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Argentina's economic crisis in 2001 and the International Monetary Fund
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Content
ARGENTINA’S ECONOMIC CRISIS IN 2001 AND THE INTERNATIONAL
MONETARY FUND
by
Christine Jun
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(POLITICAL SCIENCE)
May 2009
Copyright 2009 Christine Jun
ii
Acknowledgements
I wish to thank an anonymous scholar who uttered the pithy statement: “Obscure authors
write only for a few initiates when it would have cost them only a month of toil to render
their books clear and comprehensible to all, a month sparing a thousand able minds three
arduous years of study.” And, of course, my lovely mom, my wonderful life partner,
Judson Lee Kuehling, and brilliant friends.
iii
Table of Contents
Acknowledgements ii
List of Tables v
Abstract vi
Chapter 1: Introduction 1
Background on Argentina’s Economic Crisis (1991-2001) 3
Research Questions and Purpose of the Study 10
The Purpose of the IMF 10
General Critiques of the IMF 12
The Role of the IMF in Argentina’s Economic Crisis 14
Chapter 2: Perspectives on Argentina’s Economic Crisis 18
Long-Term Internal Conditions 18
Specific Policies or Failures of Government – Political Issues 25
Specific Policies or Failures of Government - Economic Issues 29
External Events and Conditions 33
Concluding Remarks 37
Chapter 3: IMF Involvement in Argentina (1991-99) 39
The Context of Argentina’s Need of IMF Financial Assistance in 1991 39
Financial Arrangements between Argentina and the IMF and Menem’s
Convertibility Plan 41
Argentina’s Economic Changes after the Mexican Crisis (1995-98) 50
Argentina’s Economic Changes after the Brazilian Crisis (1999) 59
Concluding Remarks 61
Chapter 4: IMF Involvement During the de la Rúa Administration (2000-01) 65
Argentina’s Relationship with the IMF in 2000 66
The Argentine Government’s Commitment to the IMF SBAs 67
The Return of Domingo Cavallo 75
Continued IMF Support for Argentina: the Completion of the
Third Review in May 81
The Completion of the Fourth Review of the SBA in September 87
Argentina’s Popular Anger and Four New Presidents 92
Problems of the IMF Approach 93
Concluding Remarks 106
Chapter5: Conclusion 108
Argentina’s Boom 109
Argentina’s Decline 111
The IMF and the de la Rúa Administration 114
The IMF’s Function 116
iv
Concluding Remarks 117
Bibliography 123
Appendix A 129
v
List of Tables
Table 1: The Impact of Social Security Privatization on Argentina's Budget
Table 2: Unemployment and Poverty Indicators for Argentina, 1991-1996
Table 3: Unemployment and Poverty Indicators for Argentina, 1995-2002
Table 4: Argentina’s Public Sector Debt (percent of GDP), 1991-2002
Table 5: Economic Indicators for Argentina, 1991-2001
Table 6: Fiscal Performance for the First Quarter Under the January 2001 SBA
Table 7: Federal and Provincial Fiscal Accounts
vi
Abstract
In a span of ten years (1991-2001), Argentina underwent a boom and bust cycle.
In the early to mid 1990s, Argentina was heralded as the International Monetary Fund’s
(IMF) success story in applying neoliberal policies promoted by the IMF for emerging
economies. Yet by 2001, Argentina was in a deep economic crisis with unemployment
approaching 20 percent, an astronomical debt that more than doubled in ten years, and a
negative growth rate of 11 percent. By December 2001, the IMF determined that
continued assistance to Argentina would be futile and in the same month the country
defaulted on its debt.
Extensive research has been conducted in an effort to understand Argentina’s
economic crisis in 2001 with the focus ranging from corruption in the Menem
administration to external factors like the Brazilian crisis in 1998. This study focuses on
the IMF’s role during the de la Rúa administration in 2000-01 to better understand how it
affected the country’s economic crisis. I propose that the conduct of the IMF during this
period suffered from two problems: 1) the absence of a coherent analysis, particularly its
assessment that Argentina’s problem was due to a liquidity crisis rather than structural
problems and 2) its failure to oversee the Argentine government’s decision making when
the government instituted a series of policies without consulting the IMF, notably in the
period between March and November 2001 and its failure to enforce sound economic
policy by continuing to release funds to the Argentine government in spite of serious
problems with government policies, e.g., undermining earlier banking reforms
undertaken in the mid 1990s.
vii
This conduct has been attributed to the fact that the IMF had a vested interest in
Argentina avoiding a debt default and maintaining Argentina’s image as a successful
example of neoliberal policies favored by the IMF, thus validating the tenets of the
Washington Consensus. In addition, the IMF was concerned about political backlash
against IMF advice, especially since the Argentine government had tried to comply with
IMF policy advice from 1991-2001, and the IMF did not want to appear that it was
withholding support from Argentina.
1
Chapter 1: INTRODUCTION
Economic conditions in Argentina at the beginning of the 1990s looked
promising. The passage of the Convertibility Law in 1991, which pegged the Argentine
peso to the US dollar, suggested that the country had finally found a solution to its
problem with hyperinflation in the 1980s. After the passage of the law, the inflation rate
dropped dramatically – from 1,344 percent in 1990 to an annualized rate of 29 percent in
1991. After 1991, the inflation rate continued to fall. It fell below 4 percent by 1994 and
still lower for every succeeding year of the convertibility system.
1
The remarkable results
of the peg provided confidence in the Argentine peso, nominal stability, and the rise in
financial intermediation.
2
When Argentina borrowed money from the World Bank (WB) and the
International Monetary Fund in 1991, the country instituted the WB/IMF Structural
Adjustment Program. This program required the following: 1) control of inflation, 2)
privatization of state-owned enterprises, 3) opening of the country to foreign imports and
investment, 4) reduced tariffs on imports, and 5) changes in labor laws. Argentina met all
of these requirements. Public sector enterprises were sold to multinational corporations
1
Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee United
States Congress (June 2003): 4, http://www.house.gov/jec/imf/06-13-03long.pdf. (accessed July 20, 2006).
: 4. See Max Corden, " Exchange Rate Regimes and Policies: An Overview," in Exchange Rate Politics in
Latin America, ed. Riordan Roett and Carol Wise (Washington D.C.: Brookings Institution, 2000).
2
Examples of financial intermediaries are commercial banks, mutual savings banks, and credit unions.
These intermediaries smoothed the flow of funds between the “savings surplus units” (households) and
“savings deficit units” (government and businesses). Essentially, these financial institutions redistribute the
savings into productive uses, thereby, providing both diversification of risk and liquidity to the individual
saver.
2
(MNCs) due to privatization. By 1992, the Argentine government was able to earn more
than $5 billion and reduce its foreign debt by $8 billion through debt-equity swaps.
3
To a certain degree, the loans attached to the WB/IMF Structural Adjustment
Program (SAP) alleviated the economic strain the Argentines underwent due to
hyperinflation. However, the SAP’s conditions may have provided short-term benefits
and long-term harm. Given the continued guidance and assistance from the IMF, did the
IMF conditions lead to the critical situation Argentina found itself in by the end of the
1990s, what role, if any, did it play in the crisis? To what extent did the IMF fail to
identify – or act upon – conditions that led to Argentina’s critical situation? Were there
measures it could or should have taken to prevent or mitigate these conditions before they
erupted in the crisis of 2000-2001?
Various explanations, ranging from long-term internal conditions to
uncontrollable events, have been advanced to explain Argentina’s crisis in 2001. Some
critics maintain that internal conditions in the government contributed to Argentina’s
economic problems. These critics point to factors such as the country’s low labor
productivity and the original sin of being serial defaulters. Others scrutinize Argentina’s
specific policies or failures of government policies, such as the Convertibility Law. Still
others focus on external events and conditions surrounding Argentina’s economic
meltdown. The Mexican Crisis in 1994 and the sluggish growth of the industrial countries
are two examples of such external events and conditions.
The IMF policies have been a source of tension and blame as well; these would
also be categorized as external factors. According to critics, IMF policy prescriptions and
3
Ernest Bartell, “The Role of Domestic Business,” Working Paper #198 (June 1993)
http://www.nd.edu/...kellogg/publications/workingpapers/WPS/198.pdf. (accessed July 23, 2007).
3
guidance failed Argentina and were unable to fulfill the IMF’s goal as stated in its
Articles of Agreement.
4
The most salient arguments are considered in the explanation of
Argentina’s economic crisis in 2001 and attempts are made to determine to what extent
the IMF strategy in working with Argentine authorities was a factor in the economic
crisis in December 2001.
BACKGROUND ON ARGENTINA’S ECONOMIC CRISIS (1991-2001)
Argentina in the 1980s was notable due to the country’s struggle to curb
hyperinflation. Argentines faced the inconveniences and the cost of price instability, the
scarce supply of financing, and the almost complete absence of credit with maturities
longer than a few weeks due to the combination of the debt overhang and the large
budget deficits.
5
Faced with these hardships, Carlos Menem, who became President in
1989, successfully assembled large-scale economic reforms with foreign credit.
6
His
approach to handling hyperinflation was notable because it brought about a qualitative
change in the economic role of the country both by opening its market to external trade
and by pegging its currency to the US dollar.
7
In 1991, Doming Cavallo, the Minister of Economy, reasoned that the passage of
the Convertibility Law would help to relieve Argentina’s economic woes, and the
4
See Lawrence J. McQuillan and Peter C. Montgomery, The International Monetary Fund, Financial
Medic to the World: A Primer on Mission, Operations, and Public Policy Issues (Stanford, CA: Stanford
University Press, 1998).
5
Sebastian Galiani, Daniel Heymann and Mariano Tommasi, “Great Expectations and Hard Times:
the Argentine Convertibility Plan,” Economia 3, no. 2 (2003): 112
http://muse.jhu.edu/journals/economia/v003/3.2galiani.pdf (accessed July 20, 2006).
6
Increase in foreign direct investment received an international endorsement. For example, Spanish
American banks opened subsidiaries; this created trust in domestic banking.
7
Lucas Llach, “A Depression in Perspective: The Economics and the Political Economy of
Argentina’s Crisis of the Millennium,”The Argentine Crisis at the Turn of the Millennium: Causes,
Consequences, and Explanations, ed. Flavia Fiorruci, trans. Marcus Klein (Amsterdan Netherlands: Askant
Academic Publishers, 2004), 44.
4
Argentine Congress quickly passed the Convertibility Law into formal legislation. The
law obliged the Central Bank to have a reserve that backed up each Argentine peso with
one US dollar. This commitment meant the Central Bank could not simply print money.
It also meant that the country had to maintain consistent fiscal policies in order to
produce sufficient income to back each Argentine peso.
There is no doubt that the currency peg had some positive results. First, it allowed
for a substantial reduction in inflation; the annual rate decreased from 3,080 percent in
1989 and 1,344 percent in 1990 to 17.5 percent in 1992.
8
The inflation rate has been
lower than 4 percent since 1994 and lower than 1 percent since 1996. As a result, interest
rates decreased and the investment rate grew significantly (gross domestic investment
increased from 14 percent of GDP in 1990 to 17 percent in 1992 and to 21 percent in
1998).
9
Second, the peg correlated to an increase in productivity, mainly in the tradable
goods sector. The annual rate of change in total factor productivity was 2.1 percent from
1991 to 1998.
10
Third, it regenerated financial intermediation. Both bank deposits and
loans increased their share in GDP: between 1991 and 1998, deposits increased from 8
percent of GDP to 26 percent, while loans grew from 14 percent to 30 percent.
11
8
Pedro Pou, “Argentina’s Structural Reforms of the 1990s” Finance and Development 37, no. 1
(March 2000) http://www.imf.org/external/pubs/ft/fandd/2000/03/pou.htm (accessed April 14, 2005).
9
Pablo Bustelo, “Capital Flows and Financial Crises: A Comparative Analysis of East Asia (1997-98)
and Argentina (2001-02),” Working Paper (November 10, 2004) http://eprints.ucm.es/6841/1/0417.pdf
(accessed December 10, 2006).
10
Miguel A. Kiguel, “Structural Reforms in Argentina: Success or Failure,” Comparative Economic
Studies 44, no. 2 (2002): 83-102.
11
Augusto De La Torre, Eduardo Levy Yeyati and Sergio Shmuckler, “Living and Dying with Hard
Pegs: The Rise and Fall of Argentina’s Currency Board,” Policy Research Working Paper Series from the
World Bank # 2980 (January 2003): 32 http://econpapers.repec.org/paper/wbkwbrwps/2980.htm. (accessed
July 20, 2005).
5
Argentina’s dramatic drop in inflation rate and increased productivity belied the
negative effects. With unregulated privatizations, rising unemployment was silently
becoming a problem. International financial shocks, such as Mexico’s currency
devaluation in December 1994, affected Argentina’s growth prospects. This led to a fear
among foreign investors that Argentina’s currency would devalue. As a result, more than
US$8 billion exited Argentina.
12
This in turn led to a spike in interest rates and a sharp
recession in 1995.
Argentina weathered the Mexican Crisis, and its economic indicators were for the
most part positive until 1998. Employment between May 1995 and October 1998 grew by
12 percent. The US$6 billion deficit on commercial transactions of 1994 halved by 1998
due to a 64 percent increase of exports, especially to Brazil. Investment flows continued
but gradually switched in form: direct investment was increasingly replaced by bonds.
13
Yet despite these positive indications, Argentina’s debt grew. Prior to 1998, there
is little indication that individuals or institutions were paying attention to Argentina’s
large and growing debt, which increased from 29 percent to GDP to 41 percent between
1993 and 1998. Investor confidence in Argentina was high as bankers competed amongst
12
US$8 billion is an amount equal to about 18 percent of all Argentina’s deposits in the domestic
banking system.
13
Lucas Llach, “A Depression in Perspective: The Economics and the Political Economy of
Argentina’s Crisis of the Millennium,”The Argentine Crisis at the Turn of the Millennium: Causes,
Consequences, and Explanations, ed. Flavia Fiorruci, trans. Marcus Klein (Amsterdan Netherlands: Askant
Academic Publishers, 2004), 44. The switch from fixed to flexible investment flows meant flexible rather
than fixed future outflows. However, the drawback to this is that portfolio capital investment can be yanked
out depending on the fears of the investors.
6
each other to underwrite Argentine government bonds from 1991 to 2000 because of their
lucrative nature.
14
As mentioned before, international financial shocks negatively affected
Argentina’s economy. In 1997, the South East Asian crisis and the devaluation in
Thailand led to a rise in Argentina’s country risk premium. This triggered a new
recession trench and increased the financial vulnerability of debtors. In 1998, Russia and
Brazil’s currency crises distressed Argentina’s economy. The Brazilian crisis, in
particular, was a source of concern. Brazil is Argentina’s neighbor and largest trading
partner, and by 1998 exports to Brazil had risen to some 30 percent of total exports.
Moreover, Argentina’s exports into the Brazilian market were essential to its 1996
recovery and subsequent growth.
15
The Brazilian real’s depreciation made Argentina’s
exports more expensive. As its exports to Brazil diminished, the tax inflows lessened as
well, adding to Argentina’s persistent budget deficits.
By October 1998, Argentina was in a recession. Foreign investors began to lose
confidence, and became much more cautious in investing in Argentina. Investors that
already had assets in Argentina started to sell many of their stocks and bonds. The capital
and financial account turned from a net inflow of $18.3 billion in 1998 to a net outflow of
$4.4 billion by 2001. The reversal of capital and the doubts of fiscal viability fed the
perception that Argentina would not grow and would eventually default on its debt.
Consequently, this concern led to fears that the currency peg of one peso to one US dollar
was unsustainable.
14
Colin M. Machachlan, Argentina, What Went Wrong (Westport, CT: Praeger Publishers, 2006), 170.
15
The reason Argentine exports expanded into the Brazilian market is attributable to the earlier
appreciation of the Brazilian real against the peso.
7
The Argentine government, with IMF pressure, ruled out devaluation as a means
of taking the economy out of its recession. To a certain extent, the conservative wing of
Argentina’s government disliked the idea of devaluation as well and the idea of
dollarizing Argentina’s economy started to germinate. The Argentine government in the
end adopted a series of industrial or protectionist policies, known as the “competitiveness
plan,” instead of devaluing the Argentine peso to stimulate the economy. This involved
tax exemptions in sectors most adversely affected by the recession, while increasing taxes
in other areas to better match the government’s expenditures. These tax hikes resulted in
Argentina’s economy shrinking in 2000 and 2001 and reduced confidence in government
finances. As the de la Rúa administration was faced with less revenue, the government
made strong and painful efforts to balance the public accounts and to service its debt by
reducing the size of its bureaucracy.
16
This was clearly an unpopular move among the
Argentine people. Unfortunately, the tight fiscal policy adopted by the Argentine
authorities exacerbated the recession. In hindsight, it appears that the Argentine
government started to shift more of their attention to reassuring their creditors that it
could service its debt than to the recession.
At the same time, the IMF continued to offer the country financial support. In
December 2000, the IMF assembled a loan worth US$39.7 billion from domestic and
international financial institutions. This package was called a “blindaje” or a financial
shield. The IMF had already earmarked US$13.7 billion in a March 2000 stand-by
arrangement (SBA). Local agents, a group of banks and private pension funds,
contributed to the financial shield. In order to access this US$39.7 billion, the Argentine
16
For example, the Fiscal Responsibility Law was approved in 1999; this set a mandatory declining
trend for the public deficit to bring it to zero in a few years.
8
government had to both address its budget deficit and fiscal deficit,
17
and continue to
service its debt.
Unfortunately, the financial shield failed to trigger long term confidence in the
Argentine government’s ability to handle the recession and honor its debt. Another
international financial shock in late December 2000 – the new economic crisis in Turkey
– precipitated a further rise in Argentina’s country risk premium.
18
This meant that
investors with Argentine assets were then holding assets deemed too risky.
In the second half of 2001, the Argentine government took measures to convince
the domestic and international public that the country would not default on its debt. The
Argentine government exchanged its bonds worth $30 billion for new ones – an action
known as the mega-swap. Although the interest rates on the new bonds were higher, this
exchange gave Argentina a longer period to honor its new debt.
19
It was Cavallo’s
decision to exchange Argentina’s bonds for new ones, and he made it without IMF
consultation. Eventually, the mega-swap was perceived to be desperate or impractical and
confidence in Argentina’s market continued to flag.
17
Budget deficit is the excess of spending over income for a government, corporation, or individual
over a particular period of time. A budget deficit accumulated by the Argentine government must be
financed by the issuance of bonds and/or the attraction of investment from domestic or international
financial markets. Fiscal deficit is the accumulation of excess liabilities and debts over income and assets
by the government; one way of accumulating this deficit is through the issuance of bonds.
18
Country risk premium determines the return in excess of the risk-free rate of return in investing in a
country. A country’s risk premium is a form of compensation for investors who tolerate the extra risk
compared to a risk free asset. Therefore, the higher the country’s risk premium the greater yield on one’s
return, but if the country risk premium is too high, it typically signals to investors that the risk of investing
in that country is too great and acts as a hindrance in attracting investment.
19
Incidentally, Credit Suisse First Boston came up with a scheme to swap Argentina’s debt with new
debt at higher interest rates. Theoretically, the Argentine government would have benefited from this swap
as it would delay the repayment of its debt. It was a short term fix as the long term harm became the
Argentine government saddled with the same debt but with higher interest rates. The only clear winner
from this mega-exchange is Credit Suisse First Boston as it made a commission of $100 million on the
exchange.
9
Despite Argentina’s initiatives and IMF financial support, the country could not
restore investor confidence. Market access to international finance was not restored and
the bond rating on Argentine bonds decreased in the third quarter of 2001. Investors
interpreted continued IMF involvement in Argentina as a sign that the country had a debt
problem. In addition, it appeared that the country was simply delaying necessary changes
in policies needed to restore economic growth. Therefore, deposit withdrawals continued
and the run against the reserves started. In December 1, 2001, the government established
a “corralito”
20
- hard restrictions on capital movements and on cash retirements from
banks.
21
The “corralito” demonstrated the Argentine government’s lack of financing.
Although the purpose of the “corralito” was to prevent capital leaving the country,
it also prevented people and businesses from making payments, and as a result, credit
evaporated. By December 5, 2001, the IMF stopped assisting Argentina. It declared that
the country had failed to fulfill the conditions in the stand-by arrangement even though
the Argentine government had pushed through austerity measures to balance its fiscal
budget. Soon thereafter, in utter desperation, which may have been the tipping point of
the crisis, the Argentine government seized billions of dollars from pension funds and
converted them into treasury bonds. This last measure was “the final straw that broke the
(Argentine) camel’s back” as the Argentine people started to organize angry
demonstrations and literally took to the streets banging pots and pans on December 13,
2001.
20
The literally meaning of corralito is a little pen or a little enclosure. It alludes to the restrictions on
capital movement.
21
One of the purposes of the measures was to avoid either the generalized bankruptcy of the banks or
the violation of the currency board monetary rule.
10
The popular anger sweeping the country now added a new dimension of difficulty
to Argentina’s recovery. Looting and protests on December 19-20 resulted in 24 deaths
which led to Minister of Economy Cavallo’s resignation on December 19, 2001, and that
of President de la Rúa on the following day. The temporary president, Adolfo Rodríguez
Saá, decided on December 23 to default on the government’s $50 billion debt to foreign
private-sector lenders, which was overwhelmingly popular among the Argentine public.
22
Soon, Saá resigned as Eduardo Caamano, head of the Lower House became the interim
president on December 30, 2001. On January 1, 2002, Eduardo Duhalde was elected
president by the legislative assembly.
RESEARCH QUESTION AND PURPOSE OF THE STUDY
The purpose of this study is to discover to what extent the IMF strategy in
working with Argentine authorities was a factor in the economic crisis in December
2001. I use Argentina as a case study to ascertain if the IMF is a useful institution in
assisting countries in economic distress. Thus far, the IMF still has a reputation of being
the “go to institution” when countries are facing economic problems even though critics
suggest that IMF policies, at best, produce marginal improvements.
23
This study focuses on the IMF’s involvement during Argentina’s boom and bust
cycle and particularly focuses on the de la Rúa administration in 2000-01 to better
22
Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee United
States Congress (June 2003), 12, http://www.house.gov/jec/imf/06-13-03long.pdf. (accessed July 20,
2006).
23
See Robert Kaufman and Barbara Stallings, “Debt and Democracy in the 1980s: The Latin America
Experience,” in Debt and Democracy in Latin America, eds. Barbara Stallings and Robert Kaufman
(Boulder, CO: Westview Press, 1989), 201-224. They have found that the results of stabilization programs
in nine Latin American countries between 1982 and 1987 have been lackluster. See also Ruben Atoyan,
and others, “Macroeconomic Adjustment in IMF-Supported Programs: Projections and Reality,” in IMF-
Supported Programs: Recent Staff Research, eds. Ashoka Mody and Alessandro Rebucci. (Washington,
D.C.: International Monetary Fund, Publication Services, 2006), 52-83.
11
understand how IMF involvement affected Argentina’s economic crisis. An examination
on the evolving role of the IMF will provide a context for analyzing the Argentine
experience.
THE PURPOSE OF THE IMF
The IMF was established in 1944 by forty-four member nations as a monetary
institution. Its responsibilities included the supervision of the international monetary
system and financial assistance to members with balance-of-payments problems. In
addition, the institution was to facilitate the expansion and balance of world trade by: 1)
increasing levels of employment and real income, 2) promoting exchange-rate stability
and avoiding competitive depreciation, 3) working for a multilateral system and
eliminating exchange controls over transactions, 4) creating confidence among member
nations and, 5) giving member nations the opportunity to correct balance of payments
disequilibrium in a shorter and less severe time period.
24
To achieve these aims, the
IMF’s main policy tool is the standby arrangement (SBA). This arrangement is a contract
with a member country that typically stipulates that the member country will abide by the
terms of the agreement – the conditions. In return, the member country would qualify for
IMF financing. This agreement is signed in the “letter of intent.” According to the IMF
charter, the institution’s funds will be available to the member country on a temporary
basis with the possibility of renewal.
When a member country receives a loan under low conditionality, the country
must merely establish that it has a “balance of payments need.” When a member country
establishes this need, it is coupled with a declaration, which the fund does not ordinarily
24
See Leland B. Yeager, International Monetary Relations: Theory, History, and Policy (New York:
Harper & Row, 1976).
12
challenge, that it is taking measures to correct the problem. If a country receives a loan
under high conditionality, the country must design a specific set of measures to eliminate
its balance of payments problem; this includes an agreement between the country and the
IMF that the measures will be adequate for that purpose. In addition, the IMF requires a
declaration of the member country’s commitment. If a country does not fully proceed to
follow the conditions and the targets contained in the letter of intent, further withdrawals
are suspended. Normally, a country is expected to restore its balance of payments and to
return the IMF’s funds in a relatively short period of time. If this is not done, the standby
arrangement is canceled.
