Argentina:
Was it lost or never found?
The news, the views, and the clues
Claudio M. Loser
Inter-American Dialogue
Washington DC
March 18, 2005
1
Argentina: the News
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The Argentine Government has been
successful in its debt restructuring
exercise. While bondholders were
complaining, the government played its
cards right, and 76 percent accepted.
However bonds for US$20 billion are not
in the exchange yet.
Pres. Kirchner remains hostile to the IMF,
but Minister Lavagna seems to send
signals of a possible program negotiation.
2
Argentina: the views (I)
How Argentines think the
Argentina-IMF fight is
seen from abroad
Let me
loose…Let me
loose..
If I catch him,
I’ll make him
chopped liver
K.
IMF
3
Argentina: The views from the Empire (II)
-How it is really seen
„
Blustein Book cover
4
Argentina: The Views from the Scene (III)
„
Tenembaum, book cover
Argentina and the IMF: the fascinating
discussion between a journalist an a key
IMF man of the nineties
5
Why is this book relevant?
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This is the publisher’s interpretation:
¿What role did the IMF play in the
Argentina economic crash? Why did it
recommend politics that had failed in
other countries? How much did personal
interests impact in the decisions that
affected millions of Argentines?
Ernesto Tenembaum presents a unique
book: during four months he exchanged
mails with Claudio Loser, … Loser,
responsible for the Fund in Latin America
between 1994 and 2002, presents the
toughest self-criticism (they say) of a
former official of the IMF has done about
that agency during the nineteen-nineties.
6
Why is this book relevant?
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The book states, for example:
“Many times, I felt that the IMF
fulfilled the role of the marines
role.”
“By its level of vertical discipline
and cohesion, the International
Monetary Fund can be compared
perfectly to the old Communist
Party, the Vatican or any army.”
“we sinned for being arrogant.
Many times, involuntarily, we
prompted measures that finished in
corruption.”
7
The views from the Scene (III)
Doing well
Monthly Evolution of Gvt. Confidence
Monthly Index of Consumer Confidence
Universidad Torcuato Di Tella
8
The clues:
Even after more than two years of strong
expansion GDP has not yet reached the levels of
seven years ago
GDP(seas. Adj.)
Leading Indicators
9
Inst. Di Tella
Unemployment, while declining markedly, remains
very high
Unem ploym ent rate
%
30
Without "Plan Jefes"
With "Plan Jefes"
26.6
25
23.0
20.4
21.4
19.7
20
19.5
19.1
17.6
16.2
14.5
15
12.1
10
5
4Q-04
3Q-04
2Q-04
1Q-04
4Q-03
3Q-03
2Q-03
1Q-03
0
10
Inflation, which had declined steadily, is on the rise
CPI Inflation
% Var YoY
12%
10%
8%
6%
4%
2%
Dec-04
Oct-04
Aug-04
Jun-04
Apr-04
Feb-04
Dec-03
Oct-03
Aug-03
Jun-03
0%
11
Several years after the crisis, Argentina’s GDP still
lags behind the rest of the region
130
125
GDP (2000=100)
120
115
Argentina
110
Brazil
Chile
105
Mexico
Venezuela
100
LA
95
90
85
80
1997 1998 1999 2000 2001 2002 2003 2004 2005
12
The picture is even more dramatic when compared
to the peak GDP year of 1998, for Argentina
130
125
GDP (2000=100)
120
115
Argentina
110
Brazil
Chile
105
Mexico
Venezuela
100
LA
95
90
85
80
1997 1998 1999 2000 2001 2002 2003 2004 2005
13
Argentina in the Nineties- The good..
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The economy grew at the fastest rate at
least since the great depression.
Inflation declined sharply.
The level of investment was high, and
productivity increased rapidly.
There was a significant process of
modernization.
Financial intermediation increased.
Foreign direct investment rose, attracted
by a massive process of privatization.
14
The bad..
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„
„
„
„
The process of privatization, while in many cases effective,
was marred with incidents of inefficiency and corruption.
The reform process was not carried out fully, particularly in
the public sector.
Except when faced with the Tequila crisis, the public
finances were never strengthened sufficiently, with little
willingness to “save for a rainy day” .
The fixed exchange rate, cornerstone of the plan, was
inconsistent with fiscal policy, and a weakening external
environment.
The availability of foreign capital both to the private and
public sector led to imprudent lending and borrowing.
