
WASHINGTON, D.C. 20003-2802
(202) 546-6666