Although the IMF favors rapid control of inflation, especially if a country adopts
short-term stabilization plans, the IMF does recognize that more time is needed if a
country plans on making structural changes. The IMF typically recognizes that a country
needs 3-5 years or longer to make the requisite structural changes. In addition, the IMF
understands that the structural changes would promote savings and/or foreign exchange
earnings. Even if an agreement exists between the IMF and the member country seeking
IMF assistance that structural change is needed, there is no one stock approach –
countries vary on the methods since the circumstances in each country is different.
25
Critics have noted how the IMF has forgotten that there is no one stock approach to
assisting countries in economic distress as it becomes more noticeable in applying a
cookie cutter approach. Ultimately, the IMF’s stated objective in standby programs is the
25
According to Nelson, these circumstances are multiple groups that are interested in making
structural adjustment but are unwilling to shoulder the major burden of adjustment. For an extended
discussion see Joan M Nelson, “Introduction: The Politics of Economic Adjustment in Developing
Nations,” in Economic Crisis and Policy Choice: The Politics of Adjustment in the Third World, ed. Joan
M. Nelson (Princeton, NJ: Princeton University Press, 1990).
13
creation of a positive balance of payments, a balanced budget, and the elimination of, or
substantial reduction in, the inflation rate through the contraction of (excessive) demand.
GENERAL CRITIQUES OF THE IMF
Expanding Role of the IMF
Criticisms of the IMF incorporate a variety of issues – among them are human
rights issues, excessive intervention in sovereign countries, and acting in the interests of
the United States.
26
Human rights groups claim that the IMF’s broad interpretation of the
“political noninterference” provisions of the Articles of Agreement permits it to
underwrite brutal governments around the world. The IMF has also been accused of
meddling in the administration of member governments under the new conditionality
guidelines.
27
Finally, the IMF has been accused of showing preferential treatment to
strategically important member countries receiving IMF financing programs, thereby
involving the fund in geopolitics.
The IMF is also criticized for its structure, negotiation practices, unprecedented
level of intervention, and “cookie cutter” policy prescriptions.
28
Structurally, the IMF
discourages transparency and independent assessments of its operations by its long-
standing practice of not releasing internal documents to the public. The IMF is also
accused of acting somewhat like a surrogate government influencing economic policy for
26
See Lawrence J. McQuillan and Peter C. Montgomery, The International Monetary Fund, Financial
Medic to the World: A Primer on Mission, Operations, and Public Policy Issues (Stanford, CA: Stanford
University Press, 1998).
27
On July 25, 1997 the IMF executive board approved new conditionality guidelines that instructed the
IMF to suspend or delay financial assistance to any member country with poor “governance” that
threatened the success of an IMF financing program.
28
See Lawrence J. McQuillan and Peter C. Montgomery, The International Monetary Fund, Financial
Medic to the World: A Primer on Mission, Operations, and Public Policy Issues (Stanford, CA: Stanford
University Press, 1998).
14
sovereign nations. This critique is especially important since the IMF has been under
attack for acting in the best interest of its largest “shareholder”, the United States. There
are also questions of what role the IMF serves and whether it does in fact promote
international economic stability. Finally, there is the question of whether the IMF’s
policy prescriptions are tailored to the unique circumstances of each country or if they are
merely giving inflexible “off-the-shelf” remedies that more often than not prolong and
deepen financial crises.
The Flexibility and Inflexibility of the IMF
Ironically, the IMF has been accused of being both flexible and inflexible in the
way it manages member countries. It is charged with inflexibility by its narrow focus on
accounting data by imposing quantitative performance criteria and structural performance
criteria to get countries to meet certain targets, such as the reduction of current account
deficit, even though this may lead to slower growth.
29
Although countries with a
substantial current account deficit generally have to reduce it eventually, the question is
does the IMF overly focus on this goal without considering the possible negative
repercussions, such as a recession? Some critics argue that, as a result of these forced
conditions, the IMF hinders the borrowing countries’ sense of joint ownership of a
policy.
30
Oddly, the IMF has also been deemed too lax or flexible in that it does not
adequately enforce its conditions, since it grants waivers when a country violates its
29
See Doug Bandow, and Ian Vasquez, “The IMF: A Record of Addiction and Failure,” in
Perpetuating Poverty: The World Bank, the IMF, and the Developing World (Washington, D.C.: Cato
Institute, 1994).
30
See Mohsin S. Khan, and Sunil Sharma, “IMF Conditionality and Country Ownership of Adjustment
Programs,” in IMF-Supported Programs: Recent Staff Research, eds. Ashoka Mody and Alessandro
Rebucci (Washington D.C., International Monetary Fund, 2006). They argue that country ownership of a
policy is crucial for its success.
15
agreement and then modifies those conditions. In addition, it is argued that lending more
money into essentially insolvent states is a mistake when coupled with the IMF’s asking
countries to take too few of the steps necessary to promote growth.
31
THE ROLE OF THE IMF IN ARGENTINA’S ECONOMIC CRISIS
Much has been written about how the IMF affected Argentina’s economic crisis
in 2001. These critiques (including some from within the IMF) range from the IMF being
too accommodating of Argentina’s economic underperformance to the IMF’s self-interest
in lending to the country. This section is a summary of the major criticisms of the IMF
involvement in Argentina from 1991-2001.
One type of criticism centered on the idea that the IMF strategy was too lax. The
critique is that the IMF tacitly allowed Argentina to ignore its persistent deficits and its
growing external debt to foreign lenders.
32
A more precise critique zeroed in on the
structural content and conditionality of the IMF-supported programs. According to this
line of criticism, the content and conditionality were too loose, especially when the
conditions were mere benchmarks.
33
Structural benchmarks meant that the IMF would
still lend to a country if benchmarks were not met as long as there were efforts to satisfy
those benchmarks. As a result, another line of argument stresses the point that the IMF
conditions were not by nature problematic, but the weak enforcement of those conditions
was the problem. More specifically, the argument is that the IMF’s willingness to grant
31
See Doug Bandow, and Ian Vasquez, “The IMF: A Record of Addiction and Failure,” in
Perpetuating Poverty: The World Bank, the IMF, and the Developing World (Washington, D.C.: Cato
Institute, 1994).
32
Kent H. Hughes, “A Social Contract Abrogated: Argentina’s Economic Crisis,” Working Paper from
The Woodrow Wilson International Center for Scholars, June 2002, 1-4.
http://www.wilsoncenter.org/topics/pubs/boletin_01_social_contract.pdf (accessed May 18, 2006).
33
See Christine Daseking and others, Lessons from the Crisis in Argentina. (Washington D.C:
International Monetary Fund, 2004).
16
waivers for unmet conditions made the conditions non-binding, especially when
Argentina’s annual deficit targets were missed every year from 1994 on.
Another type of criticism focuses on IMF’s self-interest and benefit in lending
Argentina billions of dollars. This line of argument suggests that the IMF was motivated
to offer the Argentine government more loans because the institution had already lent the
country too much to let it default on its debt. As a result, the IMF was required to lend
more money to forestall a default on their portion of Argentina’s debt – in effect, the IMF
was using IMF money to pay the IMF and associated institutions’ debt services. In other
words, IMF’s later loans to Argentina “appeared to be a bookkeeping bailout of the IMF,
not of Argentina”
34
while private holders of Argentina’s debt faced the potential reality of
default with little expectations of payments resuming.
The overarching general question that arises is whether the Argentine
government’s relationship with the IMF affected the country’s economic crisis in 2001.
Were the conditions attached to the standby arrangements (SBA) too accommodating of
Argentina’s economic underperformance? Or did the IMF simply fail to better enforce
the conditions on the SBAs? More specifically, was the IMF’s non-reaction to the de la
Rúa administration’s reform measures in 2001 a component in Argentina’s economic
meltdown?
This research builds on the existing criticisms on the IMF involvement with
Argentina, which suggest that the IMF failed to recognize or act upon problems emerging
in the years leading up to the crisis. My focus is on the two year period between January
2000 and December 2001, during the presidency of Fernando de la Rúa, and I am
proposing that the conduct of the IMF during the de la Rúa administration suffered from
34
Colin MacLachlan, Argentina, What Went Wrong (Westport, CT: Praeger Publishers, 2006), 177.
17
two problems. First, the absence of a coherent analysis, particularly its assessment that
Argentina’s problem was due to a liquidity crisis rather than more basic structural
problems. Second, the IMF’s failure to oversee Argentine government’s decision making
when the government instituted a series of policies without consulting the IMF, notably
in the period between March and November 2001 and its failure to enforce sound
economic policy by continuing to release funds to the Argentine government in spite of
serious problems with government policies, e.g., undermining its earlier banking reforms
undertaken in the mid 1990s.
One explanation for the IMF’s conduct is the fact that the IMF had a vested interest in
Argentina avoiding a debt default and maintaining Argentina’s image as a successful
example of neoliberal policies favored by the IMF, thus validating the tenets of the
Washington Consensus. In addition, the IMF was concerned about political backlash
against IMF advice, especially since the Argentine government tried to comply with IMF
policy advice from 1991-2001. The IMF did not want to appear that it was withholding
support of Argentina.
The ultimate goal of this study is to offer information for analyst studying the
effects of IMF external funding of countries in economic distress. This study seeks to
provide an analysis of the role of the IMF in the creation or reduction of debt, using
Argentina as a case study. The organization of the chapters will somewhat be
chronological. Chapter 2 will review literature covering the most salient explanations of
Argentina’s crisis. It will address the following arguments as the causes of the crisis: i)
long-term internal conditions, ii) specific policies or failures of government, iii) IMF
18
policies, and iv) external events and conditions beyond Argentina’s control. Chapter 3
will be a chronological synthesis of the IMF involvement in Argentina from the 1990s to
2001. Chapter 4 will address the IMF aid during the de la Rúa government in the 2000-01
period. Chapter 5 summarizes the findings of the study and presents a conclusion.
19
Chapter 2: PERSPECTIVES ON ARGENTINA’S ECONOMIC CRISIS
Various scholars have applied different frameworks to understand and explain
Argentina’s economic collapse in December 2001. The frameworks range from
evaluating the country’s long-term internal conditions to external events such as the
Mexican devaluation in 1994. Others have analyzed the economic policies and the
policy-making process under the Menem and de la Rúa administrations. Each of these
sets of explanation provides partial accounts of the complexity of the Argentine case.
This chapter surveys the salient research in order to provide a comprehensive picture of
explanations for the crisis.
LONG-TERM INTERNAL CONDITIONS
Several studies do not directly engage Argentina’s economic crisis but discuss
long-term internal conditions that may have contributed to it. Suzanne Duryea and
Carmen Pagés’ research (2003) focused on Argentina’s lack of labor productivity and
suggest that insufficient social investment was a possible contributing factor to
Argentina’s economic collapse in 2001. Their research examined the role of government
in producing an educated, skilled, productive workforce. Although Argentina’s education
levels are high relative to other Latin American countries, its education progress is low in
comparison to developed nations and regions, which correlates with the lack of middle-
skilled labor.
35
Kantis, Ishida, and Komori's (2003) research also focuses on the role of
government in allocating insufficient social investment, but focuses on the lack of social
investment in promoting small and medium-sized companies as opposed to education.
35
See Suzanne Duryea and Carmen Páges, “What Human Policies Can and Cannot Do for Productivity
and Poverty Reduction in Latin America,” in Latin American Democracies in the New Global Economy,
ed. Ana Margheritis (Coral Gables, FA: North-South Press, 2003): 145-172.
20
They found that entrepreneurs in Argentina encounter an unfavorable business
environment compared to those in East Asia,
36
and that Argentina’s financing and
institutional support for small and medium-sized companies, a major contributing
component to any country’s employment and production, was minimal. This was
especially the case during the 1990s, when there was an employment gap left in the
public sector due to the government’s move towards privatization. Their research points
out reforms or measures that were missing under the Menem administration when it
pushed for economic and political reforms, such as the lessening of red tape and
bureaucratic costs in the promotion of small and medium-sized companies. Their
research, to a certain extent, may explain Argentina’s deficient business climate as a
contributing factor to Argentina’ economic collapse in 2001. One question that arises
from this report is whether the political structure somehow hindered the business climate
for small and medium-sized businesses.
Other analysts are directly concerned with causes of the crisis. Michael Mussa
(2004) frames his research around the political structure of Argentina’s government and,
notes that Argentina’s system of representation earmarked much of the federal
government’s revenues to provincial politicians.
37
This meant that the provincial
politicians had access to spending funds without the hassle of collecting funds, such as in
the form of taxes. This federal arrangement led to the provincial politicians being fiscally
irresponsible, which became an acute problem when Argentina was in a recession from
36
Hugo Kantis, Masahiko Ishida, and Masahiko Komori, “Entrepreneurships in Emerging Economies:
The Creation and Development of New Firms in Latin America and East Asia,” in Inter-American
Development Bank (2003): 1-8.
37
See Michael Mussa, “Argentina and the Fund: Anatomy of a Policy Failure,” in The IMF and its
Critics: Reform of Global Financial Architecture, eds. David Vines and Christopher L. Gilbert (Cambridge,
UK: Cambridge University Press, 2004).
21
October 1998 to 2001. In addition, the constitutional relationship between the federal
government and the provinces made it difficult to reduce the earmarked funds. To a
certain extent, the provinces would have to want fewer funds on their own volition.
Mussa argues that this constitutional relationship between the federal government and the
provincial authorities prevented the government from controlling its fiscal deficit and
balancing its payments.
Javier Corrales (2002) like Mussa examines Argentina’s political structure.
Corrales found that the Argentine government suffered from the state-without-a-party
condition, which hindered the government from responding quickly to Argentina’s
economic problems in the 1990s and early 2000s.
38
His framework examined the
leadership of Menem and his role in the state-without-a-party condition. More
specifically, Corrales’ thesis is that the political structure may have been a factor in
Argentina’s economic mismanagement. He defines the state-without-a-party condition as
when the president is at odds with the leading members of the ruling party, and argues
that this situation may become an impediment to good governance. In Argentina’s case,
good management in government was missing. Corrales argues that the top echelons of
Argentina’s political structure were riddled with politicians without specialized talent.
Corrales labeled them as either the “professional politicians” or the “amateur legislators.”
Thus, regardless of progressive-minded reforms, the structure was inflexible: obstructing
change and encumbering immediate responses to the country’s economic problems.
Corrales’ research is useful in explaining the relationship between members of Congress
and President Menem during his presidential term from 1989-1999. Specifically,
38
See Javier Corrales, “The Politics of Argentina’s Meltdown,” World Policy Journal 19, no. 3 (Fall
2002), 29-42.
22
Corrales’ research explains the inability of Menem and the ruling party to work together
to handle the recession that began in October of 1998.
Mark P. Jones et al. (2002) emphasizes Corrales’ thesis that Argentina suffered
from the state-without-a-party condition.
39
However, their research emphasizes the
marginalization of economists under Fernando de la Rúa’s presidency. For instance, the
Alianza - a coalition composed of Unión Cívica Radical (UCR) and Frente por un País
Solidario (FREPASO), which supported de la Rúa’s election - was technocratically
unprepared to govern Argentina and its economy. It simply did not have enough people
trained in public policy. The UCR’s deputies in the lower chamber were undiversified
with an imbalance of lawyers, labor representatives, and economists. The other half of
Alianza, FREPASO, had similar problems since it focused on mobilizing grass-roots
organizations rather than the incorporation of trained professionals.
40
Neither UCR nor
FREPASO had enough diversified, experienced, and trained professionals leading
Argentina during the de la Rúa administration, exemplifying the state-without-a-party
condition. Jones et al.’s research raises the possibility that perhaps this is where the
discussion of repealing the Convertibility Law of 1991 faltered.
The IMF report compiled under Shinji Takagi reinforces Corrales and Jones et
al.’s research in stating that the political structure was problematic during the lead up to
Argentina’s collapse in 2001.
41
Takagi takes note of the internal differences among the
39
See Jones and others, “Professional Politicians - Amateur Legislators: The Argentine Congress in
the 20th Century,” American Journal of Political Science 46 (2002), 656-669.
40
FREPASO’s two main leaders in 1999, Chacho Álvarez and Graciela Fernández Meijide, were
better identified for their principled politics (they were advocates of human rights and fighting corruption)
than for any real achievements in public administration.
41
See International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler
Shinji Takagi (Washington, D.C.: IMF Media Services, 2004).
23
Lower House of Congress, Senate, and the majority of the provinces during de la Rúa’s
administration starting in 1999. The IMF report reveals that the internal differences
within the body politic prevented the government from receiving broad support for its
decisions. This eventually undermined many government initiatives. This was especially
the case when de la Rúa took office in December 1999 with his coalition (Alianza) of the
centrist UCR and the center-left FREPASO party. While the Alianza constituted the
majority in the Lower House of Congress, the Senate and the majority of the provinces
were under the control of the main Justicialist (Peronist) opposition.
42
The different
parties within the political structure resulted in divergent ideas on handling the economy.
For instance, when the Convertibility Law of 1991 was being questioned during 1999 and
2000, the Alianza preferred to undo the Convertibility Law and devalue Argentina’s
currency, while the Peronist party preferred to go beyond the convertibility regime and
started a discussion on dollarizing the economy.
43
In the end, the Convertibility Law was
maintained without broad support within the large political establishment. The
disagreements between the parties show to a certain extent how de la Rúa’s hands were
tied. Eliminating the Convertibility Law might have given de la Rúa options, such as
devaluing the Argentine peso to stimulate export-led growth.
Luigi Manzetti (2002) examines how corrupt political agents affected Menem’s
reforms.
44
Manzetti argues that both formal and informal Argentine institutions and rules
continued to operate according to pre-reform behavioral codes that openly contradicted
42
Ibid., 16.
43
See Miguel Teubal, “Rise and Collapse of Neoliberalism in Argentina: the Role of Economic
Groups,” Journal of Developing Societies 20 (2004).
44
Luigi Manzetti, “Argentine Implosion,” The North-South AgendaPapers, 59 (November 2002),
http://www.miami, edu/nsc/publications/Papers&Reports/ArgentineImplosion.html (accessed March 22,
2007).
24
Argentina’s reforms, and thus undermined the reforms undertaken in the 1990s.
45
Menem, the Congress, the judiciary, state governors, and the federal bureaucracy still
operated under the same set of rules that allowed payoffs, collusion, rent seeking, and
political patronage. This was contrary to the Menem administration’s promise to bring
political and economic reforms to address the public sector accounts, which had been in
deficit for more than three decades.
46
For example, the executive’s power was at the
expense of the legislative and the judicial branches, which lacked any effective oversight
of the executive.
47
As a result, Menem was able to carry out market reform policies in a
discretionary fashion, which often resulted in reallocating rents to the private sector
rather than creating the bases for healthy competition that could have promoted long-term
growth. Like Corrales, Jones et al, and the IMF report under Takagi, Manzetti’s research
concentrates on the various agents in the political structures as contributing factors to the
Argentina’s crisis in 2001, identifying the informal relationships amongst these political
bodies as hindering the reforms set forth in the 1990s.
Kurt Schuler (2003) puts the onus on the Argentine government for allowing the
country to accumulate massive amounts of debt. His finding is based on narrow
accounting data and in particular on Argentina’s growing debt throughout the 1990s to
45
See Douglas North, Institutions, Institutional Change, and Economic Performance, (New York:
Cambridge University Press, 1990). He postulated that more political and economic institutions act in a
consistent and responsible fashion, the more predictable they become, which, in turn, earns them the trust
of citizens and investors alike.
46
See International Banks for Reconstruction and Development (IBRD), Argentina: From Insolvency
to Growth (Washington, D.C., IBRD, 1993).
47
In general, the appointment of judges in Argentina, although similar to the US, is much more
politicized, as party loyalties often take precedence over technical qualifications. As a result, the three
branches of government did exist but did not perform to check and balance each branch.
25
2001.
48
According to Schuler, by mid 2001 the Argentine government found itself in a
“debt trap”. When a country is faced with a debt trap, it means a country’s inability to
pay back debt and the compounding interest because the growing debt surpasses the
country’s ability to gain enough through trade and tax revenues due to the high interest
rates. Essentially, the high interest rate, potentially coupled with a current account
imbalance, makes the debt accumulate too quickly, hence beyond the capacity of a
country’s economy to repay it. By October 2001, Argentina’s country risk premium of
20, which is the additional return one would require for investing in a country due to the
risk of investing in that country, alarmed investors who feared default.
49
Reinhart, Rogoff, and Savastano (2003) look for historical patterns to explain how
Argentina found itself in a crisis.
50
Their research has found a pattern of debt intolerance
in Argentina’s history, which they define as an inherent characteristic, as fixed as the
country’s ethnic population composition, that allows the government to act irresponsibly,
thereby pushing the foreign debt above the country’s low limit of tolerance. Reinhart,
Rogoff, and Savastano understand the Argentine economic crisis by looking at the
country’s pattern in meeting its debt obligations and its management in the past and argue
that Argentina carries the original sin of being serial defaulters and consequently suffers
from debt intolerance. Reinhart, Rogoff, and Savastano declare that debt intolerance
48
See Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee
United States Congress (June 2003), http://www.house.gov/jec/imf/06-13-03long.pdf (accessed July 20,
2006).
49
The return received for investing is generally considered to be dependent on the amount of risk
involved in the investment (stocks are riskier than bonds so have a higher return). In theory, when making
an investment you start with a risk-free rate (US government never defaulted) and add to it for any other
risks, known as a risk premium. A risk premium of 20 seems really high if one puts into perspective that a
T Bill in the United States would get a return of 5% and 25% for a bond guaranteed by Afghanistan.
50
See Carmen M. Reinhart, Kenneth S. Rogoff, and Miguel A. Savastano, “Debt Intolerance,”
Brookings Papers on Economic Activity (2003).
26
“manifests itself in the extreme duress many emerging market economies experience at
overall debt levels that would seem quite manageable by the standards of the advanced
industrial economies.”
51
In contrast, Damill, Frenkel, and Rapetti (2005) conclude that there is no evidence
to support the "debt intolerance approach." They do agree that Argentina became
indebted to international banks, but they find that the origin of the external debt problem
was due to a “recent original policy mistake (that occurred from 1991 to 2001) –
essentially, the combination of capital account opening, fixed nominal exchange rate and
appreciated real exchange.”
52
The problem was allowing capital mobility or financial
integration with developed nations, along with fixing the nominal exchange when the real
exchange rate was appreciating. They trace the increasing fiscal deficit in 1998 to 2001 to
the Asian and Russian crises in the late 1990s and of the resulting loss of investor
confidence, which in turn resulted in an increase of the country’s risk premium. They also
note that the fall in the public pension system receipts and employment contraction that
started in mid 1998 were contributing factors to Argentina’s crisis.
SPECIFIC POLICIES OR FAILURES OF GOVERNMENT – POLITICAL
ISSUES
To some extent, several of the specific policies of the Menem and de la Rúa
governments were embedded in some of the political structures identified above.
Etchemendy (2005) focused on the relationship Menem developed with the industrialists
and trade unions and how this relationship led to policies that pushed for possibly
51
Ibid., 1.
52
Mario Damill, Roberto Frenkel, and Martin Rapetti, “The Argentinean Debt: History, Default, and
Restructuring,” Initiative for Policy Dialogue based at Columbia University and Centro de Estudios de
Estado y Sociedad 6, no. 3 (December 2005), http://www.anpec.org.br/revista/vol6/vol6no3p29_90.pdf
(accessed August 26, 5005), 4.
27
disingenuous reforms.
53
Etchemendy shows that Menem’s partnerships with industrialists
and trade unions were a possible cause of Argentina’s economic predicament since the
resulting policies were questionable, i.e. in that the reforms were tailored to the interest of
these two groups and not the population at large. During the early and mid 1990s, the
Menem government used a series of concessions and side payments to gain or maintain
the support of powerful industrialists and trade unions. Etchemendy argues that these
concessions prevented the government from taking steps to enhance Argentina’s export
competitiveness or to attend to the growing pool of unemployed workers resulting from
the large-scale privatizations of state-owned enterprises.
Eaton, like Etchemendy, concentrate on the policies Menem enacted in the early
1990s as contributing factors to Argentina’s economic crisis in 2001. While Etchemendy
pays attention to Menem’s relationship with the industrialists and trade unions, Eaton
concentrates on Menem’s relationship with the provincial governors.
54
Eaton suggests
that a factor in the Argentine crisis was the ability of the provincial governors to make or
break reform programs. In 1992, Menem and the provincial governors reached an
agreement, called the 1992 Coparticipation Agreement, to reduce the percentage of
federal tax revenues distributed to the provinces while guaranteeing the provinces a
minimum revenue floor. This agreement was critical to the success of the government’s
fiscal adjustment during the early 1990s. However, Eaton argues that the provincial
revenue floor (piso mínimo) created a fiscal burden after the economy slid into a
53
Sebastián Etchemendy, “Old Actors in New Markets,” in Argentine Democracy: The Politics of
Institutional Weakness, eds. Steven Levitsky and Maria Victoria Murillo (University Park, PE:
Pennsylvania State University Press, 2005).