15
And…the Sad
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The problems that started during Menem period, did
not indicate an inevitable doom
De la Rúa’s government, implemented “good”
policies, but with little credibility, and activity
started to decline
As debt problems mounted, monetary policy became
inconsistent with the Currency Board, and fiscal
policy (mainly at provincial level) weakened
Confidence was lost, a default was declared, and
domestic deposits were frozen
IMF support was withdrawn after September 2001,
after a well documented and painful process.
Political and economic chaos led the government to
fall.
By early 2002 the peso floated and GDP was in free
fall.
16
16
What was the role of the IMF?
The blames (as I hear them)
The IMF is blamed by many for the collapse of
Argentina:
• Argentina was the “perfect student” , and the IMF was
seen as letting it down at the moment of need, and not
taking full responsibility for the collapse.
• The IMF was seen as being too lax with Argentina during
the good times, and too tough otherwise.
• The IMF allowed the creditors to leave, without
punishment.
• The IMF forced the default.
• The IMF did not pay the cost of its association with
Argentina.
17
What was the role of the IMF?
The facts (as I see them)
„
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Argentina was, in the eyes of the staff of the IMF (and likely
management) never the perfect student. The IMF protested
initially against the fixed exchange rate, and always against
the lax fiscal and structural policies.
External pressures were applied to continue with support,
in a world that believed in the forces of open financial
markets. Financial markets did not like the IMF warnings.
The IMF provided only limited financial support until 2001,
when Argentina was experiencing a major upheaval in its
financial situation.
The IMF was extremely concerned about the high costs of
leaving convertibility (as was the case eventually).
The IMF did not protect private capital, but respected the
rules.
18
And the mistakes …
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The IMF was not strong in fighting the weakening fiscal
position of the government, and in opposing the pressures
from other governments and the market participants during
the “good times”.
The IMF gave too much benefit of the doubt to the various
governments, even if the chances of success were limited.
The IMF was not willing to look into the political process,
which showed that there was no support for the
government and for significant adjustment.
The IMF and others did not emphasize the importance of
strong legal and judiciary institutions to proceed with
reforms, and we were arrogant as much as the LatinAmerican reformers in believing that taking the broad
measures guaranteed success.
19
But…
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The responsibility for the loss remains squarely with the
Argentine government, which may have operated
irresponsibly (and defending certain groups), but was the
true reflection of a vibrant even though chaotic democracy.
Of course Argentines have paid for it dearly.
Foreign and domestic investors did pay. Between the loss in
value of foreign investment after the devaluation, and the
sharp hair-cut in debt, the rate of return on investment
must have been likely negative. US$80 billion of capital
came in and may be US$20 billion left.
Most profits during the 90’s were reinvested in the country
and capital held by argentines abroad grew little on account
of outflows.
The IMF lent at the time when nobody else did; its interest
rates are low; and the burden-sharing among countries,
entails that the costs go to large and small members,
lenders and borrowers alike.
20
The aftermath (T)
The current Government has done well
in many ways,thanks to a TLC
process:
„ It has been tough with foreign
creditors, including the IMF, after the
default, and has obtained good
conditions in its new debt.
21
The aftermath (L)
The government has had lucky external conditions,
regarding high commodity prices, and low interest rates and
spreads abroad. De La Rua did not have such luck.
„
BCRA's Commodity prices index
Sovereign spreads in emerging markets
JPMorgan's EMBI
Index number 1995=100
115
EMBI+
2,500
105
EMBI_BRAZIL
2,000
95
Oct-04
Jun-04
Jan-04
Sep-03
Apr-03
Dec-02
Jul-02
Mar-02
Oct-01
Jun-01
Jan-01
Sep-00
Apr-00
Dec-99
Jul-99
Feb-99
Oct-98
May-98
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
Jul-98
0
Jan-98
55
Jul-97
500
Jan-97
65
Jul-96
1,000
Jan-96
75
Dec-97
1,500
85
22
The aftermath (C)
„
The government has the best fiscal record, in recent Argentine
history, and until recently, very cautious monetary policy, showing
a conservative policy line that is very much in line with IMF
doctrine.
6
4
2
0
-2
-4
-6
-8
1994
1995
1996
1997
1998
1999
PSBR(%GDP)
2000
2001
2002
PrimBlnc(%GDP)
2003
2004
2005
23
But…
„
Success for Argentina is not
guaranteed,
„
It requires hard work, and…
„
It is for Argentina to find or loose
24