54
See Kent Eaton, “Menem and the Governors: Intergovernmental Relations in the 1990s,” in
Argentine Democracy: The Politics of Institutional Weakness, eds. Steven Levitsky and Maria Victoria
Murillo (University Park, PE: Pennsylvania State University Press, 2005).
28
recession in 1998 and contributed to the 2001 political-economic crisis. Eaton claims that
Menem’s reforms were paradoxical in that while the reforms would not have been
possible had Menem not reached an agreement with the provincial governors, the
agreement was in the end one of the factors that facilitated the conditions for the
economic crisis. In a sense, Eaton has identified the 1992 Coparticipation Agreement as
one of the contributing factors that led to the crisis; it may not have been the trigger to the
crisis but it does explain why the federal government was obligated to allocate to the
provinces a set amount of funds even when the economy was in a recession. To a certain
extent, the 1992 Coparticipation Agreement explains why the federal government during
de la Rúa was strapped for cash in the face of looming debt to international investors.
Like Etchemendy and Eaton, Naím (1994) focuses on Menem’s presidential
decisions. Naím, however, links Menem’s old-fashioned clientelist activities to stalled
fiscal discipline and suggests how this may have had a destabilizing impact during the
1990s, especially when the Convertibility Law was upheld, and when the structural
adjustment programs were enacted in the first half of the 1990s.
55
Naím suggests that
initially, Argentina’s economic turnaround was due to Menem’s executive orders that
altered the macroeconomic environment. Although Menem had initial success in
reversing inflation and attracting extensive foreign investment, he indulged in old-
fashioned clientelistic and corrupt activities in order to do so.
56
For instance, Menem
successfully made political deals with the opposition, provincial, and labor leaders. These
55
Moisés Naím, “Latin America: The Second Stage of Reform,” Journal of Democracy 5, no.4
October (1994), 35.
56
See Finn Kyland and Edward Prescott, “Rules Rather than Discretion: The Inconsistency of Optimal
Plans,” Journal of Political Economy 85, no. 3 (1997) for further discussion of politicians' tendencies to
act in a discretionary and arbitrary fashion that makes it highly difficult to develop clear, transparent, and
stable rules of the game.
29
relationships stalled fiscal discipline and rolled back the pace of some structural reforms.
One result was a change in the constitution, which enabled Menem to serve a second term
as President.
57
Additionally, he made many reforms by emergency decree rather than by
the normal, slower process of passing laws through Argentina’s Congress.
58
Menem’s
discretionary behavior undermined the seriousness of its stabilization program.
59
Naím’s
analysis is further supported by Manzetti’s conclusion that there was not “an equal effort
to revamp the trustworthiness of other political and economic institutions that could have
strengthened the early achievements of convertibility.”
60
Naím has tried to show how
Menem’s autonomous way of pushing for reforms neglected the value in pushing for
more serious fundamental changes in the political and economic bodies of government.
Naím’s contribution to our understanding of Argentina’s economic crisis of 2001 is
pinpointing Menem’s clientelistic way disrupting the country’s political foundation.
Naím reasons that leaders like Menem may have failed to push for the
development of other political and economic institutions because the process is slow,
cumbersome, expensive, and technically difficult. Moreover, it may be that Menem’s
significant political autonomy and presidential authority that characterized governmental
decision making in the first wave of reforms was difficult to maintain in the future,
61
57
International Monetary Fund, The IMF and Argentina, 1991-200, Shinji Takagi, team leader and
compiler (IMF: Washington D.C., IMF Media Services, 2004), 16.
58
Menem’s clientelistic behavior also overlaps with formal and informal Argentine institutions which
is placed under Long Term Internal Conditions.
59
Luigi Manzetti, “Argentine Implosion,” The North-South AgendaPapers, 59 (November 2002), 3,
http://www.miami, edu/nsc/publications/Papers&Reports/ArgentineImplosion.html (accessed March 22,
2007).
60
Ibid.
61
Moisés Naím. “Latin America: The Second Stage of Reform,” Journal of Democracy vol. 5, no.4
October (1994): 35.
30
especially when he wanted to upgrade the existing public agencies distressed by neglect,
underinvestment, and special interest. Conditions for competitive private investment to
further macroeconomic stability required better organizational infrastructure of the state,
an efficient tax administration, banking supervision, regulation of privatized monopolies
and social security system, fair labor practices, the promotion of exports, an autonomous
judiciary, and improvements in a plethora of other areas. Ultimately, Naím sees a trend in
Argentina which governments are only enacting some structural reforms and not others
after launching stabilization measures, therefore making the stabilization or reversal of
the 1980s hyperinflation incomplete.
SPECIFIC POLICIES OR FAILURES OF GOVERNMENT – ECONOMIC
ISSUES
Stiglitz (2002) analyzed Argentina’s partial privatization of social security in July
1994 and found that it had damaging fiscal consequences, which contributed to the
country’s continued growing fiscal debt and prevented the government need to balance its
budget.
62
Before the partial privatization of social security, the Argentine government
was exclusively responsible for collecting revenues for social security and distributing
the funds for the social security beneficiaries. The partial privatization of social security,
however, gave the Argentine public the option to manage their own retirement accounts,
which meant that the revenue in the form of taxes once earmarked for social security was
then directed to private retirement accounts. The problem with this new system is that the
government still had to pay social security benefits to the people in the old system. The
diverted funds into private accounts meant that the government had a diminishing pool of
cash to redistribute to the social security beneficiaries. Essentially, the partial
62
Joseph Stiglitz, Argentina, Shortchanged: Why the Nation that Followed the Rules Fell to Pieces,
Washington Post, May 12, 2002, B1.
31
privatization of social security system left the Argentine government with two different
types of retirement plans, and the one that they were responsible for was unsustainable.
As such, Stiglitz’s research explains how one factor continued to add to the government’s
budget deficit and growing fiscal deficit. He actually calculated that the Argentine
government should have actually shown a surplus in the 2000 and 2001 budgets if the
government did not partially privatize social security.
Dean Baker and Mark Weisbrot, like Stiglitz, analyzed Argentina’s social security
system and concluded that partial privatization of social security was a source of lost tax
revenue.
63
Yet more telling, they also found how this lost revenue forced the government
to look for other avenues of financing and eventually compensated for the lost taxes with
more borrowing. The Argentine government had no choice to borrow more money as
indicated in Table 1.
Table 1: The Impact of Social Security Privatization on Argentina's Budget
(percent of GDP)
64
1994 1995 1996 1997 1998 1999 2000 2001
Lost Soc.Sec.Rev -0.5 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0
Interest Rate
(percent)
10 10 10 10 14 14 20 20
Interest Costs -0.01 -0.10 -0.20 -0.30 -0.60 -0.86 -1.59 -2.16
Additional Deficit -0.51 -1.10 -1.20 -1.30 -1.59 -1.86 -2.59 -3.16
Cumulative Debt -0.51 -1.62 -2.72 -3.83 -5.35 -7.50 -10.05 -13.49
Moreover, Baker and Weisbrot found that Argentina’s new debt incurred high interest as
the country’s risk premium was high.
65
Furthermore, they calculated that the deficit
63
See Dean Baker and Mark Weisbrot,
“The Role of Social Security Privatization in Argentina’s
Economic Crisis.”, The Center for Economic and Policy Research (2002), 1
http://www.thirdworldtraveler.com/IMF_WB/IMF_Crash_Argentina.html (accessed on April 13, 2006).
64
Ibid.
65
Ibid.
32
created by the lost tax revenue almost equaled the budget deficits the Argentine
government had in the 1997-2000 period.
Alberola, López, and Sérven (2004) specifically pay attention to the exchange rate
in understanding the country’s budget imbalance.
66
They argue that the country suffered
from an overvalued exchange rate and found that Argentina’s monetary policy to be the
key problem with the country’s overall fiscal imbalance. They stated that Argentina’s
decision to use the US dollar as the anchor currency eventually led to an overvaluation of
the peso.
67
Alberola, López, and Sérven argue that although it is typical to apply an
inflexible exchange rate to stabilize prices, in Argentina’s case, the inflexibility of the
exchange rate was too extreme as it worked to constrict Argentina’s economic
movement. Their contribution is the idea that the Argentine government failed to change
the Convertibility Law when it no longer functioned as it once successfully did in 1991 to
combat hyperinflation in 1991.
Pamela K. Starr (2003) also agree with Alberola, López, and Sérven’s conclusion
that the convertibility law eventually functioned as a straight jacket for Argentina’s
economic movement. She found that the convertibility law eventually undermined the
competitiveness of Argentina’s economy and negatively affected the country’s current
account as the peso became overvalued.
68
It also restricted the government’s option in
setting forth export led growth policies to help the government balance its current
account and balance its budget.
66
See Enrique Alberola, Humberto López, and Luis Servén. Tango with the Gringo: The Hard Peg
and Real Misalignment in Argentina. Washington, D.C.: World Bank (June 2004).
67
Ibid.
68
See Pamela K. Starr, “Argentina: Anatomy of a Crisis Foretold,” Current History (February 2003),
65-71.
33
Schuler’s report (2003) to the United States Congress’ Joint Economic Committee
looks at economic indicators to find the contributing element that led to Argentina’s
collapse in 2001. As noted above, Schuler specifically pays attention to the
administration of de la Rúa, Menem’s successor, and the three tax increases of 2001,
which met with lackluster results. The government was concerned with the growing
budget deficit, which was at the time 2.5 percent of GDP, and trying to reduce it. It is
worth noting that at the same time de la Rúa was attempting to reduce the budget deficit,
the country was undergoing a recession. The de la Rúa administration hoped that the
reduction would instill confidence in government finances by the international lenders,
reduce interest rates, and thereby spur the economy. Moreover, the de la Rúa government
thought that raising tax rates was the only option that seemed both politically feasible and
economically beneficial. To this end, he secured approval for three big tax increases,
effective January 2001, April 2001, and August 2001.
69
Schuler’s analysis raises an important question: why was the de la Rúa
administration’s priority reducing the federal budget deficit (by reducing spending) and
not addressing the recession? In hindsight, the de la Rúa administration’s decisions to tax
more was counterproductive; it might have made more sense to take a countercyclical
approach and stimulate the economy by investing, thereby stimulating growth and hence
having new pools of business from which to collect taxes. Ironically, the tax increases
ended up reducing confidence in government finances and further decreasing the
69
Argentina, Law 25.239, Law 25.413 (the Competitiveness Law), Decree 380/2001. The other key
law of this period was Law 25.453 (the Zero Deficit Law). There had also been some tax increases under
president Menem in April 1995, August 1996 and December 1998. The April 2001 package included
subsidies intended to offset much of the tax increase.
34
Argentine public’s confidence by discouraging growth in the private sector, the source of
the government’s tax revenue.
EXTERNAL EVENTS AND CONDITIONS
Shahid Javed Burki and Sebastián Edwards (1996) state that Argentina suffered a
short term turbulence as a result of the Mexican peso crisis of 1994.
70
This phenomenon
is known as the contagion effect, which means the cross-country transmission of shocks
or the general cross-country spillover effects. Writing in 1996, Burki and Edwards do not
directly engage in the Argentine crisis discourse, but instead offer an explanation of how
a particular external factor upset the progress of Argentina’s economic growth in the
early 1990s. Prior to Mexico’s currency devaluation in 1994, Argentina enjoyed strong
macroeconomic performance between 1991-1994. Before the crisis, real growth averaged
7.7 percent, inflation was significantly reduced, the fiscal situation was stable, and the
current account deficit remained below 4 percent. The Mexican devaluation demonstrated
how Argentina’s financial sector was vulnerable to negative external shocks. When the
Mexican devaluation occurred, investors lost confidence in Argentina’s finances and
started to withdraw their capital. Since the nature of the Convertibility Plan required that
the peso be fully backed by international reserves, the central bank could not reduce its
reserves to redistribute them to the banks in order to offset the run against bank deposits.
Burki and Edwards’ contribution is to show how Argentina’s economic progress was
vulnerable to such external shocks. Their analysis is useful in that their work offers a
picture of Argentina’s vulnerability to economic problems as early as 1994, even when
economic indicators seem to indicate otherwise.
70
See Shahid Javed Burki and Sebastián Edwards, “Latin America After Mexico: Quickening the
Pace,” unpublished World Bank manuscript (1996).
35
Shahid Javed Burki and Guillermo Perry (1997) show how the Mexican
devaluation in 1994 revealed underlying problems to Argentina’s banking system that
may have contributed to its crisis in 2001.
71
Argentina had already begun to strengthen
bank regulation and supervision when the Mexican peso devaluation in 1994 revealed the
problematic nature of Argentina’s banks in 1995. The devaluation of the Mexican peso in
December 1994 resulted in sharp outflow of Argentina’s bank deposits that in turn
exposed the weaknesses of many publicly owned and private banks.
Colin M. Lewis, in “Argentina”(1999), however, offers a different look at the
contagion effect and declares that Argentina’s underlying problems were masked by the
consequences of the Mexican devaluation.
72
He notes, like Burki and Edwards, that the
Tequila Effect, due to the Mexican devaluation, produced a run on the Argentine peso
from the banks in 1995. Anxious savers withdrew deposits (roughly 15 percent of
deposits were withdrawn from the banking system), and pesos were converted into
dollars as interest rates surged and a recession began.
73
But what Lewis is contending is
that the devaluation led to more attention to fixing its banking system and preventing
additional deposit withdrawals than to other serious problems, such as the increasing
rates of unemployment and increasing poverty. The unemployment rate in 1995 reached
16.6 percent, an increase of 4.5 percent from the previous year. The poverty rate in 1995
was 24.8 percent, an increase of 5.8 percent from the previous year. See table 2 below:
71
Shahid Javed Burki and Guillermo Perry, The Long March: A Reform Agenda for Latin America and
the Caribbean in the Next Decade, (Washington, D.C.: World Bank Publications, 1997).
72
See Colin M. Lewis, “Argentina” in Case Studies in Latin American Political Economy, eds. Julia
Buxton and Nicola Phillips (Manchester, UK: Manchester University Press, 1999).
73
Ibid. 51.
36
Table 2: Unemployment and Poverty Indicators for Argentina, 1991-1996
74
1991 1992 1993 1994 1995 1996
Unemployment rate, % 6.0 7.0 9.3 12.1 16.6 17.3
Poverty rate, % 21.5 17.8 16.8 19.0 24.8 27.9
Similar to the previous works, Lucas Llach (2004) looks at effects of the Mexican
peso devaluation in 1994, but also discusses the role of the Brazilian real devaluation in
1999.
75
Like the others, Llach has found that the Mexican and Brazilian devaluations
were correlated with Argentina’s net outflows of capital. Although Llach’s focus is net
capital outflow, he also recognized that other features at the time of the crises, such as the
renewed strength of the US dollar and the deterioration of Argentina’s terms of trade in
1999, may have led to a recession. Llach understood these elements to be eventual
contributors to Argentina’s collapse in December 2001.
Guillermo E. Perry and Daniel Lederman’s work (1998) is part of the discourse
around Argentina’s crisis and its connection to the East Asian crisis in 1997; they also
look at the pressures faced by the Argentine government that led it to create policies that
would amplify the slowdown in growth.
76
They argue that the East Asian crisis of 1997
did not affect Argentina greatly and that the effects of capital outflows were modest.
They suggest that if the East Asian crisis had not occurred, a slowdown in Argentina’s
growth was expected given the fact that Argentina recorded a remarkably high GDP
74
Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee United
States Congress. Washington, D.C. (June 2003), 5-6, http://www.house.gov/jec/imf/06-13-03long.pdf.
(accessed July 20, 2006).
75
See Lucas Llach, “A Depression in Perspective: The Economics and the Political Economy of
Argentina’s Crisis of the Millennium,” in The Argentine Crisis at the Turn of the Millennium: Causes,
Consequences, and Explanations, eds. Flavia Fiorucci and Marcus Klein. (Amsterdam, Netherlands:
Askant Academic Publishers, 2004).
76
See Perry E. Guillermo and Daniel Lederman, Financial Vulnerability, Spillover Effects, and
Contagion: Lessons from the Asian Crises for Latin America, (Washington, D.C.: World Bank
Publications, 1998).
37
growth rate of 8.4 percent before the East Asian crisis. In addition, Perry and Lederman
found that Argentina had many symptoms that made the country already vulnerable,
including: 1) its perverse incentive structure in domestic finance, 2) its lack of
transparency in corporate governance and financial transactions, 3) lax regulation and
supervision, and 4) the rigid exchange rate regime. Again, their focus is on the policies
themselves. Hence, according to Perry and Lederman’s analysis, the country had internal
vulnerabilities prior to external crises.
Sidney Weintraub (2002) analyzes Argentina’s crisis on two levels – the
government’s commitment to fiscal discipline and the sluggish growth of industrial
countries. In the first level of his analysis, he argues that the Argentine government
lacked fiscal discipline; in the second level he scrutinizes the sluggish growth of
industrial countries as a factor in Argentina’s economic struggles. Weintraub emphasizes
that the major problem with Argentina was “the lack of the necessary fiscal discipline to
run a convertibility/currency board system,”
77
at the same time he notes that the main
external factor contributing to Argentina’s crisis was the sluggish growth in the industrial
countries. This departs from the previously-mentioned scholars’ analyses of other
countries’ crises affecting Argentina’s economic woes. Weintraub states that the sluggish
growth of the industrial countries functioned as a brake on Argentina’s and other Latin
American countries’ exports. The stagnation of exports was further exacerbated by the
high import restrictions in the industrial countries, including the United States, on the
most competitive Latin American products, especially in agriculture.
78
Accordingly, the
77
Sidney Weintraub, “Spotlight on Latin America” in The Bretton Woods Committee Critical Issues
Forum, (December 2002), 12.
78
Ibid. 13.
38
drop in exports to the industrial countries was one factor in Argentina’s persistent budget
deficits. Weintraub’s contribution is to show how the sluggish growth and certain trade
policies in industrial countries affected a negative trade balance with Argentina.
Schuler suggests that the unusual strength of the US dollar was a factor into
Argentina’s economic recession. He engages in the discussion of the crisis, but focuses
on the recession that started in October 1998 and continued up until the crisis in
December 2001. Schuler examines the Convertibility Law, which pegged the Argentine
peso to the US dollar. As a result of this law, the Argentine peso appreciated with the
dollar against most other currencies, notably the Brazilian real and the euro.
79
Since the
value of Argentina’s currency rose with the US dollar, Argentina’s goods became
expensive. As a result, Argentina’s exports to Brazil decreased due to their higher costs;
Argentine products became too expensive in the Brazilian market when the Brazilian
currency devaluation occurred. Perhaps, if the currency peg had been dropped, it have
triggered more exports, or at least allowed Argentina to remain competitive with
countries that had a cheaper form of currency.
CONCLUDING REMARKS
Explanations for Argentina’s economic crisis by different scholars fall into three
broad categories – long-term internal conditions, specific policies or failures of
government, and external events and conditions. Analyses in these categories have
scrutinized the leadership of Menem and de la Rúa, certain economic policies, and the
79
It should be noted that the US Federal Reserve’s measure of exchange rate strength of the dollar was
based on an index level of 100 for March 1973, rose from a low of 84.23 in July 1995 to a peak of 113.09
in February 2002 – its highest level since January 1989. Incidentally, some analysts of US monetary policy
thought that from 1999 to 2001, part of the strength of the dollar resulted from the Federal Reserve keeping
monetary policy too tight. Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic
Committee United States Congress (June 2003), 31, http://www.house.gov/jec/imf/06-13-03long.pdf.
(accessed July 20, 2006).
39
contagion effect. As mentioned in the introduction, the research on Argentina’s crisis
does not identify any one factor that triggered the crisis, but various components together
offer a comprehensive picture of how the country reached the point of declaring a debt
default in 2001. To this discussion, an examination of the IMF in its analysis and
oversight of Argentina’s economy will be added. In the following chapter, a
chronological synthesis of IMF’s involvement in Argentina in the 1990s to 2001 will be
detailed.
40
Chapter 3: IMF INVOLVEMENT IN ARGENTINA (1991-99)
Before analyzing the IMF’s role in Argentina’s crisis during the period 2000 and
2001, this chapter will chronologically detail the IMF’s engagement with the Argentine
government from 1991 through 1999. It will include an explanation of Argentina’s need
for financial assistance in 1991 and describe the IMF’s support, through a series of
standby arrangements (SBAs), which set up funds which the Argentine government could
draw on provided it complied with performance criteria required by the Fund. The
purpose of this chapter is to offer a chronologically synthesis of IMF involvement with
the Argentine government in the 1991-99 period.
THE CONTEXT OF ARGENTINA’S NEED OF IMF FINANCIAL ASSISTANCE
IN 1991
Carlos Saul Menem started his presidency in July 1989 faced with a
hyperinflation of 3000 percent and US$60 billion worth of debt (US$4.5 billion of it in
unpaid interest). Menem and his administration immediately designed a package to
stabilize the economy and to promote growth. The currency was devalued and fixed at a
considerably depreciated level. The Menem administration also announced structural
reform programs consisting of: 1) an overhaul of the tax collection agencies, 2)
privatization of public enterprises, 3) promotion of competition (by opening up the
economy for investment by foreign firms), and 4) central bank independence. In addition,
two basic laws were passed by Congress: the Law of Reform of the State, which
authorized the privatization or liquidation of public enterprises, and the Economic
Emergency Law, which included measures to improve public finances in the short term
and structural reforms over the medium term. The country received IMF support as it
41
reached an agreement with the institution for a US$1.5 billion loan in September 1989.
80
This loan allowed the government to cope with the country’s immediate financial needs.
One month later, in October 1989, the Argentine authorities requested a standby
arrangement (SBA) with the IMF, which indicated the IMF would pave the way for a
later extended arrangement.
81
After the Menem administration took measures to stabilize the economy, inflation
dropped from 3000 percent to 1344 percent, economic activity increased, the fiscal deficit
was reduced, and capital returned. However, toward the end of 1989, the performance
criteria established under the IMF-supported program were missed by wide margins.
82
Moreover, a disparity between the official and parallel exchange rates emerged, and the
currency became subject to a speculative attack. This was followed by a run on the
banking system.
83
The Argentine government immediately responded to the economic downturn. On
January 1, 1990, the Argentine authorities decreed that all austral-denominated bonds and
term deposits in the banking system should be converted into 10-year US dollar-
denominated government bonds, called BONEX. The idea behind this plan was to
eliminate the large quasifiscal deficits of the central bank. In March and September of
1990, the government introduced comprehensive measures again to strengthen public
80
Adela Gooch and Paula Bluestein, IMF to Lend Argentina $1.5 Billion; Agreement Seen as Crucial
Step Toward Economic Recovery, Washington Post, September 28, 1989,
http://www.highbeam.com/doc/1P2-1214167.html (accessed August 3, 2009).
81
IMF Independent Evaluation Office, The IMF and Argentina 1991-2001, team leader and compiler
Shinji Takagi (Washington D.C.: International Monetary Fund, 2004), 78.
82
Ibid. 79.
83
Ibid.
42
finances, such as increasing the value added tax (VAT).
84
Privatizations proceeded
without complications and became a source of “easy” cash flow, largely from foreign
direct investment (FDI), for the Argentine government.
Yet despite this success, the measures undertaken in 1990 by the Menem
administration to reverse the economic downturn had limited results. The currency
continued to depreciate and the inflation was still high. Due to BONEX, the demand for
austral-denominated assets diminished. At the same time, the IMF suspended a tranche of
US$240 million to Argentina because the country did not comply with all IMF conditions
from the October 1989 SBA.
85
FINANCIAL ARRANGEMENTS BETWEEN ARGENTINA AND THE IMF AND
THE MENEM ADMINISTRATION’S CONVERTIBILITY PLAN
In the beginning of 1991, Menem and his administration were faced with an
unstable economy and loss of IMF support. On January 30, as Domingo Cavallo took
office as Minister of Economy, the exchange rate band was established, with the lower
band of 10,000 australes and the upper band of 8000 australes to the dollar. Any positive
effect with the established band was minimal.
On March 1, Cavallo introduced the idea of establishing a currency board that
would fix Argentina’s peso at a fixed rate with the value of another country’s stronger
currency. Accordingly, Cavallo crafted a new piece of legislation – the Convertibility
law, which pegged the peso to the US dollar one-to-one and was approved by Congress
on March 28. The Convertibility Law became the bedrock of Argentina’s stabilization
84
“IMF Argentina Action,” New York Times, October 4, 1990.
http://query.nytimes.com/gst/fullpage.html?res=9C0CE5DF1F30F937A35753C1A966958260 (accessed
October 3, 2008).
85
This payment was an installment of a $1.3 billion loan to Argentina approved in September of 1989.
43
plans, which took effect on April 1, 1991; this ended hyperinflation. The idea of the
Convertibility Law was “to give holders of Argentine currency a property right to the
dollars backing the currency – something they had not had in two generations.”
86
The
exchange rate was initially 10,000 Argentine australes per dollar, but then was augmented
on January 1, 1992 when the austral was replaced with the peso. One peso was worth
10,000 australes, and the peso was pegged to the US dollar, one-to-one.
Aside from pegging the peso to the US dollar, the law dictated that the central
bank uphold liquid international reserves to cover 100 percent of the monetary base.
87
Convertibility also abolished price indexation, allowed contracts to be denominated in
foreign currencies, and even allowed foreign currencies to be used as alternative means of
payments.
88
The IMF demonstrated its endorsement of the Convertibility Law by
approving a stand-by arrangement worth approximately $10 billion.
89
In addition, the
Convertibility Plan called for broader market-oriented structural reforms, all of which
met with IMF approval. Argentina’s reform plans revolved around labor market reform,
liberalization of trade, and privatization. As a result, on November 1, Menem announced
a broad program of economic deregulation and trade liberalization, and two weeks later,
Congress approved the Emergency Law authorizing temporary contracts and capping
86
Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee United
States Congress (June 2003), 4 http://www.house.gov/jec/imf/06-13-03long.pdf. (accessed July 20, 2006).
87
Hector Shamis, “Argentina: Crisis and Democratic Consolidation”, Journal of Democracy 13, no. 2
(April 2002), 81-96. However, it should be noted that Convertibility Law allowed some of the monetary
base to be backed by the government’s own dollar-denominated bonds rather than actual dollars. See Kurt
Shuler, “Ignorance and Influence: U.S. Economists on Argentina’s Depression of 1998-2002,” Econ
Journal Watch 2, no. 2 (August 2005), 17.
88
Domingo F. Cavallo and Joaquin F. Cottini, “Papers and Proceedings of the Hundred and Fourth
Annual Meeting of the American Economic Association,” The American Journal Review 87, no. 2 (May
1997), 17.
89
Ibid., 18.
44
indemnity. Yet although it approved of the nature of the market-oriented structural
reforms, the IMF had little direct influence on the nature of the reforms. The IMF was
most influential in the technical assistance it provided, particularly in tax
administration.
90
As briefly described in the first chapter, the Convertibility Law brought almost
immediate stabilization and an economic boom. Hyperinflation ended; the inflation rate
declined from 1344 percent in 1990 to 29 percent in 1991 and by 1995 was only 1.6
percent.
91
Investor confidence was high, and as a result, sizable foreign investment
flooded the country. The net capital inflows to Argentina from 1992-1994 increased from
$7 billion in 1992 to over $12 billion in 1994. However, it should be noted that one form
of this investment boom was the sale of state-owned enterprises (SOE). As such,
privatization added substantial but only onetime gains for the Argentine government.
92
As privatization helped to diminish Argentina’s debt without inflationary results, the zeal
to privatize was high.
93
During the Menem administration, more than a hundred state-
owned companies were privatized;
94
it was second only to Mexico in terms of
90
IMF Independent Evaluation Office, The IMF and Argentina 1991-2001, team leader and compiler
Shinji Takagi (Washington D.C.: International Monetary Fund, 2004), 4.
91
Pedro Pou, “Argentina’s Structural Reforms of the 1990s” Finance and Development 37, no. 1
(March 2000) http://www.imf.org/external/pubs/ft/fandd/2000/03/pou.htm (accessed April 14, 2005).
92
According to Maria Victoria Murrillo, Labor Unions, Partisan Coalitions, and Market Reforms in
Latin America (New York: Cambridge University Press, 2001), 141. Privatization for the most part gained
popular consensus as a solution to poor performance due to the fiscal deficit of Argentina that led to the
deterioration of publicly provided services.
93
Maria Fernanada Ariceta, “Privatization in Argentina: When Accountability Suffered,” Journal of
Development and Social Transformation (2002), 53.
94
Examples of Argentina’s extensive privatization move included association deals and concessions
for fuel extraction, railway concession, gas and transport distribution, the water and electricity supplies,
iron and steel companies, the privatization of YPF (energy company), hydroelectric and thermic stations,
electricity transmission, railway and subway concessions, power stations, and electricity distribution, power
stations, and Bahia Blanca Petrochemical.
45
privatization revenue, earning US$18 billion between 1990 and 1995.
95
Overall, the
Convertibility Law produced dramatic macroeconomic achievements, including the
development of new capital markets.
96
In March 1992, the IMF agreed to an extended arrangement for $17 billion,
replacing the standby arrangement (SBA) in 1991 for $10 billion.
97
The Menem
administration’s Convertibility Plan prescribed tenets that the IMF upheld, such as trade
liberalization, liberalization of financial markets, and privatization. As a result, the
Argentine government privatized port services by decree, and the sale of the state oil
company was authorized by law. The IMF’s approval and extension of the SBA, along
with its financing, had specific structural performance criteria and quantitative
performance criteria. One of the criteria called for the implementation of tax reform to
gain more revenue from distributed profits and business primary surplus by June 30,
1992. Another criterion was the implementation of social security reform to achieve
financial balance on cost and accrual basis by December 31, 1992.
To satisfy the first criterion (the implementation of tax reform), the Menem
administration made tax reform the center of its fiscal adjustment plan. Overall, the
government’s effort at tax reform was successful as the tax administration became more
efficient. The Argentine government’s approach to tax reform required (i) broadening the
potential VAT base, (ii) establishing higher tax penalties to prevent tax evasion, and (iii)
95
Maria Victoria Murrillo, Labor Unions, Partisan Coalitions, and Market Reforms in Latin America
(New York: Cambridge University Press, 2001), 141-142.
96
Brad Setser and Anna Gelpern, “Pathways Through Financial Crisis: Argentina,” Global
Governance 12 (2006), 472.
97
IMF loans are denominated in SDR’s, a basket of the five leading currencies. Between 1991 and
1995, the average exchange rate for the SDR was 1.41 US dollars. See Domingo F. Cavallo and Joaquin F.
Cottini, “Papers and Proceedings of the Hundred and Fourth Annual Meeting of the American Economic
Association,” The American Journal Review 87, no. 2 (May 1997), 18.
46
improving the basic functions of tax administration in terms of inspection, audits, tax
management, and personnel policy.
98
By 1992, Argentina’s saw its tax revenue increase
by more than 200 percent as compared to 1989, which seemed to indicated that the
country’s structural adjustment plans along with the IMF structural performance criterion
of tax reform were the correct policy measures to stabilize Argentina.
99
Along with tax reform, the Argentine government pursued labor reform, which
was an IMF requirement. The move towards the flexibilization of labor corresponded
with the government’s desire to make domestic firms more competitive, especially with
Argentina’s market open to global competition. The assumption behind labor flexibility
was that it would create a better climate for investment since the cost of labor would be
low, a precondition for job creation.
100
Proponents of labor-code reforms believed more
benefits would come from modifying “anachronistic laws,” which date from the 1930s
and 1940s. The Argentine government recognized that comparatively its labor markets
were restrictive, rigid, and cumbersome. For example, Argentina’s labor laws mandate
two months’ notice or two months’ wages before dismissal, at which point the fired
worker becomes entitled to a twelfth of his or her salary and bonuses from the last year,
plus vacation, all multiplied by the total number of years worked.
101
98 Jacques Morisset and Alejandro Izquierdo. “Latin America and the Caribbean Country Department IV,
The World Bank” Working Paper Series 1192 (September 1993): 5.
99 Jacques Morisset and Alejandro Izquierdo. “Latin America and the Caribbean Country Department IV,
The World Bank” Working Paper Series 1192 (September 1993): 6.
100
Martin Crespo, "Miracle in Buenos Aires," Finance Week (14 September 1993), 48-51.
101
Christopher Sabatini and Eric Farnsworth, “The Urgent Need for Labor Law Reform” Journal of
Democracy 17, no.4, 52.
47
The labor reform, as well as its implementation of structural reforms, altered the
Argentine government’s goals regarding its workers.
102
Its stance was no longer to
directly or indirectly encourage job creation and try to ensure mass social inclusion based
on the stability and security of work.
103
As previously mentioned in chapter 1, the
government market-oriented reforms required that the government focus more on the
competitiveness of Argentine producers as opposed to its ability to create jobs. As such,
the government encouraged measures that would assist in the Argentine producers to
lower their costs in order to avoid a recurrent deficit in its commercial balance.
104
(Additionally, this resulted in Argentina’s ability to adhere to the IMF condition that its
trade account be balanced, which will be discussed later in the chapter.) This equated to
the government allowing “the logic of the market to regulate labor, salaries, and
conditions of employment and left the actors in the labor market to interact among
themselves.”
105
The result of this “logic” led to the elimination of job security and other social
benefits that guaranteed workers’ present and future protection.
106
In addition,
privatization resulted in cutbacks in employment. For example, the privatization of
Argentina’s national rail company in 1991 resulted in 79 percent of the company’s
102
Javier Lindenboim, “The Precariousness of Argentine Labor Relations in the 1990s,” Latin
American Perspectives 31, no. 21 (2004), 23.
103
Ibid.
104
Ibid.
105
Ibid.
106
Ibid.
48
workforce being laid off.
107
Between 1990 and 1993, more than 85,000 employees lost
their jobs due to the privatization of formerly state-owned industries and the downsizing
of others in anticipation of their sales.
108
The unemployment rate started to swell in the
mid to late 1990s. See table 3 below:
Table 3: Unemployment and Poverty Indicators for Argentina, 1995-2002
109
1995 1996 1997 1998 1999 2000 2001 2002
Unemployment
rate, %
16.6 17.3 13.7 12.4 13.8 14.7 18.3 23.6
Poverty, % 24.8 27.9 26.0 25.9 26.7 28.9 38.3 57.5
Although growth and employment did follow some reforms, the dearth of transitional
employment opportunities increased unemployment rates, reduced social services, and
pushed people into the informal economy.
110
In general, informal employment finds
workers in suboptimal situations who have limited access to job security or basic benefits
and safety protections.
111
On November 9, the labor unions expressed dissatisfaction with
Menem by organizing a general strike.
As labor reforms took place and the informal sector grew, the influence of unions
diminished as well. Compared to 1980, Argentina’s level of unionization decreased by
107
William Megginson, “Privatization.”Foreign Policy, no. 118 (Spring, 2000), 23. However, it should
be noted that the Argentine railway workers who remained on the job, for example, saw their productivity
surge by 370 percent in the years immediately following privatization.
108
Nancy Powers, “Politics of Poverty in Argentina in the 1990s.” Journal of Interamerican Studies
and World Affairs (Winter 1995), 99.
109
Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee
United States Congress. Washington, D.C. (June 2003), 5-6, http://www.house.gov/jec/imf/06-13-
03long.pdf. (accessed July 20, 2006).
110
Colin M. MacLachlan, Argentina, What Went Wrong. (Westport, CT: Prager Publishers, 2006), 168.
111
Christopher Sabatini and Eric Farnsworth, “The Urgent Need for Labor Law Reform” Journal of
Democracy 17, no.4, 53-54.
49
almost 50 percent.
112
Established unions, such as Argentina’s General Confederation of
Workers (CGT), were eclipsed by high unemployment rates which forced people to seek
any job in the informal sector. As more people enter the informal sector, which is
composed of small producers, casual laborers, street vendors, illegally contracted
workers, and domestic employees, the more difficult it is to apply the usual union model
of banding large numbers of workers together in order to negotiate with employers by
leveraging the collective power of the workers’ labor.
113
Therefore, arguably, it would
appear that the results of the labor reforms were unequal. In the long run, without the
aegis of unions, labor might be exploited.
At this juncture, as privatization was taking place and unemployment rates were
increasing, the national government was reducing its size and restructuring its
relationship with the provinces, another element that was contributing to the country’s
increasing unemployment rate. Argentina’s national government reduced the size of the
national state administration by laying off 103,000 employees and transferring 283,000
employees to provincial employment.
114
The noticeable rise in the unemployment rate
had the potential to undermine Argentina’s nascent growth and the IMF’s quantitative
performance criteria. It appears that either the IMF failed to notice this unemployment
trend or did not deem it significant enough to destabilize Argentina’s progress in
stabilizing its economy.
112
Ibid., 54.
113
Ibid., 55.
114
See World Bank, Argentina: From Insolvency to Growth. (Washington, D.C.: The World
Bank,1993).
50
Additional layoffs were expected since the national government sought to end the
habitual deficit spending of the provinces, which the national government had typically
underwritten.
115
In the early 1990s, fiscal pacts were arranged between the national and
provincial governments to curb the provinces’ deficit spending and enforce fiscal
responsibility. The fiscal pacts required the provincial governments to undertake
structural adjustment measures, such as lowering public payrolls in exchange for transfers
of debt forgiveness from the national government.
116
The Argentine government’s liberalization of the financial system brought both
positive and negative results. The Argentine government’s foreign bank debt was
restructured in 1993 (largely due to issues of Brady Bonds), which attracted international
capital flows.
117
The Brady Plan, introduced in December of 1992, exchanged
government liabilities in default from foreign banks for guaranteed bonds - the Brady
Bonds.
118
The advantage Argentina received from this exchange was the lowered interest
rates on its debt. In part by issuing these bonds, the Argentine government’s balance
sheet improved, and it appeared that the government had the ability to keep its current
account balanced – an important IMF criterion. However, the negative, long-term
115
Nancy Powers, “Politics of Poverty in Argentina in the 1990s.” Journal of Interamerican Studies
and World Affairs (Winter 1995), 99.
116
See World Bank, Trends in Developing Economies. (Washington, D.C.: World Bank 1994).
117
In 1988 Argentina went into complete default with commercial banks. See Roque B. Fernández,
“Loan and Bond Finance in Argentina, 1985-2005,” Serie Documentos de Trabajo 343, Universidad del
CEMA, Buenos Aires, Argentina, (April 2007), 4.
118
Miguel Teubal, “Rise and Collapse of Neoliberalism in Argentina: the Role of Economic Groups,”
Journal of Developing Societies 20, no.3-4 (2004), 182.
51
drawback in international capital flows was the Argentine government’s increased debt,
via bonds, from 7.7 percent to more than 20 percent of GDP between 1992 and 1993.
119
As mentioned earlier, social security reform was an IMF structural performance
criterion in the extended agreement in 1992. After issuing the Brady Bonds, the
Argentine government next worked to reform its social security system, – a dominant
source of the government’s growing debt. However, the Argentine public was leery of the
government’s hand in restructuring social security system and held demonstrations, along
with the Radical party and the labor unions, to protest the reform. Regardless of the
protest, on September 23, the Senate approved the reform, and Argentina partially
privatized its social security system in October 1993. Unfortunately, the results were
ineffective in curbing the government’s growing debt, because the new social security
system, the Integrated System of Retirement and Pensions, was flawed.
120
It widened the
gap between the government’s social security revenues and its social security outlays.
121
Estimates suggested that the system’s expenditures would exceed revenues until 2015.
Moreover, the Argentine government did not specify a particular way to finance the
deficit.
122
Yet the IMF did not offer any precise guideline in reforming the country’s social
security system. In hindsight, we know that the partial privatization of social security
119
Roque B. Fernández, “Loan and Bond Finance in Argentina, 1985-2005,” Serie Documentos de
Trabajo 343, Universidad del CEMA, Buenos Aires, Argentina, (April 2007), 4.
120 For an extended discussion on the new privatization system See Jan Walliser and Scott M.
Becker, “Social Security Privatization: Experiences Abroad,” Congressional Budget Office Paper, January
1999, http://www.cbo.gov/ftpdocs/10xx/doc1065/ssabroad.pdf (accessed August 30, 2008), 75-77.
121 Federico C. Molina, “The Republic of Argentina,” Securities and Exchange Commission Registration
no. 333 (2004), 30.
122 At this juncture, Argentina had the following options: 1) let public indebtedness increase
temporarily, 2) make additional taxes, 3) strictly enforce tax payments to reduce evasion, and 4) reduce in
public pension benefits.
52
deprived the Argentine government a source of tax revenue since it diverted new funds to
private accounts, while the government was still obligated to honor obligations to current
retirees. The government approximately lost 1 percent of GDP per year from 1994-
2001.
123
In due course, Argentina accrued more debt at high interest rates to compensate
for this loss.
ARGENTINA’S ECONOMIC CHANGES AFTER THE MEXICAN CRISIS (1995-
1998)
The Mexican peso crisis hit, involving a sharp devaluation of the Mexican peso
following a series of political crises and extensive capital flight, in December 1994. Due
to fears that Argentina’s currency would devalue like the Mexican peso over $8 billion
exited from Argentina (an amount equal to about 18 percent of all deposits in the
domestic banking system), bank liquidity tightened, the stock market fell by 35 percent,
and GDP fell by 2.8 percent. At the same time, the unemployment rate was rapidly
reaching 20 percent in 1995. The Argentine government was faced with a recession and
as a result was experiencing some pressure to get rid of the currency peg to allow the
printing of money in order to combat rising unemployment.
In response, the Menem administration allayed fears of devaluation by promising
to maintain convertibility at all cost. The Argentine government was able to secure
financial packages from international institutions and private local investors by allowing
their interest rates to dramatically increase; their prime lending rate peaked at 40
123
Dean Baker and Mark Weisbrot,
“The Role of Social Security Privatization in Argentina’s Economic
Crisis.”, The Center for Economic and Policy Research (2002), 1
http://www.thirdworldtraveler.com/IMF_WB/IMF_Crash_Argentina.html (accessed on April 13, 2006).
53
percent.
124
As a result, access to finances came in the way of portfolio capital inflows,
notably to purchase Argentine dollar bonds.
125
In addition, the Argentine government
restructured the banking system, privatizing many poorly managed banks owned by
provincial governments. Through mergers, acquisitions and closures, the number of
domestic banks – both public and private – declined dramatically, while the number of
foreign-owned bank assets rose from 15 to 73 percent between 1994 and 2000.
126
The
government also raised taxes by raising the VAT from 18 percent to 21 percent to
generate more revenue.
127
The Argentine government’s ability to draw new sources of
financing during the recession allowed the government to maintain convertibility.
128
At the same time, the Argentine government negotiated with the IMF on April
1995 for a loan worth $11 billion for Argentina.
129
After the tequila effect, the IMF
124
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 28.
125
Notably, the stock of assets to be privatized shrank in the mid 1990s. David Felix, “After the Fall:
The Argentine Crisis and Repercussion.” Foreign Policy in Focus (2002), 1.
http://www.fpif.org/pdf/reports/PRargentina2.pdf (accessed August 12, 2005).
126
See Augusto De La Torre, Eduardo Levy Yeyati and Sergio Shmuckler, “Living and Dying with
Hard Pegs: The Rise and Fall of Argentina’s Currency Board,” Policy Research Working Paper Series from
the World Bank # 2980 (January 2003), 32 http://econpapers.repec.org/paper/wbkwbrwps/2980.htm.
(accessed July 20, 2005).
127
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 19.
128
It should be mentioned that the Argentine government also made structural changes in banking and
introduced a new banking law, which allowed the creation of an efficient system for bank closure and
resolution. Furthermore, the federal government had adopted ambitious financial sector reforms in the
second half of the 1990s which translated to closing or privatizing many poorly managed banks owned by
provincial governments and consolidating and internationalizing the banking system. For more information
see Augusto De La Torre, Eduardo Levy Yeyati and Sergio Shmuckler, “Argentina’s Financial Crisis,
Floating Money, Sinking Banking,” World Bank Draft (June 3, 2002)
http://wbln0018.worldbank.org/LAC/lacinfoclient.nsf/1daa46103229123885256831005ce0eb/74fec6924c42c4ed85256c22
005cc4bd/$FILE/Floating%20Money%20Sinking%20Banking%20(3Jun02).pdf (accessed July 24, 2005).
129
Domingo F. Cavallo and Joaquin F. Cottini, “Papers and Proceedings of the Hundred and Fourth
Annual Meeting of the American Economic Association,” The American Journal Review 87, no. 2 (May
1997), 18.
54
assisted the Argentine government to put together an impressive financial package that
stopped the bank run in the second quarter of 1995.
130
This financial package included
loans from other institutions, as well as subscription of a US $2 billion “patriotic” bond
by the private sector.
131
One year later, the IMF Executive Board decided to approve a
SBA worth $5 billion with Argentina because the “authorities decided that it was
convenient to remain under the umbrella of an IMF program.”
132
Overall, the IMF was pleased with the country’s economic recovery in 1996. The
IMF was satisfied that the Argentine government was able to get buyers for its bonds, and
the Fund “was quick to protect it with emergency credits against the flightiness of
portfolio capital.”
133
The emergency credit from the IMF also functioned to help revive
private capital inflows to Argentina in 1995-96.
134
As Argentina’s economic growth
reached 5.5 percent in 1996, Michel Camdessus, the managing director of the IMF spoke
before a Buenos Aires audience, enthusiastically claiming that “Argentina now offered
‘lessons…that we can share with others’ about how to prosper.”
135
Regardless of Camdessus’ fervor over Argentina’s economic performance in
1996, there were subtle signs that the country’s economic state was mixed. Although the
country’s economic growth reached 5.5 percent and the government’s most recent tax
130
Ibid., 19.
131
Ibid.
132
Ibid.
133
David Felix, “After the Fall: The Argentine Crisis and Repercussion.” Foreign Policy in Focus
(2002),1-6 http://www.fpif.org/pdf/reports/PRargentina2.pdf (accessed August 12, 2005).
134
It should be noted that injections of emergency credit during the Brazilian crisis in 1999 failed to
revive investor confidence and attract private capital inflow.
135
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 29.
55
hikes in VAT accounted for 59 percent of the tax receipts,
136
net growth in exports did
not increase to balance the government’s current account in the mid 1990s. This led to a
negative balance in Argentina’s current account, which did not align well with the IMF’s
quantitative performance criterion that the country remains fiscally disciplined.
Moreover, Argentina’s debt was increasing through the government’s issuance of bonds.
Within the institution of the IMF, some internal differences on how Argentina
was faring after the Mexican peso crisis arose. Some IMF management and staff favored
a more explicit stance in support of the exchange rate peg, while other departments and
some Executive Directors started to wonder if the peg should be reexamined.
137
For
example, the Policy Development and Review Department in the IMF both questioned
the appropriateness of the exchange rate arrangement in view of the need to stimulate
domestic demand as it projected weak growth prospects.
138
On the political front, there were some hostilities brewing between Menem and
Cavallo which eventually led to the resignation of Cavallo on July 18, 1996. Simply,
Menem started to express reservations about Cavallo’s policies. Political rivals and labor
groups long called for his removal as they felt his policies led to increased levels of
unemployment and poverty.
139
By 1996, the unemployment rate had reached 17.3 percent
and the poverty rate reached 27.9 percent. In addition, Menem was aware of the IMF’s
136
Paul A. Haslam, “Argentina’s Governance in Crisis.” Focal: Canadian Foundation for the
Americas (2002), 4 http://www.focal.ca/pdf/argentina_03.pdf (accessed January 3, 2006).
137
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 19-20.
138
Ibid.
139
Calvin Sims, “International Business: President Ousts Finance Chief in Argentina,” The New York
Times (July 27, 1996), https://www.nytimes.com/1996/07/27/business/international-business-presdinet-
ousts-finance-chief-in-argentina.html (accessed March 31, 2009).
56
concern over the country’s inability to meet the its quantitative performance criteria and
wanted to take measures to balance it books and meet its debt payment. In the end,
Menem named Roque Fernandez as the new Minister of Economy. With the resignation
of Cavallo, Argentine stock and bonds tumbled.
Nevertheless, the IMF fully supported the Menem administration’s method in
responding to the Mexican crisis in 1994 and the following recession. The IMF found the
convertibility plan to be effective and approved another SBA in April 12, 1996 in the
amount of $720 million in SDRs. This SBA of 4/12/96 was similar to the previous two
arrangements as it emphasized fiscal discipline, such as a cap on government
expenditures excluding the interest payment on their previous debt. Oddly enough, in
1996 and even in 1997 the Argentine government did not necessarily need any more hard
currency from the IMF, as capital was still flooding into the country from private sources.
Again in 1997, the IMF’s managing director, Camdessus, publicly applauded Argentina’s
remarkable GDP growth of 8.1 percent and the near zero inflation rate.
Argentina’s fiscal account in 1997 suggested that the government was fiscally
disciplined as a result of the convertibility law since the law limited the printing of
Argentine pesos, which in turn prevented the government from spending beyond its
means. The 1997 budget year actually showed that the government was running a small
surplus if it excluded the government’s interest payments. A closer examination of
Argentina’s “books,” however, showed that the country’s debt was growing. The IMF
noticed this, but decided at the time that it was not yet a primary concern. As Stanley
Fisher, the managing director of the IMF, wrote in the margins of a staff memo, “‘Budget
57
balance in (19)97 is less important than finding or agreeing on a financeable deficit that
will be attained given reasonable growth performance.’”
140
Unfortunately, Fisher’s comment belied a serious problem – the Argentine
government’s heavy reliance in external borrowing in foreign currencies.
141
As the
country’s debt was held by external creditors (who tend to be much more susceptible to
swings in market sentiment than domestic creditors), debt servicing was conditional on
export receipts.
142
This meant the country was starting to have a large external debt-
service ratio, which could trigger a run on the currency.
143
The IMF management and
staff noticed this problem in hindsight; it did not surface immediately since growth was
robust. The rise in the debt ratio was modest in the early to mid 1990s, and the staff
projected that the modest rise in debt ratio would be the norm in future years.
144
After April 1997, Argentina’s debt accumulation consistently exceeded GDP
growth; its public sector debt was swelling. See table 4 below:
Table 4: Argentina’s Public Sector Debt (percent of GDP), 1991-2002
145
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Debt 34.8 28.4 30.6 33.7 36.7 39.1 37.7 40.9 47.6 50.9 62.2
Although the IMF was aware of the steady increase in debt, it is only in hindsight the
IMF realized the enormity of the public sector debt. As such, when the IMF pressed for a
140
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 48.
141
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 26.
142
Ibid.
143
Ibid., 27.
144
Ibid.
145
Ibid., 10.
58
program with deficit reducing measures that included the implementation of a single
presumptive tax,
another round of reforms in labor and in the national social security
system, and reform in the financial system, it failed to adequately incorporate debt
dynamics into conditionality.
146
The essential problem was the IMF’s outlook that if the
deficit declined that the market would be willing to finance both the deficits and the
investment needed to generate high levels of growth. This outlook ignored the likely
scenario that Argentina’s growth would falter, the terms of trade would shift or capital
flows would reverse.
147
At the start of 1998, Argentina’s economic indicators showed that the country was
doing relatively well if the rate of unemployment, the stagnation in exports, and the
country’s expanding debt were ignored. The $6 billion deficit on commercial transactions
of 1994 had dropped to $3 billion by 1998 due to the 64 percent increase of exports,
especially to Brazil.
148
Even with the lucrative trade with Brazil, Argentina still required
external capital to finance payment of interests and other services since the country was
importing more than they were exporting. One report showed that imports seemed to
exceed exports by approximately $8 billion in 1998 alone.
149
The only way the country
would be able to finance such consumption from abroad would have been to borrow more
US dollars. As such, this trade deficit would undermine the IMF’s desire that the country
reach a zero deficit by 2000.
146
Ibid., 28.
147
Ibid.
148
See David Felix, “After the Fall: The Argentine Crisis and Repercussion.” Foreign Policy in Focus
(2002) http://www.fpif.org/pdf/reports/PRargentina2.pdf (accessed August 12, 2005).
149
See International Monetary Fund, “IMF Concludes Article IV Consultation with Argentina,” Public
Information Notice (PIN) 99, no. 21 (March 11, 1999).
http://www.imf.org/external/np/sec/pn/1999/PN9921.HTM (accessed August 2, 2008).
59
The IMF responded to Argentina’s growing debt and trade deficit on February 4,
1998 with an extended arrangement of $2.08 billion in SDRs. Like the previous
precautionary arrangement, the informal conditions attached to the arrangement included
the reform of the labor market and reform of the tax laws. According to the IMF, this
arrangement was geared to support the Argentine authorities in reducing Argentina’s
deficit and deepening structural reforms.
150
It should be noted that at this point the IMF
started to recognize Argentina’s potentially large debt.
The Menem administration did not agree with the IMF’s projection that the
country was faced with an unsustainable debt. It did not find its current account to be
problematic even with a widening trade deficit as investors were still willing to finance
its consumption and growth.
151
Regardless, the Argentine government did agree to enact
revisions in labor laws to better manage the high unemployment rate. Yet when the bill
for labor market reform was approved in September 1998, the law was a watered down
version from what the bill originally promised. In any event, the law did not reverse the
high unemployment rate and allowed the continued deterioration of labor conditions, one
of the principal indicators of the inadequate performance of the urban job market in
Argentina during the 1990s.
152
In response to the IMF suggestions, the Argentine government made significant
tax reforms which broadened the base of the income and value added taxes, imposed a
150
See International Monetary Fund, “IMF Concludes Article IV Consultation with Argentina,” Public
Information Notice (PIN) 99, no. 21 (March 11, 1999).
http://www.imf.org/external/np/sec/pn/1999/PN9921.HTM (accessed August 2, 2008).
151
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 55.
152
Javier Lindenboim, “The Precariousness of Argentine Labor Relations in the 1990s,” Latin
American Perspective 31, no. 4 (2004), 31.
60
minimum corporate income tax based on gross assets, and limited the deductibility of
interest payments under the income tax.
153
At the same time, the government pursued
measures to strengthen budgetary procedures, tax administration, and the management of
the social security operations. With these measures, it appears that Argentina’s
government was following through with the structural benchmarks given to Argentina in
February 4, 1998.
Yet, overall, the IMF was faced with a difficult decision. Although it recognized
the Argentine government’s effort in making structural reforms, it was concerned that the
government still did not view its trade deficit and increasing debt to be a significant
problem, especially when the growth rate was 3.8 percent in 1998, a sharp drop from a
growth rate of 8.1 percent the previous year. Argentina’s current account balance for
1997 was negative US$37.7 billion, and in the following year, the current account was
negative US$40.9 billion.
154
Faced with the problem of persuading the Argentine
government that the country did indeed have a looming economic problem, the IMF had
two options. One option was to refuse to complete the regularly scheduled reviews.
Although real money was not earmarked for Argentina, the IMF’s decision not to
complete the review held symbolic value as it would indicate to the financial markets that
the country was not a viable place for investment. The other option was to complete the
scheduled review, as the IMF did not want investors to lose confidence in Argentina.
153
International Monetary Fund, “IMF Concludes Article IV Consultation with Argentina,” Public
Information Notice (PIN) 99, no. 21 (March 11, 1999)
http://www.imf.org/external/np/sec/pn/1999/PN9921.HTM (accessed August 2, 2008).
154
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 10.
61
The Russian default and devaluation in August 17, 1998 reinforced the IMF’s
decision to take the more flexible stand. It had to complete the review to prevent a
contagion effect. Argentina became a case study of an emerging economy that
successfully and prudently implemented the Washington Consensus under IMF tutelage.
In a fall 1998 press conference, Camdessus, the managing director of the IMF, again
applauded the country’s “achievements” and declared that “so clearly, Argentina has a
story to tell the world: a story which is about the importance of fiscal discipline, of
structural change, and of monetary policy rigorously maintained.”
155
It should be noted, however, that the IMF staff did not share Camdessus’
enthusiasm. It could not ignore the country’s trade deficit, which increased from US$4.1
billion in 1997 to US$5.6 billion in 1998, and its need to borrow more dollars to offset
the loss of existing reserves, which increased the debt to 41 percent of GDP. More
specifically, the IMF staff could not disregard the pronounced drop in the terms of trade.
Although merchandise exports rose by 9 percent, prices fell by 10.5 percent, with a
resulting drop in export value of 2 percent. Moreover, the IMF could not discount the
increase, in 1998, in the net interest payments abroad of some US$800 million, reflecting
higher international interest rates as well as higher external indebtedness.
156
ARGENTINA’S ECONOMIC CHANGES AFTER THE BRAZILIAN CRISIS
(1999)
In January 1999, the Russian and Brazilian devaluations that occurred at the end
of 1998 negatively affected Argentina’s economy. The Brazilian devaluation in particular
155
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 58.
156
See International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler
Shinji Takagi (Washington, D.C.: IMF Media Services, 2004).
62
affected Argentina since Brazil was Argentina’s largest trading partner, receiving 30
percent of its exports. The negative effects from the crises included: a sharp jump in the
interest rates,
157
capital flight, as investors became more cautious about investing in
emerging economies,
158
stagnant trade, especially with Brazil, and 4) a drop in industrial
production, with many manufacturing plants departing as it became too expensive to do
business in the country.
159
Diminishing exports for Argentina was a particularly grave
consequence as it in turn negatively affected tax inflows, resulting in the country’s
persistent budget deficit.
160
The Brazilian currency devaluation and its effect discouraged
investment, lowered export earnings, squeezed tax receipts, and reduced output. In the
face of these negative indicators, Menem did not budge from his commitment to maintain
the peso-dollar parity, and later suggested that he was proposing to dollarize the
economy.
Argentina’s economic situation in 1999 was tenuous. In the early part of 1999, the
country’s economic condition was bleak, but it did improve later in the year. For
example, by April of 1999 the high interest rate proved to be temporary since interest
157
For example, 30 day loans in pesos, a benchmark indicator, the prime rate – the rate banks charge
their best business customers – rose from below 8% a year in August 1998 to a high of 19% in late
September 1999. See Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic
Committee United States Congress (June 2003), 6 http://www.house.gov/jec/imf/06-13-03long.pdf.
(accessed July 20, 2006).
158
For example, in 1998 Argentina’s net foreign investment was $18.3 billion. As capital outflow
started to occur in 1999, Argentina’s capital and financial account had turned to a net outflow of $4.4
billion by 2001.
159
By May of 1999, Argentina’s industrial production fell by 10.2 percent compared to the previous
year and output from key automotive sector dropped down by 49.5 percent. See Maricar S. Paz Gallardo,
“Prospects for Equity Investment in Argentina,” Emerging Markets Project at Fordham University,
(http://www.fordham.edu/emp/country_studies/argentina,pdf) (accessed August 8, 2008).
160
See Padma Desai, Financial Crisis, Contagion, and Containment (New Jersey: Princeton University
Press, 2003), Also, the author suggests that these escalating uncertainties raised foreign investor’s fears
about a debt and default and a peso devaluation, both of which occurred in December 2001.
63
rates had returned to around the level before the Brazilian crisis. Furthermore, the
Argentine government increased spending in the run-up to the October presidential
elections, which spurred a mild pick-up in economic activity in the second half of 1999.
Yet regardless of the positive economic indicators in the fall of 1999, Argentina’s
economic outlook was still difficult. Its GDP declined by 3.5 percent in 1999.
161
In April
of 1999, the Argentine government accumulated a deficit of US$841.3 million, a 7.54
percent increase from its first quarter deficit from 1998.
162
As the interest rates increased
and the economy continued to contract, Argentina anticipated a budget deficit of US$5.1
billion by 1999. The country found itself in a vicious cycle of declining confidence and
investment, falling exports, shrinking tax revenue, increasing debt service obligations and
deteriorating balance of payments.
163
CONCLUDING REMARKS
It is bewildering to observe and trace Argentina’s economic boom and eventual
bust during the 1990s. It appeared with the Menem administration and in particular with
the Convertibility Law that the Argentine government had finally found the solution to its
chronic bout with hyperinflation. Equally important, Argentina’s dazzling economic
performance in the early to mid 1990s seemed to be evidence that Washington Consensus
based market-oriented and structural adjustment reforms worked. With these reforms, the
government was flush with financing from international markets. By 1996, the IMF’s
161
See IMF Independent Evaluation Office, The IMF and Argentina 1991-2001, team leader and
compiler Shinji Takagi (Washington D.C.: International Monetary Fund, 2004), for more information.
162
See Maricar S. Paz Gallardo, “Prospects for Equity Investment in Argentina,” Emerging Markets
Project at Fordham University, (http://www.fordham.edu/emp/country_studies/argentina,pdf) (accessed
August 8, 2008).
163
Paul A. Haslam, “Argentina’s Governance in Crisis.” Focal: Canadian Foundation for the
Americas (2002),4 http://www.focal.ca/pdf/argentina_03.pdf (accessed January 3, 2006).
64
managing director, Camdessus, even publicly acknowledged that Argentina’s turnaround
and economic revival was a case study for other potentially emerging economies.
Problems, however, lurked underneath Argentina’s economic health. The
country’s increasing unemployment rate during the boom was one problem. There were
also problems resulting from specific policies, such as the partial privatization of social
security. Ironically, instead of the desired result that it would alleviate the government’s
expenditures, it actually added to the country’s growing debt. It was, however, the
increased issuance of bonds after the Mexican peso crisis that ultimately caused
Argentina’s debt to balloon astronomically. The enormity of the public sector debt
became more obvious in April 1997. As the country followed through with market-
oriented reforms, investor confidence in the country was high. As a result, the
government incurred debt as if markets would always offer financing. Rogelio Frigerio,
who eventually became the secretary of economic policy in 1998 stated, “‘You can say to
the politicians, ‘We need fiscal balance.’ But if you get the money so easily, as we did,
it’s very tough to tell the politicians, ‘Don’t spend more, be more prudent,’ because the
money was there, and they knew it.”
164
The IMF staff could not ignore Argentina’s increasing debt through the issuance
of bonds and other macroeconomic indicators that suggested that the country was headed
for some problems. The country’s trade deficit of US$5.6 billion, indicating that the
country was unable to balance its current account, violated an IMF quantitative
performance criterion. Moreover, the IMF could not discount the net interest payments of
approximately US$800 million in 1998, reflecting higher international interest rates and
164
Paul Bluestein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 52.
65
higher external indebtedness. In 1999, the IMF noted that the country’s debt was 47
percent of GDP. Overall, the IMF interpreted these indicators to mean that the country
was unable to be fiscally disciplined – another IMF condition.
As 1999 came to a close, Argentina elected a new president, Fernando de la
Rúa,
165
whose vision to improve the state of Argentina’s economy was to maintain
convertibility and free-market policies. De la Rúa’s strategy in managing Argentina’s
economy was similar to methods used by Menem in overcoming hyperinflation and
negative growth in the early 1990s. The daunting economic indicators that faced de la
Rúa at the end of 1999 included: a current account balance of negative $11.9 billion, real
GDP growth of negative 3.4 percent, a public sector debt of 47.6 percent of GDP, a
decline of industrial production of negative 6.5 percent, an unemployment rate of 13.8
percent, and a poverty rate of 26.7 percent. Yet, de la Rúa was resolved to reduce the
government’s deficit by securing a US$2 billion tax increase and by cutting spending by
US$1.4 billion. At the start of de la Rúa’s presidency, the IMF supported this vision with
a stand-by arrangement in March 2000.
166
The next chapter will continue to describe the IMF’s relationship with the de la
Rúa administration in 2000-01 to better gauge how it affected the country’s economic
crisis in December 2001. I am proposing that the conduct of the IMF during this period
suffered from two problems: 1) the absence of a coherent analysis , particularly its
assessment that Argentina’s problem was due to a liquidity crisis rather than more basic
structural problems and 2) its failure to oversee Argentine government’s decision making
165
De la Rúa’s support and election was due to a union of two center-left parties, the old Radical Civic
Union (UCR) and the new-urban based Frente del País en Solidario (FREPASO) known as Alianza.
166
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 80.
66
when the government instituted a series of policies without consulting the IMF, notably
in the period between March and November 2001 and its failure to enforce sound
economic policy by continuing to release funds to the Argentine government in spite of
serious problems with government policies, e.g., undermining its earlier banking reforms
undertaken in the mid 1990s.
This conduct can be explained by the fact that the IMF had a vested interest in
Argentina avoiding a debt default and maintaining Argentina’s image as a successful
example of neoliberal policies favored by the IMF, thus validating the tenets of the
Washington Consensus. In addition, the IMF was concerned about political backlash
against IMF advice, especially since the Argentine government tried to comply with IMF
policy advice from 1991-2001. The IMF did not want to appear that it was withholding
support of Argentina.
67
Chapter 4: IMF INVOLVEMENT DURING THE DE LA RÚA
ADMINISTRATION (2000-01)
When the de la Rúa administration came into power in December 1999 it
inherited a ballooning debt, particularly due to the government’s issuance of bonds,
reduced access to financing, and a large fiscal deficit. In order to combat these problems,
the de la Rúa administration’s strategy was similar to that of Menem. This is ironic since
to a certain degree Menem’s policies, while initially successful in eliminating
hyperinflation also triggered Argentina’s recession in the long-term. Regardless, de la
Rúa maintained convertibility and aimed to deepen structural reforms that Menem
initiated.
De la Rúa announced to his countrymen that he would take measures to prevent
further exodus of industries and recognized that a “sustained strengthening of
macroeconomic policies and a revitalized structural reform effort would be essential to
buttress confidence in domestic and foreign financial markets and to facilitate a
sustainable recovery of the economy with continued price stability.”
167
The IMF
supported de la Rúa’s resolve and strategy with a precautionary program with informal
conditions, emphasizing expenditure cuts as a means to put Argentina’s fiscal house in
order.
This chapter will closely detail the de la Rúa administration’s relationship with
the IMF in 2000-01 periods to better gauge how it affected the crisis in December 2001.
This chapter will argue that the conduct of the IMF during this period suffered from two
problems: 1) the absence of a coherent analysis, particularly its assessment that
167
See IMF. Press Release No. 00/17. March 10, 2000. “IMF Approves US$7.2 Billion Three-Year
Stand-By Credit for Argentina.” http://www.imf.org/external/np/sec/pr/2000/pr0017.htm (Accessed
7/30/08)
68
Argentina’s problem was due to a liquidity crisis rather than more basic structural
problems and 2) its failure to oversee Argentine government’s decision making when the
government instituted a series of policies without consulting the IMF, notably in the
period between March and November 2001 and its failure to enforce sound economic
policy by continuing to release funds to the Argentine government in spite of serious
problems with government policies, e.g., undermining its earlier banking reforms
undertaken in the mid 1990s.
This conduct can be explained by the fact that the IMF had a vested interest in
Argentina avoiding a debt default and maintaining Argentina’s image as a successful
example of neoliberal policies favored by the IMF, thus validating the tenets of the
Washington Consensus. In addition, the IMF was concerned about political backlash
against IMF advice, especially since the Argentine government tried to comply with IMF
policy advice from 1991-2001. The IMF did not want to appear that it was withholding
support of Argentina.
ARGENTINA’S RELATIONSHIP WITH THE IMF IN 2000
De la Rúa administration’s approach in January 2000 in stimulating growth and
curbing its gaping $6.5 billion budget deficit
168
met with mixed results. The Argentine
authorities judged that raising tax rates was the only option for addressing the budget
deficit, although they also imposed some spending cuts. However, it should be noted that
previous efforts to improve tax revenue, via tax increases and improvements at tax
compliance, proved to be ineffective.
169
Regardless, in January 2000, the de la Rúa
168
Various sources have stated Argentina’s budget deficit to be as high at $7.2 billion.
169
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 30.
69
government enacted the first of its three packages of tax increases ranging from an
increase in sales tax on many consumer goods and services to placing a higher income
tax rate on people on the upper income bracket.
170
As the country’s economy continued to contract in the early 2000 period, the IMF
again approved another line of credit worth $7.2 billion to Argentina on March 10,
2000.
171
This standby arrangement (SBA) emphasized tax reform, expenditure changes,
renewal of structural reforms, and maintenance of the convertibility law. The IMF
reasoned that these reforms would lead to increased confidence from domestic and
financial markets.
The IMF extended this line of credit to improve investor confidence and help
Argentine borrowers obtain access to financing at better interest rates to cover the
operating costs of the country claiming that the country was simply facing a liquidity
problem. It also maintained that the country’s recession was nearing its end and
projected that the country’s GDP would grow to 3.4 percent by the end of the year.
172
The
IMF, overall, reasoned that the implementation of their conditions would strengthen
confidence and competitiveness in Argentina’s economy which would then facilitate the
growth of exports. This in turn would create a virtuous cycle that would help Argentina to
service its debt, balance its fiscal budget, and close its $6.5 billion budget deficit.
170
Argentines earning $3,500 a month, or $42,000 a year, faced a 200-percent increase in income
taxes.
171
This new line of credit replaces the earlier February 4, 1998 precautionary agreement, which
involved the funds in theory, meaning there was no real intention of disbursing the funds “earmarked” to
the country.
172
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 39.
70
THE ARGENTINE GOVERNMENT’S COMMITMENT TO THE IMF SBAs
The de la Rúa administration embraced the spirit of the IMF’s SBA and officially
announced an austerity plan to fulfill the country’s commitment to the SBA in June 2000.
In order to improve Argentina’s economic state and fulfill the IMF’s conditions, the de la
Rúa administration became committed to reduce its budget deficit of $6.5 billion to $4.5
billion. Therefore, Argentina planned to do the following: 1) reduce public spending by
$938 million, 2) cut employee salaries by 12 percent, 3) close several government offices,
4) eliminate labor benefits, 5) suspend public work projects, and 6) increase taxes on the
middle class.
The IMF officially recognized that Argentina’s economy was not reviving but
floundering, even with the government’s commitment to follow through with IMF
conditions. The IMF reviewed the progress of Argentina’s economy on September 15,
2000 and found that although the country made substantial efforts to deepen structural
reforms and get its fiscal house in order, the results of the reforms were lackluster.
173
Even the government’s restraint in spending was insufficient in terms of balancing its
budget. The IMF also noted that the lack of investor confidence in Argentina led to a
drop in the bond rating for Argentine bonds from September to mid- November 2000.
This did not bode well for the government as it meant that the government would not be
able to find markets to finance the country’s financing needs at manageable rates. In
October, Argentina’s recession hit the two year mark; this was contrary to the IMF’s
projection that the recession had bottomed out seven months earlier.
173
IMF, “Argentina: Second Review Under the Stand-By Arrangement and Request for Augmentation
– Staff Report; Staff Statement; Press Release on the Executive Board Discussion,” IMF Country Report,
no. 01/26 (January 2001), 4 https://www.imf.org/external/pubs/ft/scr/2001/cr0126.pdf (accessed August 2,
2008).
71
The country’s uninspiring economic performance in the first three quarters of
2000 proved the IMF’s projected GDP growth of 3.4 percent by the fourth quarter to be a
near impossibility. The IMF’s line of credit worth $7.2 billion had failed to soften
investor’s lack of confidence in Argentina. What occurred instead was a “progressive
hardening of financing conditions in international markets, which resulted in rising
borrowing costs and reduced market access for Argentine private and official borrowers
alike.”
174
As such, no momentum existed to kick start Argentina’s virtuous cycle of
servicing its debt, reducing its fiscal deficit, and reduce its $6.5 billion budget deficit.
Instead, the country’s fiscal deficit was projected to reach 3.6 percent of GDP and the
public’s debt-to-GDP ratio rose to nearly 50 percent. In short, the IMF’s rosy March 2000
projections were a bust. See table 5 below:
Table 5: Economic Indicators for Argentina, 1991-2001
175
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Fed.
Rev, bn
pesos
9.9 26.2 36.7 42.5 45.3 42.1 49.1 50.1 48.9 46.1 40.5
Total
debt,
$bn
65.4 68.3 64.7 75.1 98.8 111.4 128.4 141.4 145.3 146.2 165.2
Current
Acct,
$bn
-0.7 -5.7 -8.2 -11.2 -5.2 -8.2 -12.2 -14.5 -11.9 -8.9 -4.6
Yet, in December, the IMF still supported Argentina and continued to claim, as in
March, that Argentina was facing a liquidity crisis. As such, the IMF responded to the
liquidity crisis by first agreeing with the Argentine authorities that a strengthened
program was needed emphasizing growth, competitiveness, and medium-term fiscal
174
Ibid.
175
Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee United
States Congress (June 2003), 5-6 http://www.house.gov/jec/imf/06-13-03long.pdf (accessed July 20, 2006).
72
discipline.
176
Second, the IMF released the $2 billion, the undrawn amount under the
previous SBA. Third, the IMF more than doubled the funds which the Argentine
government could borrow to $13.7 billion.
177
Then, on December 19, 2000, the IMF
promised a $39.7 billion loan package to assist the country’s ability to reduce its fiscal
deficit and balance its budget.
178
The $39.7 billion loan package consisted of : i) $12
billion in new loans from official international agencies,
179
ii) $13.7 billion from a pre-
existing credit line from the IMF, iii) $11 to $17 billion credit lines from Argentina’s
domestic
180
and international private banks, iv) and $3 billion from the pension authority.
If the Argentine government accepted the loan package, it had to agree to several
conditions. Although most of the IMF conditions were non-specific regarding how it
should balance its capital inflow with outflow, the IMF did specify that the main feature
of the new program was the “acceleration of structural reforms deemed critical both to
ensure long-run fiscal sustainability and to strengthen competitiveness, in particular
fiscal, social security, and health care reforms and other measures aimed at promoting
investment.”
181
As the Argentine government also recognized how the partial
privatization of the social security system in 1994 resulted in a widening gap between the
176
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 40.
177
Ibid.
178
See Joseph Kahn, “I.M.F. Plans Billions in Aid to Argentina,” The New York Times, December
19, 2000, Tuesday;
http://query.nytimes.com/gst/fullpage.html?res=940DEED81239F93AA25751C1A9669C8B63&sec=&spo
n=&pagewanted=1 (accessed December 2, 2004).
179
These lenders included the IMF, the World Bank, the Inter-American Development Bank and the
government of Spain.
180
It should be noted that the pledges from the domestic financial markets were ill-defined.
181
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 40.
73
government’s social security revenues and its social security outlays,
182
this condition had
strong appeal in the government.
The IMF’s projection for Argentina’s economic revival in 2001 was highly
optimistic. GDP growth, which was -0.8 percent in 2000, was projected to rebound to 2.5
percent, and real investment was expected to grow by 5.8 percent, following a decline of
6.8 percent in 2000.
183
The IMF also “foresaw” that the program would lead to export
growth of 11 percent over the medium term, assuming a general continuation of the
improvement in the external environment, such as a further decline in US interest rates,
further depreciation of the US dollar, and further improvements in the country’s terms of
trade.
184
The IMF claimed that its past support, particularly in 1991, “was a catalyzer for
additional funding from the World Bank, the Inter-American Development, and the
Eximbank of Japan.”
185
The IMF hoped that its continued support would have the same
positive effect.
Despite Argentina’s promise to adhere to the IMF conditions and IMF’s positive
projections, bond investors still predicted that the country’s economy would worsen.
186
This meant that regardless of the overwhelming monetary support from the IMF and the
figurative seal of approval attached to this support, Argentina’s chance to recover was
182
Federico C. Molina, “The Republic of Argentina,” Securities and Exchange Commission,
Registration no. 333 (2004). 30.
183
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 41.
184
Ibid.
185
Domingo F. Cavallo and Joaquin F. Cottini, “Papers and Proceedings of the Hundred and Fourth
Annual Meeting of the American Economic Association,” The American Journal Review 87, no. 2 (May
1997), 19.
186
See Fernández, Roque B. and others, “Loan and Bond Finance in Argentina, 1985-2005,”
Universidad del CEMA, Buenos Aires, Argentina, no. 343 (April 2007),
www.cema.edu.ar/publicaciones/doc_trabajo.html (accessed July 23, 2008).
74
virtually nil. The bond investors’ forecast effectively closed the international financial
markets to Argentina, and the $39.7 billion rescue package assembled by the IMF failed
to reopen these bond markets on viable terms.
187
By the end of 2000, Argentina’s bond
debt was already staggering at $65 billion or 23% of GDP.
188
Therefore, the bond
investors’ dismal prediction on the state of Argentina’s economy to a certain extent
foreshadowed the government’s continued struggle to get its fiscal house in order. The
year 2001 did not bode well for the country.
Despite the bond investors’ negative prediction, in less than a month, on January
12, 2001, the IMF board formally approved the December 2000 standby arrangement.
The IMF staff reasoned that the government’s effort to deepen structural reforms, balance
its budget, and reduce its fiscal deficit deserved the IMF’s continued support even though
the institution knew the funds from the IMF could not cover the full financing needs of
Argentina in 2001. The IMF hoped its tranche of fiscal support would serve as a catalytic
role
189
to induce a quick recovery of market confidence and access to private capital
inflows, and that the rest of Argentina’s financing needs would come from the domestic
market.
187
See Paul A. Haslam, “Argentina’s Governance in Crisis.” Focal: Canadian Foundation for the
Americas (2002), 1-16.
188
Fernández, Roque B. and others, “Loan and Bond Finance in Argentina, 1985-2005,” Unversidad
del CEMA, Buenos Aires, Argentina, no. 343 (April 2007),
www.cema.edu.ar/publicaciones/doc_trabajo.html (accessed July 23, 2008), 15.
189
Official financing is considered catalytic if it is large enough to build confidence, but not large
enough to over projected outflows
75
The IMF financing was immediately disbursed and three more installments of
IMF financing were disbursed over the remaining quarters of 2001.
190
There was one
element to the SBA that was controversial which was that only one-fifth of total access
occur under the Supplemental Reserve Facility (SRF). The SRF involves a higher rate of
charge and a shorter repayment period under an SBA.
191
The emphasis of this SBA
remained on the fiscal adjustment, such as balancing the budget and reducing the fiscal
deficit. This also included the performance criteria of monitoring the provincial finances.
Moreover, the IMF also required that the Argentine authorities rescind unwanted items in
the 2001 budget, which were actions of Congress.
192
The IMF also required that the
Argentine authorities to somehow undo the deadlock in the passage of legislation to
reform the pension and health care systems. Yet, even with the emphasis on structural
reforms, it should be noted that these projected reforms were only benchmarks.
193
In exchange for the approval of the SBA, the Argentine government declared its
commitment to accelerate its structural reform efforts and to focus on growth,
demonstrating its commitment to better fiscal management by supporting measures to
consolidate targets stipulated to balance its budget at both the federal and the provincial
levels of government.
194
It also reassured its domestic and foreign investors that the
190
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 42. An SBA is typically capped at 300 percent of
the quota.
191
Ibid.
192
Ibid.
193
Ibid.
194
IMF, “Argentina: Second Review Under the Stand-By Arrangement and Request for Augmentation
– Staff Report; Staff Statement; Press Release on the Executive Board Discussion,” IMF Country Report,
no. 01/26 (January 2001), https://www.imf.org/external/pubs/ft/scr/2001/cr0126.pdf (accessed August 2,
2008):10-11. For more specific information see this document.
76
country would continue to service its debt even though the recession indicated that the
Argentine government needed to increase its spending with the goal of stimulating the
economy.
By January 23, 2001, eleven days after its approval, it was evident that the SBA
was not having the desired catalytic effect as investor confidence was dismally low, and
as the Argentine government was forced to auction three month treasury bills at yields of
6.75 percent.
195
Moreover, members of Congress were fiercely opposed to IMF
conditions that revolved around spending cuts in the pension and healthcare system and
by the provinces. As such, in February 2001, two decrees, as previously mentioned IMF
requirements, to reform the pension and healthcare systems were challenged in the courts
and suspended. One result of this challenge to pension and healthcare systems reform was
the downgrade of Argentina’s sovereign debt by three major credit rating agencies.
196
In
late February, fiscal performance had slipped significantly, and with unchanged policies
“the federal deficit for the year would reach $10 billion instead of the targeted $6.5
billion.”
197
On March 2, the Minister of Economy, José Luis Machinea, resigned in
frustration. Immediately, Ricardo López Murphy replaced Machinea and tried to regain
market confidence by proposing deficit reducing measures worth $2 billion, including the
195
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 109.
196
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 46.
197
Ibid.
77
elimination of free university education, which were met with fierce protests.
198
López
Murphy’s program, including spending cuts, provoked strong political opposition after an
initial show of support.
199
Seventeen days later, on March 19, 2001, López Murphy was
forced to resign as Minister of Economy as de la Rúa was unwilling to support him and
his measures after six top officials quit in protest against the spending cuts of his
orthodox programs. Structural reforms were met with fierce political objections from
Congress. FREPASO was willing to devalue the peso, but the IMF did not want the peso
to be devalued. The six resignations marked the start of the true crisis phase of
Argentina’s economic problems. By the end of March, the market’s confidence in
Argentina dropped even more as deposit withdrawals were accelerating.
200
The six
resignations of top officials and removal of two ministers of economy seemed to show
that, “even under conditions of extreme economic crisis, the Argentine political system
was incapable of supporting even relatively modest step toward the implementation of a
sound fiscal policy.”
201
RETURN OF DOMINGO CAVALLO
When Murphy was forced to resign as Minister of Economy, Cavallo returned to
fill this position on March 20, 2001. Enthusiastic about his appointment, Congress
enacted the Economic Emergency Law, giving de la Rúa special quasi-legislative powers
198
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 110.
199
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 46.
200
Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee United
States Congress (June 2003), 32 http://www.house.gov/jec/imf/06-13-03long.pdf. (accessed July 20,
2006).
201
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 46.
78
and agreed to institute a financial transaction tax, leaving the government to free to set
the tax rate, temporarily boosting expectations that strong fiscal adjustment could be
rapidly put in place.
202
As immediately became apparent, Cavallo’s policy stance was a radical departure
from the previous two ministers of economy as he soon announced a series of measures
that dramatically modified the economic program to be supported by the IMF, while
reaffirming commitments to the convertibility regime and to the fiscal targets of the
original SBA.
203
Argentina was still undergoing a recession, had minimal access to
financing, faced strong political objections to pension and healthcare reforms, and deposit
withdrawals were accelerating.
Eight days into his position, Cavallo announced on March 28 an economic
program to bring in $3.8 billion.
204
Cavallo wanted to demonstrate that convertibility, his
original idea, still worked and that the original fiscal targets in the January SBA were
achievable by placing a tax on financial transactions, changing other taxes and tariffs, and
changing the sectoral “competitiveness plan,” which was oriented to increase exports and
to improve profitability in the sectors most affected by the recession.
205
At the same time,
the government aimed to improve the provinces’ finances and collaborated with the
provincial governments to secure a sustained adjustment of the provinces’ fiscal
202
Ibid.
203
Ibid., 47.
204
For details on how this amount was to be brought into Argentina see IMF. June 2001. “Argentina:
Third Review Under the Stand-By Arrangement, Request for Waivers and Modification of the Program –
Staff Report and News Brief on the Executive Board Discussion.” IMF Country Report No. 01/90.
Washington, D.C. http://www.imf.org/external/pubs/ft/scr/2001/cr0190.pdf.
205
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 52.
79
position.
206
In this respect, Cavallo proved to be committed to IMF conditions with the
goal of reducing its fiscal deficit and balancing its budget. Yet, these measures were
taken without IMF consultation, which revealed that the IMF’s impact on Argentina or
Cavallo’s decision-making was limited.
By the end of March, economic indicators showed that Argentina’s economy was
still struggling. Tax compliance had dropped. Investor confidence had not been regained.
The first quarter’s fiscal targets were breached in the first quarter by large margins.
207
See
table 6 below:
Table 6: Fiscal Performance for the First Quarter Under the January 2001 SBA
(in millions of pesos)
208
Established
Target
Adjusted
Target
Outcome
Overall fiscal balance of federal govt. -2100 n/a -3122
Primary expenditure of federal govt. 13,313 n/a 13,684
Change in federal stock of debt 2150 1311 2457
Change in stock of debt of consolidated
govt.
2750 1903 2457
As indicated above, the target established for Argentina’s overall fiscal balance was
missed by $1 billion pesos. The federal government finances were rapidly deteriorating.
At the same time, the provincial governments were unable to control their expenditures
within the designated $600 million cap.
206
In early April of 2001, the national government signed an agreement with the province of Buenos
Aires; one of the main objectives was to facilitate the coordination of financing operations. This agreement
demonstrated that the province of Buenos Aires was committed to the elimination of the country’s fiscal
deficit by 2005.
207
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 46.
208
Ibid., 48.
80
In April, Cavallo took firmer measures to find financing sources for the
government. In addition, he assured US Treasury Secretary, Paul O’Neill that the
Argentine government would not seek any additional funds from the international
community beyond the $39.7 billion already pledged in December 2000.
209
Cavallo used
his influence to compel the Argentine authorities to work with domestic banks to craft
proposals for a voluntary debt exchange aimed as markedly reducing gross borrowing
requirements of the federal government over the next 3-4 years.
210
In addition, Cavallo
“convinced” the Argentine banks to buy government bonds worth up to $3 billion at
below market rates;
211
this was Cavallo’s method of obtaining new sources of financing
without seeing more financial aid from the international community.
To entice the banks to buy government bonds, Cavallo relaxed bank liquidity
requirements by allowing up to $2 billion worth of government securities to be
considered as liquid reserves.
212
Unfortunately, this had the result of undermining the
Convertibility Law as one fifth of the deposits were not backed by US dollars in the
central bank. The Argentine authorities defended its move to lower the liquidity
requirements by stating that it was consistent with the Convertibility Law and easing the
209
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 116.
210
This voluntary debt exchange was projected to be about US$22 billion a year. This objective was to
be achieved by extending principal obligations and reducing interest payments.
211
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 123.
212
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 61.
81
monetary conditions was “appropriate to offset the more restrictive fiscal stance
envisaged for the remainder of the year.”
213
Although the Argentine authorities lowered the liquidity requirements, at this
stage, April 2001, the Argentine authorities, along with the IMF, continued to be
committed to the convertibility regime, which was still viewed as the anchor for price and
financial stability. Since dollarization of public and private liabilities and contracts were
extensive, the IMF particularly felt that “(any) change in the regime would likely have
large adverse consequences on the balance sheets of the nonfinancial private sector, the
banking system, and the public sector, with generalized disruption and dislocation of the
economy.”
214
Yet, in April 14, 2001, Cavallo informed the IMF that the peso would be linked to
a blended average of the dollar with the euro, thus disrupting the convertibility law.
215
Cavallo along with the Argentine authorities reasoned that making the value of the peso
flexible would outweigh the loss of predictability that may ensue. The reason Cavallo
modified the convertibility law is that the strength of the US dollar, which was at its
strongest in 15 years, meant that the value of the peso was too strong, limiting the
competitiveness of Argentine firms and companies and thus the possibility of an export
213
International Monetary Fund, “Argentina: Third Review Under the Stand-By Arrangement and
Request for Augmentation – Staff Report; Staff Statement; Press Release on the Executive Board
Discussion,” IMF Country Report no. 01/90 (June 2001), 18
http://www.imf.org/external/pubs/ft/scr/2001/cr0190.pdf (accessed August 2, 2008).
214
Ibid. 20.
215
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 61.
82
led growth.
216
Cavallo reasoned that it would be better to link the value of the peso with
the blended average of the US dollar and the euro since approximately 25 percent of
Argentina’s trade was with the European Union as oppose to 15 percent with the US.
217
Cavallo stated that the new blended average would take into effect, if and only if, one
euro was equivalent to one US dollar. Ultimately, the switch of the exchange rate link of
the peso would be a 50-50 combination of the dollar and the euro.
218
This measure was
taken without prior consultation with the IMF. By April 16, approximately $5 billion
more in deposits had departed the banks, a clear indication that the bank run was
continuing. Confidence in Cavallo was rapidly disappearing as IMF staff contacts with
major New York-based investment banks revealed that market participants were skeptical
of Argentina’s policy plans.
219
As previously mentioned, Cavallo relaxed bank liquidity requirements and the
banks were facing a run on its deposits. Due to these events, the IMF staff became
alarmed about the banking system, in addition to the long list of concerns it already had
over Argentina, including the government’s fiscal deficit, its unmanageable budget, and
lost access to financing. It should be noted that in October 2000, six months before, the
IMF had claimed that Argentina’s banking system was well-capitalized and that the
domestic banking system was highly liquid, solvent, and well-supervised. At the end of
April, the country’s two largest public banks – the Banco de la Nación and the Banco de
216
Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee United
States Congress (June 2003), 10 http://www.house.gov/jec/imf/06-13-03long.pdf (accessed July 20, 2006).
217
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 120.
218
Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee United
States Congress (June 2003), 10 http://www.house.gov/jec/imf/06-13-03long.pdf (accessed July 20, 2006).
219
Ibid., 48-49.
83
la Provincia de Buenos Aires – and a number of smaller banks were facing liquidity
problems.
Due to the IMF staff’s alarm over Argentina’s banking system, the IMF staff sent
the IMF management a document entitled “Argentina Possible Crisis Scenarios” stating
that the banking system posed the greatest challenge if Argentina had to restructure its
debt or devalue its currency.
220
At this stage, the IMF doubted the bank run could be
stopped and stipulated that Argentina’s banks would need large injections of funds to
avert a banking crisis. As the Argentine authorities, to a degree, had to strong-armed the
domestic banks to buy government bonds at below market rates and as Cavallo pledged
to US Treasury Secretary O’Neill that the country would not seek additional sources of
credit, finding large injections of funds at favorable rates was a virtual impossibility.
Yet, in early May 2001, Cavallo appeared to have found a solution to Argentina’s
need for funds. He, again without IMF consultation, proposed a “mega-swap” - an
exchange of maturing bonds for new bonds with longer maturities with high interest
rates. The idea of the mega-exchange was to postpone Argentina’s debt payments,
convincing bondholders to exchange their bonds for new bonds the Argentine
government at a higher high interest rate. Aside from being upset over Cavallo’s singular
decision, the IMF directors disliked the lack of details and conditions of the mega-swap,
which would lock in high interest rates that would prove to be unsustainable in the
medium term, and found the swap to be infeasible since it was predicated on optimistic
growth assumptions. Several IMF Directors also found it problematic that the same
220
Ibid.
84
structural problems that had proved to be a hindrance in the first quarter remained
unaddressed with the discussion of the mega-swap.
221
Eventually, the IMF staff calculated the true burden and disadvantage of the
mega-swap. The IMF staff estimated that the Argentine government would save $12
billion in debt payments from 2001-05 but incur $66 billion in payments between 2006
and 2030. The staff also calculated that the Argentine government would be locked into a
16 percent interest rate for lengthening the maturities.
222
In summary, this meant that in
order for the government to have the ability to honor its growing debt the country’s
growth needed to exceed its projected growth. For the most part, the IMF had grave
reservations of the mega-swap, which it viewed as strapping Argentina with an even
more astronomical debt. At this stage, some IMF Directors expressed concern that to
withhold support for Argentina would be tantamount to “ ‘ shying away’” from the IMF
mandate, and at the same time, expressed concern that it was surrendering to the same
“’procyclical influence that are driving market behavior.’”
223
Other IMF board members
rationalized their support because “ ‘ no one had proposed a different strategy that, risk
adjusted, promises a less costly alternative.’”
224
CONTINUED IMF SUPPORT FOR ARGENTINA: THE COMPLETION OF THE
THIRD REVIEW IN MAY
Although the country’s economy was still in a recession , tax compliance was
non-existent, pension and healthcare reforms and reductions in the provincial finances
221
Ibid.
222
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 129.
223
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 49.
224
Ibid., 59.
85
had not been implemented, and a banking crisis was looming, the IMF grudgingly
supported Cavallo with the completion of the third review of the SBA on May, 21, 2001.
The Argentine authorities as well as the IMF realized that Argentina’s recovery was not
on track. The IMF Executive Board noted that the critical situation had been the result of
the authorities’ “unexpected relaxation of the fiscal stance,”
225
it unanimously approved
the management’s recommendation to complete the third review of the SBA.
226
This resulted in waivers for the substantial slippage in compliance with the end-March
performance criteria and allowed the disbursement of the $1.2 billion tranche to
Argentina.
227
Like the previous completion of reviews of the SBA, the IMF attached conditions
- flexible benchmarks as oppose to strict quantitative and structural performance criteria.
The IMF did not veer from its original conditions emphasizing tax reform, pension and
healthcare reform, and competitiveness laws, such as the creation for a timetable to
eliminate the common external tariff (CET) surcharge. As in the past, the Argentine
authorities declared that they would adhere to the year end fiscal targets for 2001 and
advance structural reforms. The new conditions were that the government preserve the
independence of the central bank, and ensure that the central bank maintain high liquidity
despite Cavallo’s action in relaxing banking requirements. Yet, even with the Argentine
government’s assurances, some IMF directors had serious reservation on what was the
best course of action in assisting Argentina. Generally, the IMF justified its support
225
Ibid., 49.
226
Ibid.
227
Ibid., 47.
86
because of Argentina’s value as a stabilizing force in the region and emerging markets in
general and because no one within the institution had a better strategy.
228
The new policies failed to restore investor confidence. Doubts resurfaced on the
sustainability of the country’s public debt following the Argentine authorities’ failure to
sustain fiscal policies.
229
Domestic financial sector ceased to continue financing the
government.
230
This indicated that the government lost all access to financing to cover its
expenditures.
In June, in spite of IMF reservations, Cavallo implemented the mega-exchange, in
which the short-term debt was exchanged for long-term debt at high interest rates, 18
percent.
231
This swap of debt immediately became a problem. While the debt at lower
interest rates may have been unsustainable, the new, higher rates made it virtually
impossible for the government to continue servicing its debt.
232
The mega-swap came
into fruition in June and immediately resulted in saddling the country with more debt at a
staggering interest rate.
Approximately 2 weeks after the completion of the mega-swap, Cavallo
announced new measures again, without IMF consultation. These measures included the
228
Ibid., 50.
229
International Monetary Fund, “IMF Augments Argentina Stand-By Credit to $21.57 Billion, and
Completes Fourth Review.,” Press Release no. 01/37 (September 7, 2001), 2
http://www.imf.org/external/np/sec/pr/2001/pr0137.htm (accessed August 20, 2008).
230
One of the reasons for this lack of confidence and the domestic financial sector reaction was the
spreads on Argentine bonds. In July, the spreads widened to over 1700 basis points, and narrowed only to
approximately 1400 basis points in August.
231
Miguel Teubal, “Rise and Collapse of Neoliberalism in Argentina: the Role of Economic Groups,”
Journal of Developing Societies, 20 (2004), 185. Just to give an indication of how this new interest rate
was, it was 13% higher than interest on US treasury bills.
232
Roque B. Fernández and others, “Loan and Bond Finance in Argentina, 1985-2005,” Serie
Documento de Trabajo, Universidad del CEMA Buenos Aires 343 (April 2007), 16
www.cema.edu.ar/publicaciones/doc_trabajo.html (accessed July 23, 2008).
87
so-called “convergence factor,” which amounted to a devaluation for the non-energy
tradable goods sector by mimicking the proposed basket peg announced earlier through
fiscal means.
233
The rationale for Cavallo’s measure was to improve the competitiveness
of its sectors affected by the recession. Essentially, the convergence factor meant that a
subsidy was to be paid to exporters and a duty charged to importers, with the amount
equivalent to the difference between the prevailing exchange rate and the exchange rate
calculated by the basket.
234
The IMF determined that the convergence factor created a
dual exchange rate because the system operated through the budgetary process, and not
through the foreign exchange market. Instead of boosting competitiveness, the
convergence factor indicated that the currency peg was no longer viable. By the end of
June, the same month the mega-exchange took place, economic indicators suggested a
worsening of Argentina’s situation. Tax revenue for June was 4.9 percent below the
previous year’s level.
In addition, political discord between the federal and provincial governments was
increasing. Provincial governments complained that the federal government did not
funnel sufficient funds to cover their June bills, such as school lunches for children.
Cavallo’s measures were not working as the government still struggled to find sources of
revenue and financing to balance its budget. In addition, the government now had to
contend with the strong possibility of a banking crisis.
233
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 51.
234
Ibid.
88
On July 10, 2001, the Argentine government was forced to auction 3 month bonds
at 14 percent to attract buyers, an astounding interest rate.
235
On the next day, as the
country lost access to foreign and domestic credit, Cavallo announced a zero-deficit plan,
which was passed into law by Congress, aimed at : eliminating the federal government
deficit from August 2001 onward, 2) restoring the viability of Argentina’s fiscal position,
3) halting the outflow of deposits and easing domestic financing conditions, and 4)
introducing across the board proportional cuts in primary expenditures in the event of a
prospective deficit. The zero-deficit plan was met with considerable skepticism,
especially the wage and pension cuts implied by the law, as it appeared to be politically
unsustainable.
236
Also, this plan confirmed the dire liquidity situation of the government.
Deposit runs continued throughout late July. By August 3, 2001, Argentina’s
international reserves fell from $28.8 billion in July to $20.4 billion by early August.
Three weeks later, the IMF staff indicated to the IMF Executive Board that if the IMF
failed to respond quickly a collapse of the exchange rate would occur followed by a
default. The staff suggested three options: 1) augment the existing arrangement by $8
billion in support of an enhanced version of the existing strategy, 2) put together a
program (of unspecified design) from large amounts of money ($30-40 billion) from the
official sector, or 3) rethink the entire strategy (i.e. changing the exchange rate regime,
restructuring the debt, or both).
237
235
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 132.
236
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 52.
237
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 51.
89
On August 21, 2001, the next day, the Managing Director chose to augment the
existing arrangement by $8 billion in support of an enhanced version of the existing
strategy. However, $3 billion of it was earmarked to be used to restructure the debt; this
was a surprise to most IMF Directors as it was an unorthodox approach. It should be
noted that this idea stemmed from US Treasury Secretary O’Neill.
238
Approximately $3
billion was to be made available in support of a possible debt restructuring. The IMF
hoped that the $3 billion could be used as an instrument to convince bondholders to
accept a voluntary bond exchange with a reduced interest rate from 14 to 7 percent. In the
end, $3 billion made available in September 2001 was not used to restructure the debt,
“as it became evident very quickly that there was no effective way of using this relatively
small sum to reduce the debt burden of Argentina.”
239
Nevertheless, the IMF was
supporting an unchanged program and reasoned that this was the best course of action.
The IMF felt if that it did not support the enhanced version of the existing arrangement a
speculative attack on the peso would occur, leading to a depletion of foreign exchange
reserves and a debt default.
240
Before the IMF officially approved the augmentation of the SBA, the Managing
Director met with his senior staff to further discuss the viability of this option. It was
determined that the program had a small chance of succeeding.
241
It justified the move to
augment the SBA by stating that the government needed breathing space, approximately
238
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 150.
239
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 54.
240
Ibid., 51.
241
Ibid., 53.
90
4 to 5 months, to make the critical decisions for the state of its economy. Augmenting the
program would be less costly for the Argentine people, neighboring countries, and the
IMF itself. Finally, the IMF reasoned that approving the augmented program would
lessen the political backlash against IMF policy advice, especially if other nations had a
preconceived notion that the IMF was withholding support for a country that had been
under IMF-supported programs for the last decade.
242
The IMF staff did not necessarily approve of the Managing Director’s decision to
augment the existing strategy. Many found that regardless of IMF’s approval of the
augmentation of the SBA, the IMF would not be spared any blame, and more
importantly, many found the additional billions of dollars in the augmented agreement
would not give the Argentine government sufficient time to make a substantive
difference. The dissenters projected continued capital runs of billions of dollars and
another billion onto Argentina’s debt to the IMF itself.
243
In addition, IMF staff report
specifically stated that that last $5 billion aid to Argentina exposed the IMF to great
risk.
244
Yet, the staff did try to justify the management’s decision. As such, the IMF staff
tried to convince the Argentine authorities to commit to a series of measures, especially
fiscal measures, but without success.
245
However, the IMF management was able to get
242
Ibid.
243
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 150. See International Monetary Fund, The IMF and
Argentina, 1991-2001, team leader and compiler Shinji Takagi (Washington, D.C.: IMF Media Services,
2004), 54.
244
See International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler
Shinji Takagi (Washington, D.C.: IMF Media Services, 2004), 56.
245
Ibid.
91
the Argentine authorities to commit to the idea of engaging with the IMF on a possible
alternative policy framework in the event of international reserves fell below a critical
threshold.
246
On September 2, 2001, less than two weeks after the official approval of the
augmented SBA, the Argentine government announced new economic indicators,
including a 14 percent fall in revenue. The government planned to compensate for this
revenue loss by cutting $900 million worth of expenditures.
247
THE COMPLETION OF THE FOURTH REVIEW OF THE SBA IN
SEPTEMBER
Despite its concern, on September 7, 2001, the IMF augmented the program and
officially completed the fourth review of the program. Yet, two Directors abstained from
supporting the completion of the review, which was rare for the IMF’s consensus-based
decision-making process.
248
The IMF increased its loan to the Argentine government
from $14 billion to $22 billion to strengthen the reserves of the Central Bank.
Approximately US$6.3 billion was available immediately.
249
The central reason for the
IMF’s continued support was to buy the Argentine authorities time to put together a
solution that would be both less disorderly and less costly than an immediate collapse of
246
It should be noted that this critical threshold was set just above the balance of outstanding IMF
credit.
247
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 160.
248
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 54.
249
International Monetary Fund, “IMF Augments Argentina Stand-By Credit to $21.57 Billion, and
Completes Fourth Review.”, Press Release no.01/37 (September 7, 2001), 1
http://www.imf.org/external/np/sec/pr/2001/pr0137.htm (accessed August 20, 2008).
92
the regime.
250
As with other completed reviews of the SBA, this fourth review had
informal conditions attached: to improve the tax collection system, to approve a law to
reform provincial finances, to balance its budget, to preserve its monetary policy, and to
guarantee prompt payments of past loans.
The Argentine government took initiatives to comply with the IMF structural
benchmarks to make its public finances sustainable, by, among other things, improving
tax revenues and by arranging better revenue sharing arrangement between the federal
government and the provinces. The IMF Staff indicated that in order to achieve
sustainability, the provinces and the federal government had to reach an agreement on a
new revenue-sharing mechanism, which they had so far failed to do.
251
Among measures
to reduce the federal deficit, Argentina increased the financial transactions tax by 0.2
percent to 0.6 percent, reversed the reduction in gasoline taxes, suspended income tax
reductions, and indefinitely postponed a move towards VAT from an accrual to a cash
basis.
252
Moreover, the Argentine government made further cuts in its budget deficit from
$5.3 billion to $4.1 billion by cutting civil servants’ salaries by 12-15 percent. With these
measures in place, the Argentine authorities projected a modest recovery of real GDP
growth in the final quarter of 2001 and a growth rate of 2.5 percent in 2002.
253
250
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 54.
251
See International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler
Shinji Takagi (Washington, D.C.: IMF Media Services, 2004), 56.
252
International Monetary Fund, “IMF Augments Argentina Stand-By Credit to $21.57 Billion, and
Completes Fourth Review.”, Press Release no.01/37 (September 7, 2001), 3
http://www.imf.org/external/np/sec/pr/2001/pr0137.htm (accessed August 20, 2008).
253
Ibid.
93
By late October, it become clear that the zero deficit policy and the augmentation
of the SBA failed to bring about Argentina’s economic recovery as the GDP was then
expected to drop by 4.5 percent in 2001.
254
A few days later, on November 1, 2001, the
Argentine authorities announced new measures to balance its budget: a debt exchange, a
new batch of competitiveness plans, a rebate of VAT payments on debt card transactions,
and a temporary reduction in employee social security contributions.
255
The IMF staff
informed the IMF board that the new measures would fail to make the Argentine finances
sustainable, and was “ not consistent with fiscal reality.”
256
The IMF staff again
emphasized, as in September, that the Argentine government needed to make stronger
efforts to make the provinces realize that it was in their self-interest to agree on some sort
of revenue sharing mechanism.
257
By mid-November, Argentina’s central bank reserves had fallen to $19.44 billion,
meaning that the $5 billion disbursed to the Argentine government a month before had
already evaporated.
258
The Argentine authorities responded to this drop in reserves by
announcing a new measure permitting the central bank to introduce an effective cap on
deposit rates. Instead of slowing or stopping the bank run, the cap on deposit rates
restarted a renewal of the bank run with more than $3.6 billion lost in three days, bringing
the cumulative decline since the beginning of the year to $15 billion or approximately 20
254
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 56.
255
Ibid.
256
Ibid.
257
Ibid.
258
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 171.
94
percent of total deposits.
259
To make matters worse, the mega-exchange of debt taken in
June proved to be a failure. The Argentine public’s reaction was a deposit drop of 2.1
billion pesos, almost 3 percent, in a single day in November.
260
By the end of the year, the crisis was severe. On the first day of December, the de
la Rúa government limited cash withdrawals to 1200 pesos a month, which essentially
meant that bank accounts were partially frozen, to compensate for the drastic drop in
deposits in late November. The government further dictated that transferring funds out of
Argentina required a formal approval from the central bank.
261
The bank freeze resulted
in halting private-sector activity since businesses and individuals could only use their
deposits to pay other depositors at the same bank. The public reacted in angry
demonstrations called cacerolazos because the people banged on casserole pots and
pans.
262
This bank freeze was only advantageous for the Argentine government as it “freed
up” capital for the government “to borrow” from the Argentine people. Essentially, the
Argentine government appropriated a portion of the savings from bank depositors to
finance itself, pay off some foreign debt, and prevent bank failure.
263
The threat of bank
failure loomed because the government was incapable of paying back the money these
259
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 56.
260
Bank deposits peaked in February 2001 with an equivalent of almost US$90 billion (90 billion
pesos). It appears that the Argentines may have felt uncertain about the future of the peso and feared a
deposit freeze like those of 1982 and 1989, which led to a steady decline in deposits from March onward.
261
“Decree 1570/2001, Communicación “A” 3372,” Banco Central de la República Argentina,
http://www.bcra.gov.ar/folio/A3372.pdf (accessed February 7, 2007).
262
Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee United
States Congress (June 2003), 12 http://www.house.gov/jec/imf/06-13-03long.pdf (accessed July 20, 2006).
263
Kurt Schuler, “Argentina on the Brink,” Joint Economic Committee United States Congress (June
2003): 35 http://www.house.gov/jec/imf/06-13-03long.pdf (accessed July 20, 2006).
95
banks lent them even with below market rates.
264
The consequence of the federal
government’s insolvency was the illiquidity of the Argentine banks.
265
On December 5, 2001, four days after the bank freeze, the IMF told the
Argentine government that it could no longer support its economic policies and the fifth
review of the SBA was not completed. This meant that the $1.3 billion tranche would not
be released to Argentina. Various departments within the IMF found that Argentina’s
fiscal deficit target would be missed by $2.6 billion, the restructure of the fiscal deficit
was infeasible, and that the country would continue to face large financing gap in the
immediate future. At this stage, Argentina had little chance of receiving loans from any
foreign source. On December 13, a general strike occurred. Seven days later, looting and
protests occurred for two days resulting in 24 deaths.
266
Cavallo tried to introduce a new budget with more expenditure cuts. The leading
opposition that controlled Congress instead insisted that Cavallo resign his position as
Minister of Economy. On December 19, Cavallo resigned. In desperation, the Argentine
government seized billions of dollars from pension funds and converted them into
treasury bonds.
267
264
Hans F. Sennholz, “Argentina on the Brink: From the Ludwig von Mises Institute in Austria, a
research and educational center of classical liberalism, libertarian political theory, and the Austrian School
of economics.,”www.mises.org/story/901 (accessed on March 30, 2002).
265
Ibid.
266
Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee United
States Congress (June 2003), 12 http://www.house.gov/jec/imf/06-13-03long.pdf (accessed July 20, 2006).
267
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 171.
96
ARGENTINA’S POPULAR ANGER AND FOUR NEW PRESIDENTS
The Argentine people responded as popular anger swept the country which added
a new level of difficulty in Argentina’s economic recovery.
268
The eruption of Buenos
Aires drove de la Rúa from the presidency after two years in power: he resigned on
December 20, 2001. Senate President Ramón Puerta agreed to be president for 48 hours.
Then on December 22, Congress installed Governor Adolfo Rodríguez Saá as the interim
president with a term of 90 days until new elections could be held for someone to serve
the remainder of de la Rúa’s term.
Sáa pledged to negotiate with the bondholders to reduce its debt while he
suspended service on its debt. Sáa sought a permanent write down of least 30 percent of
the debt.
269
A complete suspension of the $155 billion in federal and provincial dollar
debts would have allowed the government to release approximately $28 billion for
emergency jobs and other social programs to combat the recession, instead of being
diverted to pay off the debt.
270
Unfortunately, a complete write down was highly unlikely
since approximately $64 billion of debt was held by domestic banks and privatized
pension funds.
On the third day of Sáa’s presidency, Argentina declared default on the majority
of its public debt although debt obligations with international financial organization
268
Hans F. Sennholz, “Argentina on the Brink: From the Ludwig von Mises Institute in Austria, a
research and educational center of classical liberalism, libertarian political theory, and the Austrian School
of economics.,”www.mises.org/story/901 (accessed on March 30, 2002).
269
David Felix, “After the Fall: The Argentine Crisis and Repercussion.” Foreign Policy in Focus
(2002):2 http://www.fpif.org/pdf/reports/PRargentina2.pdf (accessed August 12, 2005).
270
Ibid.
97
continued to be serviced.
271
To make matters worse, foreign banks started to refuse to
honor local deposits despite the Argentine central bank president’s declaration that the
country’s financial system was stable since the majority of the banking system was
foreign owned.
272
This severely questioned the legitimacy of Argentina’s entire banking
system.
By the eighth day of his presidency, Sáa resigned. Afterward, the leader of the
Chamber of Deputies, Eduardo Caamano became the fourth interim president until the
Peronists could agree on another candidate. Finally, Senator Eduardo Duhalde, a
representative of Peronism’s powerful political machine, became president on January 1,
2002 with a mandate from Congress to serve out the remainder of de la Rúa’s term.
As previously mentioned, the de la Rúa administration’s focus on fixing the
economy could not undo the economic problems de la Rúa inherited from the Menem
administration. In early 2000, it was no secret that the country had to contend with a
recession, a large fiscal deficit, an unbalanced budget, and limited access to financing. As
it tried to get its fiscal house in order, for the most part, the de la Rúa administration
attempted to follow IMF policy recommendations. Yet despite the IMF’s assistance and
Argentina’s commitment, the country’s economy continued to decline.
PROBLEMS OF THE IMF APPROACH
A close examination of IMF involvement reveals several problems in the IMF
approach which failed to adequately address the looming crisis. As previously mentioned,
arguments will be made that the IMF suffered from two problems: 1) the absence of a
coherent analysis, particularly its assessment that Argentina’s problem was due to a
271
Miguel Teubal, “Rise and Collapse of Neoliberalism in Argentina: the Role of Economic Groups,”
Journal of Developing Societies, 20 (2004), 185.
272
Ibid., 186.
98
liquidity crisis rather than more basic structural problems and 2) its failure to oversee
Argentine government’s decision making when the government instituted a series of
policies without consulting the IMF, notably in the period between March and November
2001 and its failure to enforce sound economic policy by continuing to release funds to
the Argentine government in spite of serious problems with government policies, e.g.,
undermining its earlier banking reforms undertaken in the mid 1990s. Overall, these
errors were made because of the IMF’s vested interest in that Argentina uphold the
“model reformer” image by avoiding a debt default and being heralded as a successful
example of neoliberal policies, thus validating the tenets of the Washington Consensus.
In addition, the IMF was concerned about political backlash against IMF advice,
especially since the Argentine government tried to comply with IMF policy advice from
1991-2001. The IMF did not want to appear that it was withholding support of Argentina.
The Absence of a Coherent Analysis
During the earlier stage of the de la Rúa administration, the IMF, based on a
number of highly optimistic assumptions regarding the overall health of Argentina’s
economy, maintained that Argentina’s economic problems stemmed from a liquidity
crisis. In March 2000, the IMF determined that the country’s recession, which had started
in October 1998, had bottomed out, and projected the GDP growth to rebound to 3.4
percent by the end of the year.
273
As a result, in March 2000, the IMF approved a new
stand-by arrangement (SBA) and $7.2 billion of financial assistance. The ultimate
purpose of the SBA were to improve investor confidence and lower the cost of financing
for Argentine borrowers. The IMF rationalized that its financial assistance would signal
273
IMF Independent Evaluation Office, The IMF and Argentina 1991-2001, team leader and compiler
Shinji Takagi (Washington D.C.: International Monetary Fund, 2004), 40.
99
to investors that Argentina was still a viable place for investment. Although the SBA did
ask for structural reform, the IMF’s ultimate judgment was that the country faced a
liquidity problem and not a structural one.
Stiglitz’s analysis of Argentina’s partial privatization of social security supports
the argument that the IMF erred in its judgment that the country faced a liquidity
problem.
274
Stiglitz found that Argentina’s earlier decision to partially privatize the social
security system had damaging fiscal consequences, which contributed to the country’s
continued fiscal and budget deficits. Argentina partially privatized its social security
system in July of 1994.
275
This decision was made due to an IMF criterion of reforming
its social security by December 31, 1992.
276
Before the partial privatization, Argentina’s government was exclusively
responsible for collecting revenues for social security and distributing the funds for the
social security beneficiaries. The partial privatization of social security, however, gave
the Argentine public the option to manage their own retirement accounts, and much of
the revenue in the form of taxes once earmarked for social security was then directed to
private retirement accounts. The problem with this new system is that the government
still had to pay social security benefits to the people in the old system. The diverted funds
into private accounts meant that the government had a diminishing pool of cash to
redistribute to the social security beneficiaries. Essentially, the partial privatization of
274
Joseph Stiglitz, Argentina, Shortchanged: Why the Nation that Followed the Rules Fell to Pieces,
Washington Post, May 12, 2002, B1.
275
See Dean Baker and Mark Weisbrot,
“The Role of Social Security Privatization in Argentina’s
Economic Crisis.”, The Center for Economic and Policy Research (2002), 1
http://www.thirdworldtraveler.com/IMF_WB/IMF_Crash_Argentina.html (accessed on April 13, 2006).
276
The IMF board approved an extended arrangement on March 31, 1992 in the amount of $4.02
billion in SDRs if social security and tax system were reformed.
100
social security system left the Argentine government with two different types of
retirement plans, and the one that they were responsible for was unsustainable.
Another analysis of Argentina’s social security system, by Dean Baker and Mark
Weisbrot, yields conclusions very similar to Stiglitz’s conclusion that Argentina faced
structural problems, as opposed to a liquidity problem.
277
Baker and Weisbrot also found
that the country lost tax revenue from partial privatization of social security, but they add
that to compensate for the lost revenue, the Argentine government had no choice but to
borrow more money. Moreover, Baker and Weisbrot found that Argentina’s new debt
incurred high interest as the country’s risk premium was high.
278
Furthermore, Baker and
Weisbrot calculated that the deficit created by the lost tax revenue was almost equal to
the government budget deficits that Argentina ran from 1997-2001.
Mussa’s analysis regarding the political structure of Argentina’s government
might explain how the IMF discounted the problems the federal government had getting
the provinces to reduce its spending to help balance its budget. In 2000 and 2001, the
IMF consistently wanted Argentina’s federal government to reduce its “financial
obligations” to the provinces as the funds increased over the course of the 1990s and
early 2000. See table 7 below:
277
See Dean Baker and Mark Weisbrot,
“The Role of Social Security Privatization in Argentina’s
Economic Crisis.”, The Center for Economic and Policy Research (2002), 1
http://www.thirdworldtraveler.com/IMF_WB/IMF_Crash_Argentina.html (accessed on April 13, 2006).
278
Ibid.
101
Table 7: Federal and Provincial Fiscal Accounts
(percent of GDP)
279
1996 1997 1998 1998 1999 2000 2001
Federal Govt. Total Expenditures 18.76 19.62 19.11 20.09 21.93 21.96 22.02
Transfers to Provinces 5.62 5.84 6.04 6.13 6.29 6.35 5.93
Total Revenues 19.09 17.18 18.63 18.9 20.25 19.57 18.78
Fiscal Balance -0.53 -1.93 -1.46 -1.36 -1.68 -2.39 -3.24
Mussa’s work clarifies that Argentina’s system of representation earmarks much of the
federal government’s revenues to provincial politicians.
280
This meant that the provincial
politicians had access to spending without the hassle of collecting funds, such as in the
form of taxes. This explains why the federal government struggled to decrease its
transfers to the provinces, particularly in 2000 as the transfers to the provinces increased
while the federal government’s revenue decreased. This federal arrangement led to the
provincial politicians being fiscally irresponsible, which became an acute problem when
Argentina was in a recession from October 1998 to 2001. Even if Argentina was facing a
liquidity crisis in March 2000, Mussa’s work explains why the constitutional relationship
between the federal government and the provinces made it difficult to reduce the
earmarked funds. Even when the Argentine government tried to reduce provincial
spending, such as Machinea tried to do in early March 2001, it was met with fierce
political resistance in Congress and in public demonstrations.
As suggested in Schuler’s analysis, by March 2000, the Argentine government
was facing more than a liquidity crisis. Argentina accumulated massive amounts of
279
IMF Independent Evaluation Office, The IMF and Argentina 1991-2001, team leader and compiler
Shinji Takagi (Washington D.C.: International Monetary Fund, 2004), 81.
280
See Michael Mussa, “Argentina and the Fund: Anatomy of a Policy Failure,” in The IMF and its
Critics: Reform of Global Financial Architecture, eds. David Vines and Christopher L. Gilbert (Cambridge,
UK: Cambridge University Press, 2004).
102
debt from 1991 to 2001.
281
As indicated above (see Table 7), by the end of the 1990s, the
debt was over $100 billion, and had reached $165 billion by 2001. Essentially, the high
interest rate, potentially coupled with a current account imbalance, makes the debt
accumulate too quickly, hence beyond the capacity of a country’s economy to repay it.
In October 2000, seven months after the IMF determined that Argentina was
facing a liquidity crisis, the IMF still adhered to its initial declaration that the country was
facing a liquidity problem. According to the IMF’s diagnosis, the liquidity problem was
due to the country’s lost access to international capital markets, rather than the fact that
the country’s exchange rate was largely misaligned – the alternative diagnosis.
282
The
IMF clung to its original diagnosis and based their assessment to the country’s modest
surplus in the trade balance in 2000 in comparison to the steady decline in trade from
1997-99 and the fact that Argentina’s banking system was well-capitalized.
Alberola, López, and Sérven disagree with the IMF’s conclusion that Argentina
was faced with a liquidity crisis because of the lost access to international capital
markets.
283
It is not that they disagree with their original assessment but argue that the
IMF failed to better understand the role of the exchange rate in the country’s budget
imbalance. Alberola, López, and Sérven argue that the country was suffering from an
overvalued exchange rate.
281
See Kurt Schuler, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee
United States Congress (June 2003), http://www.house.gov/jec/imf/06-13-03long.pdf (accessed July 20,
2006).
282
IMF Independent Evaluation Office, The IMF and Argentina 1991-2001, team leader and compiler
Shinji Takagi (Washington D.C.: International Monetary Fund, 2004), 40.
283
See Enrique Alberola, Humberto López, and Luis Servén. Tango with the Gringo: The Hard Peg
and Real Misalignment in Argentina. Washington, D.C.: World Bank (June 2004).
103
They argue that Argentina’s decision to use the US dollar as the anchor currency
led to an overvaluation of the peso.
284
The Convertibility Law of 1991 required an
inflexible exchange rate that may have contributed to Argentina’s financial collapse in
December 2001. Alberola, López, and Sérven argue that although it is typical to apply an
inflexible exchange rate to stabilize prices, in Argentina’s case, the inflexibility of the
exchange rate was too extreme as it worked to constrict Argentina’s economic
movement. Alberola, López, and Sérven’s contribution is the idea that the liquidity crisis
was not merely caused by the lack of investor capital, but the failure of the Argentine
government to change a law that no longer functioned as it did to successfully combat
hyperinflation in 1991.
It is likely that the Argentine public and government were still haunted by the
hyperinflation of the 1980s, and wanted above all to keep inflation in check. Yet its
desire to prevent even a small degree of inflation may have been the country’s undoing.
As the country continued to struggle to balance its budget in 2000 and 2001, the
Argentine government found itself issuing bonds to attract more hard currency into the
country to meet its financing needs. For instance, in late January 2001, the government
was forced to auction 3 month treasury bills at yields of 6.75 percent. It would appear that
the country’s monetary policy functioned more as a "straitjacket"
285
in the 2000 and 2001
period.
284
Ibid.
285
Javier Corrales, “The Politics of Argentina’s Meltdown,” World Policy Journal Fall 19 no. 3 (Fall
2002), 31 http://www.worldpolicy.org/journal/articles/wpj02-3/corrales.pdf (accessed May 19, 2006). See
Steve Hanke, “A Monetary Constitution for Argentina: Rules for Dollarization,” Cato Journal 18 (Winter
2001), 405-19.
104
On December 18, 2000, as Argentina’s economic indicators showed no positive
signs that the country’s economic outlook would improve, the IMF still adhered to its
original diagnosis that the country was facing a liquidity crisis. As a result, the IMF
assembled a loan package worth up to $39.7 billion for Argentina. By this time, internal
IMF memos revealed that not all members of the institution found this diagnosis credible
and articulated the debt dynamics were unsustainable and therefore the program was very
unlikely to succeed.
286
Two members of the Executive Board found that the country’s
debt was too large for the additional funds to have any positive effect. For instance,
Thomas Bernes from Canada calculated that Argentina’s hard currency and its potential
earnings from exports would have to be used to pay off Argentina’s debt.
287
Bernes
specifically indicated that the IMF made an error in October 2000 when it declared that
the country would soon recover based on Argentina’s small trade surplus. He dismissed
the IMF staff’s projections that the country’s exports would rapidly increase, and argued
that their projections were based on “a much more rapid rate than what we have seen over
recent history.”
288
Yet, overall, the small minority of naysayers gave the SBA the benefit of the
doubt based on three considerations. They did agree that there was some theoretical
possibility that the implementation of the conditions in the SBA would improve investor
confidence. The second consideration was that the Argentine government deserved
another chance as it appeared that up to this point to have built a strong track record over
286
IMF Independent Evaluation Office, The IMF and Argentina 1991-2001, team leader and compiler
Shinji Takagi (Washington D.C.: International Monetary Fund, 2004), 43.
287
Paul Blustein, And the Money Kept Rollin In (And Out): Wall Street, the IMF, and the Bankrupting
of Argentina (New York: Public Affairs, 2005), 107.
288
Ibid.
105
the 1990s. The final consideration was that large costs would be involved if the IMF
failed to assist Argentina at this stage.
289
Insufficient Oversight and Failure to Enforce Sound Economic Policy
In the critical period between March and November 2001, the IMF failed to
exercise oversight over the actions of Domingo Cavallo when it continued to support
Argentina even when Cavallo’s policies were seen as seriously flawed. The IMF failed to
prevent Cavallo from weakening Argentina’s banking system. Following the Mexican
Crisis in December 1994, the Argentine government made strong efforts to improve the
liquidity of its banks. It closed and merged many poorly-run and undercapitalized banks,
and in late 2000 the IMF noted the solid footing and strong liquidity of the banks. In
April 2001, however, Cavallo undermined the previous banking reforms by relaxing bank
liquidity requirements and allowing up to $2 billion worth of government securities to be
considered liquid reserves.
290
Cavallo reasoned that this gesture would act like a “carrot”
to entice banks to buy approximately $3 billion in government bonds at below market
rates. Approximately a week after Cavallo’s decision, the IMF staff sent IMF
management a memo stating that the Argentine government risked suffering from a
serious banking crisis.
For the IMF, the convertibility law held symbolic value to the international and
domestic banks and investors, representing Argentina’s commitment to stay the course
and weather the recession. Although evidence suggest that convertibility law constricted
Argentina’s economic movement, the IMF failed to stop Cavallo from modifiying the
289
IMF Independent Evaluation Office, The IMF and Argentina 1991-2001, team leader and compiler
Shinji Takagi (Washington D.C.: International Monetary Fund, 2004), 43.
290
IMF Independent Evaluation Office, The IMF and Argentina 1991-2001, team leader and compiler
Shinji Takagi (Washington D.C.: International Monetary Fund, 2004), 47.
106
convertibility law to change the anchor to an equally weighted basket of the euro and the
dollar in mid April 2001.
As mentioned, Alberola, López, and Sérven argued that the convertibility law
eventually functioned as a straight jacket for the Argentine government. Pamela K. Starr
also found how the convertibility law eventually undermined the competitiveness of
Argentina’s economy and negatively affected the country’s current account as the peso
became overvalued.
291
Although Cavallo’s act in altering the convertibility law might be
viewed as an act of courage, for this monumental decision, Cavallo needed IMF support
and endorsement to modify the convertibility law in order to give this move credibility in
the eyes of the international financial markets. As Setser and Gelpern noted, by 2001, the
convertibility law was not merely an anchor for monetary policy; it gave Argentina
credibility and as a result access to external financing.
292
Applying Setser and Gelpern’s
argument, Cavallo ignored the central importance of the overvalued currency and the
heavy use of US dollars in domestic financial contracts. As such, the IMF saw Cavallo’s
decision as counterproductive in restoring market confidence.
293
Schuler’s research found that the switch of the exchange rate link of the peso to a
50-50 combination of the dollar and the euro was counterproductive. He found that the
immediate reaction to the tinkering of the convertibility law was a doubling of the
291
See Pamela K. Starr, “Argentina: Anatomy of a Crisis Foretold,” Current History (February 2003),
65-71.
292
Brad Setser and Anna Gelpern, “Pathways Through Financial Crisis: Argentina.” Global
Governance 12(2006), 466.
293
IMF Independent Evaluation Office, The IMF and Argentina 1991-2001, team leader and compiler
Shinji Takagi (Washington D.C.: International Monetary Fund, 2004), 47.
107
interbank interest rates in pesos and the first step to devaluation.
294
Schuler also contends
that the public’s immediate reaction to the change in the currency anchor was a slow and
silent run on banks, indicating the public’s distrust of the government’s monetary
policy.
295
He reasons that Cavallo’s modifications of the convertibility system harmed the
Argentine government’s credibility in its management of the economy. In addition, Starr
has found that not only did the modification worsen investor confidence but undermined
Cavallo as a Minister of Economy as investors became suspicious of his decisions.
296
The IMF also gave Cavallo too much leeway when the institution failed to
oversee Cavallo’s decision for the mega-swap – an exchange of maturing bonds with
longer maturities at higher interest rates. As mentioned, the IMF disliked this idea as the
IMF did not have clear picture on the benefits of the exchange and determined that it
would be a counterproductive instrument for Argentina’s economy. Setser and Gelpern
argue that the domestic and international financial markets viewed the mega-exchange as
a desperate act since the mega-exchange was a short-term fix.
297
Schamis not only saw
the mega-exchange as a counterproductive and irrational decision but argued that this
decision revealed how both Cavallo and de la Rúa “lost touch with the realities of the
country they were supposed to be governing.”
298
The result of the mega-exchange was
294
Kurt Schuler, “Fixing Argentina.” A Cato Institute Working Paper (April 26, 2002), 10.
295
Ibid.
296
Pamela K. Starr, “Argentina: Anatomy of a Crisis Foretold,” Current History (February 2003), 67.
297
Brad Setser and Anna Gelpern, “Pathways Through Financial Crisis: Argentina.” Global
Governance 12(2006), 469.
298
Hector Shamis, “Argentina: Crisis and Democratic Consolidation,” Journal of Democracy 13, no. 2
(April 2002), 81-96.
108
the further erosion of investor confidence and the continued withdrawal of funds out of
the country’s financial system.
As mentioned previously, Cavallo imposed a bank freeze on December 1, 2001
without IMF consultation, which led to such serious consequences as the strangling of
economic activity, and again demonstrated Cavallo’s independent decision-making for
Argentina’s policies. In spite of Cavallo’s arbitrary decisions, the IMF tacitly supported
Cavallo with its continued support and completion of the reviews which disbursed funds
to the country.
The IMF’s Vested Interest
Why did the IMF continue to complete the reviews when certain groups within
the IMF, such as the Argentina Task Force,
299
had indicated the precarious state of
Argentina’s economy? One explanation of the IMF’s overwhelming support for the de
la Rúa administration may have been related to the institution’s vested interest in
maintaining the image of Argentina as a successful emerging economy under the tutelage
of the IMF, thus validating the neoliberal ideology of the Washington Consensus. It has
been argued that in general, neoliberal programs and policies have proven to produce
negative and dire consequences such as increases in poverty, inequality, increasing rate of
unemployment, external dependence, and decline in state capacity.
300
It should be noted
that the IMF was still suffering from an international backlash in its handling of the East
Asian crises in the late 1990s. In its modified role, the IMF did more than simply lend as
a lender of last resort; it also offers structural adjustment plans influenced by the
299
An interdepartmental team assembled in mid-1999 to undertake analytical work on Argentina.
300
See David Heald, “The Relevance of Privatization to Developing Economies,” Public
Administration and Development, 10, no. 1, 3-18.
109
Washington Consensus. Recent history, unfortunately, has demonstrated that the
countries that followed IMF policy advice were in many cases left worse off and saddled
with additional debt. This effect undermines the neoliberal principles: free market and
open competition, limited state intervention, and comparative advantage in free trade.
The manner in which the IMF completed four reviews of the January 2001 SBA
indicated that the IMF was focused on the need to attract foreign investment and loans,
leading to its efforts to assure investors that Argentina’s economy was fundamentally
sound and to demonstrate the validity of the neoliberalism. In addition, the completion of
the reviews seemed to serve another function – saving the IMF’s face as a viable
institution.
The IMF’s continued financial support of Argentina during 2001 suggested
falsely not only that the IMF had faith in the de la Rúa administration’s policies, but also
that the IMF’s borrowers do not default on its loans. Feldstein suggests that the IMF
needed to maintain this skewed image in order to get more funds from the US and other
countries.
301
To a certain degree, the IMF may have felt compelled to lend to Argentina
to legitimate the institution’s role in the international community. In short, the IMF’s
decisions to complete the reviews and release tranches of funds to Argentina were made
with the intention of “saving face.” This point seems especially valid when we consider
that the IMF knowingly completed the fourth review of the SBA with the understanding
that the country needed to reduce its debt in September 2001. The IMF’s solution to
Argentina’s growing debt was to use $3 billion of the $8 billion loan to convince the
country’s bondholders to accept a voluntary bond exchange. The IMF continued to
301
Martin Feldstein, Argentina Doesn’t Need the IMF, Wall Street Journal, May 28, 2002.
http://www.nber.org/feldstein/wj052802.html (accessed December 19, 2006).
110
financially support Argentina in order to maintain the fiction that its borrowers do not
default on its loan.
It has also been suggested that the IMF’s continued financial support of
Argentina, in the face of negative economic indicators, had to do with the IMF’s self-
interested desire to stay financially afloat. MacLachlan found that the amount the IMF
lent to Argentina was in excess of the amount authorized by the IMF bank’s governors.
The IMF felt compelled to bail out Argentina since this was the only viable way of
forestalling a default. As previously mentioned, a month after completing the third
review of the SBA in July 2001, the IMF knew that Argentina needed a new strategy to
overcome its recession and fiscal deficit. Eventually, the IMF staff laid out two possible
options to better the country’s economic state, but in the end the IMF was unsure how to
best assist the country. In September, the IMF tried to bail out Argentina by disbursing $8
billion. The IMF forestalled a default on its portion of the debt; in effect, the Argentine
government used IMF loans to pay off the IMF and associated institutions’ debt.
According to MacLachlan, “it appeared to be a bookkeeping bailout of the IMF, not of
Argentina.”
302
CONCLUDING REMARKS
As indicated in chapter 3, by the end of 1999, Argentina was confronted with
major economic problems ranging from an overvalued exchange rate to increasing
unemployment rates. The country’s public debt increased as the country continued to
issue bonds with the public sector debt equaling 48 percent of GDP. It is obvious that the
de la Rúa administration carried out a number of policies that resulted in exacerbating the
302
Colin M. Machachlan, Argentina, What Went Wrong (Westport, CT: Praeger Publishers, 2006) 177.
111
crisis, including three major tax increases, the failure to devalue the exchange rate, and
borrowing against bank reserves, thus weakening the banks, which in turn led to a
massive withdrawals of deposits. The government response was to freeze bank accounts,
which brought the crisis to a head, leading to massive demonstrations, the resignations of
de la Rúa and a succession of four presidents within two weeks.
Throughout most of the de la Rúa administration, the IMF continued to support
the Argentine government, tacitly or directly, in spite of the misgivings expressed by
members of the IMF staff and some board members. IMF policies were geared to attract
investments. Arguing that Argentina’s problem was simply a liquidity problem due to
loss of access to international capital markets, rather than a structural crisis due to the
privatization of social security and consequent loss of tax revenue, massive debt and high
interest rates, and overvaluation of the exchange rate due to continued adherence to the
currency peg, the IMF continued to authorize loans and release funds through the review
process. During the March – November 2001 period, the IMF failed to exercise oversight
as Cavallo implemented reforms without consulting the IMF and failed to publicly react
when the government engaged in highly questionable policies such as borrowing against
bank reserves, resulting in weakening the banks. Throughout this period, the IMF
continued to authorize loans and release funds through the review process. The IMF’s
support was fueled by its vested interest that Argentina remains the IMF’s “poster boy”
as a successful emerging economy by following the neoliberal based policies of the
Washington Consensus.
112
Chapter 5: CONCLUSION
The chief purpose of this project was to examine the period leading up to the
crisis in December 2001 and examine the expanded role of the IMF as an economic
advisor to emerging economies as well as a lender of last resort. A common criticism of
the IMF is that the institution offers “cookie cutter” advice and “off-the-shelf” remedies
that fail to address the different needs of each country in need of financial assistance. But
while the IMF has been accused of excessive rigidity in attempting to enforce its own
ideological agenda, it has also been accused of being too flexible in providing financing
when countries have failed to follow its structural and fiscal requirements. This was
notable during the 1980s and 1990s when the IMF took on the role of economic advisor
to developing economies, pushing a broad agenda of neoliberal reforms based on the
principles of the Washington Consensus.
This project builds on the existing critiques of the IMF to examine its
performance in the two years leading to the economic crisis to identify the problems with
IMF advisement and policies. These problems included the institutions assessment that
the country was faced with a liquidity crisis as opposed to basic structural problem, and
its failure to enforce sound economic policy and oversee Cavallo singular decisions as
Minister of Economy from March to November 2001 when the Argentine government
instituted a series of policies without consulting the IMF. It is further suggested that these
problems reflected the IMF’s concern that Argentina avoid a debt default and its vested
interest in Argentina’s image as a successful example of the neoliberal policies pawned
by the IMF, thus validating the tenets of the Washington Consensus.
113
ARGENTINA’S BOOM
Argentina’s success in eliminating hyperinflation in 1991 and its economic
growth from the early to mid 1990s dazzled the Argentine people and international
financial markets alike. It appeared that President Menem and the Minister of Economy
Cavallo finally found the formula to lead the country out of hyperinflation. This formula
was the Convertibility Plan, which pegged the Argentine peso with the US dollar and
fostered large-scale, neoliberal based structural reforms.
Argentina’s macroeconomic indicators in 1991-1994 indicated that Menem and
Cavallo’s Convertibility Plan had brought forth amazing results: inflation was low,
investor confidence was high, and foreign direct investment was flooding the country.
The federal government amassed $12 billion through one-time gains from privatization
and exports increased significantly. Overall, Argentina’s economic gains looked robust.
Yet despite the positive economic indicators, there were hints that pointed to
failings in Menem’s management of the country. One hint was the growing
unemployment rate, which increased from approximately 7 percent in 1992 to close to 20
percent by the end of 2001.
303
Although a lot of capital was coming into the country in
the form of foreign direct investment, Argentina’s current account balance was negative,
and public debt increased dramatically with the result that Argentina was heavily
dependent on foreign investment and loans. Later it would be recognized that the
Argentine government’s structural reforms had negative repercussions: the partial
privatization of social security and the wholesale privatization of state-owned enterprises
resulted in a loss of government revenue as privatization was conducted without
303
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 31.
114
establishing sufficient regulation.
304
Between 1989 and 1992, almost every asset that the
Argentine state owned was privatized, such as gas, electricity, highways, and oil.
305
With
these privatizations, the government could no longer assure its people good, affordable
services since it lost its capacity to structure relative prices in the economy.
306
In
hindsight, the move towards privatization only positively impacted short-term
government finances.
With the onset of the Mexican Crisis in 1994, investor confidence started to
waver. Menem reassured investors by promising to maintain convertibility at all costs. As
a result, the Argentine government was able to secure additional financial loans, but with
a change in the type of investments; access to finances came in the way of portfolio
capital inflows. Regardless of the underlying problems, the IMF found the Argentine
government’s progress in economically recovering acceptable in 1996.
Regardless of IMF’s positive response to Argentina’s economic performance in
1996, the country was unable to balance its budget. This did not align well with the
IMF’s quantitative performance criterion that the country remains fiscally disciplined.
The IMF did note that the country’s debt was growing, especially with the government’s
issuance of bonds, but decided that it was not yet a primary concern.
At the start of 1998, the IMF recognized Argentina’s growing debt and trade
deficit and responded with an extended arrangement in February 1998 with informal
conditions geared towards structural reforms. Although the existence of many investors
304
See Maria Fernanda Ariceta, “Privatization in Argentina: When Accountability Suffered,” Journal
of Development and Social Transformation, (2002), 51-56.
305
Ibid., 53.
306
See Daniel Azpiazu and Adolfo Vispo, “Some Lessons of the Argentine Privatization Process,”
Cepal Review, LC/G.1845P,_54 (December 1994), 129-47.
115
willing to finance Argentina’s consumption and growth led the Menem administration to
disagree with the IMF’s projection, the Argentine government agreed to deepen structural
reforms.
Regardless of the Argentine government’s desire to deepen reforms, the Russian
and Brazilian devaluations had immediate negative effects in 1999. The Brazilian
devaluation in particular affected Argentina since Brazil was its largest trading partner.
The Brazilian currency devaluation, in general, discouraged investment, lowered export
earnings, squeezed tax receipts, and reduced output. The Argentine government found
itself in a vicious cycle of declining confidence and investment, falling exports, shrinking
tax revenue, increasing debt service obligations and deteriorating balance of payments.
307
As 1999 came to a close, Argentina had a new president, de la Rúa, and was
facing a severe economic downturn. When de la Rúa took office in December 1999, he
announced that he would take measures to maintain convertibility and free-market
policies. In addition, he pledged to reduce the government’s deficit by securing a $2
billion tax increase and by cutting spending by $1.4 billion.
ARGENTINA’S DECLINE
The de la Rúa administration, for the most part, tried to get its fiscal house in
order with efforts to reduce its fiscal deficit and to balance its budget, even during a
recession. At the same time, the Argentine government was trying to convince
international and domestic markets that it was safe to invest in the country. The IMF
supported Argentina’s economic plans, initially asserting that the country’s recession was
nearing its end and that it was temporarily suffering from a liquidity crisis. The IMF
307
Paul A. Haslam, “Argentina’s Governance in Crisis.” Focal: Canadian Foundation for the
Americas (2002) http://www.focal.ca/pdf/argentina_03.pdf (accessed January 3, 2006), 4.
116
rationalized that a boost in investor confidence would improve Argentina’s economic
future.
Yet, throughout 2000, the country was unable to attain its goals. It could not find
a way to balance its budget, and it seems likely that it had started to suffer adjustment
fatigue. The IMF, however, came through with an SBA in December 2000 of $39.7
billion to help weather Argentina’s “temporary” financial imbalances. Essentially, the
IMF appeared to be clinging to the notion that once investor confidence increased
Argentina’s economy would turn around.
The $39.7 billion loan to Argentina did not have the catalytic effect the IMF
desired. Instead, investors continued to be leery of lending to the country. Unfortunately,
what did start were bank withdrawals, signifying that the Argentine people were
becoming distrustful of the solvency of the banks. Bank withdrawals began in March
2001 and deposits had declined from approximately $75 billion to $60 billion pesos by
the November 2001. What is particularly noteworthy is the dramatic decline of $15
billion pesos from March 2001 to November 2001.
308
Another impediment to the
fulfillment of IMF conditions was the fact that they met with significant political
resistance as the Argentine Congress refused to allow any spending cuts that were
politically unpopular.
What may have made Argentina’s financial situation worse were the resignation
and the forced removal of two Ministers of Economy and the subsequent return of
Cavallo to fill this position. Although the arrival of Cavallo was met with widespread
euphoria, the IMF had reservations about Cavallo as he became increasingly
308
International Monetary Fund, The IMF and Argentina, 1991-2001, team leader and compiler Shinji
Takagi (Washington, D.C.: IMF Media Services, 2004), 47.
117
uncooperative with the institution. As the year 2001 progressed, Cavallo announced more
decisions without IMF consultation. Nevertheless, from March to November 2001, it
appeared that the IMF was tacitly approving Cavallo’s decisions as it continued to
complete the reviews from the January 2001 SBA and release funds to Argentina’s
government.
In December 5, 2001, the IMF decided not to complete the fifth review of the
SBA and publicly indicated its disfavor towards Cavallo’s policies. The policy that may
have broken the IMF’s quiet tolerance of Cavallo’s past policies was the banking
restriction that partially froze bank accounts. This measure essentially allowed the
Argentine government to appropriate a portion of its people’s savings from bank
depositors to finance itself, pay off some foreign debt, and prevent bank failure. Overall,
this measure indicated that the federal government was insolvent and that the Argentine
banks were illiquid. Ultimately, the IMF found that Argentina would miss its fiscal
deficit target by $2.6 billion, that the restructure of the fiscal deficit was infeasible, and
that the country would continue to face large financing gap in the immediate future.
Before the year 2001 came to a close, dramatic events were unleashed. Congress insisted
that Cavallo vacate his position as the Minister of Economy. The Argentine people
responded in popular anger over the government’s mismanagement of the country’s
finances. The country officially defaulted on its debt. De la Rúa was driven to resign on
December 20 after two years in power. Puerta, Sáa, and Caamano were essentially all
presidents for “a day,” until Senator Eduardo Duhalde became president on January 1,
2002 with a mandate from Congress to serve out the remainder of de la Rúa’s term.
118
THE IMF AND THE DE LA RÚA ADMINISTRATION
Building on the existing critiques of the IMF, the institution suffered from two
problems during the de la Rúa administration period. The first problem was the absence
of a coherent analysis, particularly its assessment that Argentina’s problem was due to a
liquidity crisis rather than more basic structural problems in March 2000 and 2) its failure
to oversee Argentine government’s decision making when the government instituted a
series of policies without consulting the IMF, notably in the period between March and
November 2001 and its failure to enforce sound economic policy by continuing to release
funds to the Argentine government in spite of serious problems with government policies,
e.g., undermining its earlier banking reforms undertaken in the mid 1990s. One
explanation for this conduct can be explained by the fact that the IMF had a vested
interest in Argentina avoiding a debt default and maintaining Argentina’s image as a
successful example of neoliberal policies favored by the IMF, thus validating the tenets
of the Washington Consensus. In addition, the IMF was concerned about political
backlash against IMF advice, especially since the Argentine government tried to comply
with IMF policy advice from 1991-2001. The IMF did not want to appear that it was
withholding support of Argentina.
First, in the early stages of the de la Rúa administration, the IMF insisted that
Argentina’s economic problems stemmed from a liquidity crisis that could be resolved by
foreign investment rather than more basic structural problems, an example of incoherent
analysis. As a result of this analysis, the IMF approved a new SBA with more financing
and ignored the more serious structural problems facing the country. The IMF failed to
focus on the fact that Argentina’s fiscal imbalance stemmed, in part, from the partial
119
privatization of Argentina’s social security system. As the IMF continued to cling to its
initial analysis, the institution failed to acknowledge the impact of Argentina’s
overvalued exchange rate on its current account balance. Finally, the IMF ignored
warnings from the British and the Canadian board members that Argentina was really
faced with an unsustainable debt problem, and not merely a liquidity problem.
Second, the IMF fell short in overseeing Cavallo’s decision-making, especially in
the period between March and November 2001 when the Argentine government
instituted a series of policies without consulting the IMF. This in turn led to the IMF’s
failure to enforce sound economic policy. It appears that the IMF gave Cavallo too much
leeway, after his return as the Minister of Economy, in his attempt to balance the fiscal
budget and reduce Argentina’s fiscal deficit. For instance, the IMF watched as Cavallo
inadvertently weakened Argentina’s banking system by relaxing bank liquidity
requirements. This was especially troubling since the Argentine government had made
strong efforts to make its banks liquid and well-capitalized in the mid 1990s. Eventually,
Cavallo’s decision led to the possibility of the country facing a serious banking crisis.
The IMF also failed to stop Cavallo from following through with the mega-swap,
especially when the institution calculated how the mega-swap would further straddle the
country with a larger debt and interest rate.
Finally, the IMF’s support for the de la Rúa administration may have had to do
with the institution’s vested interest in Argentina continuing to uphold the image that it
was a successful emerging economy under the tutelage of the IMF. Recent history,
unfortunately, has demonstrated that many countries that follow IMF policy advice were
left worse off and saddled with more debt. The IMF’s continued financial support of
120
Argentina during 2001 gave the false impression that the IMF had faith in the de la Rúa
administration’s policies, and that its borrowers did not default on its loans. It suggests
that the completion of the four reviews of the January 2001 SBA served another function
– “saving face.”
To a certain degree, the IMF may have felt compelled to lend to Argentina to
legitimate the role the institution serves for the international community. In effect, the
completion of the reviews, as mentioned before, might have been a “bookkeeping bailout
of the IMF, not of Argentina.”
309
THE IMF’S FUNCTION
The IMF’s involvement with Argentina restarted in 1991 when the Menem
administration introduced the convertibility plan and ended in December 2001 when the
IMF decided against completing the fifth review of an SBA. The ten year relationship,
based on surveillance and program design, revolved around the IMF identifying
Argentina’s vulnerabilities and offering technical advice to make the country a successful
emerging economy. During the de la Rúa administration in 2000-01 period, the IMF’s
consistent policy advice was balance it budget and deepen structural reforms in order to
maintain the convertibility law. However, the IMF did not always offer concrete methods
to fulfill their requirements. When the de la Rúa tried to deepen reforms and balance its
budget, he was met with fierce political reactions from public demonstrations to the
resignation of top officials. This exemplifies how policy advice cannot be offered in a
political vacuum.
Yet, the IMF stood firm in its conclusion that the solution for the Argentine
government to avoid devaluation and debt default is by securing the confidence from
309
Colin MacLachlan, Argentina, What Went Wrong (Westport, CT: Praeger Publishers, 2006), 177.
121
domestic and international investors. The IMF, as an institution, did undergo tension over
Cavallo’s autonomous policy decisions. This tension, however, was not publicly
showcased as the IMF feared negative market reactions to their concern, especially when
the IMF was aware of the accelerating deposit withdrawals.
CONCLUDING REMARKS
While various factors led to the crisis, the failure of the IMF to adequately
respond to structural problems, such as the retention of the currency peg and the resulting
overvaluation of the peso, raises questions about its performance. During the de la Rúa
administration, in particular, the designation of Argentina’s crisis as a liquidity problem
and the concentration of efforts on attracting foreign capital, and the failure to exercise
sufficient oversight during Cavallo’s term as the Minister of Economy at the end of 2001
indicate the inadequacy of the IMF in helping Argentina overcome the lead up to the
crisis. More generally, the IMF role in Argentina throughout the 1990s lends support to
critics of the IMF’s shift from “lender as last resort” to advisor of emerging countries.
122
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Appendix A
Argentina’s Timeline of Selected Events, 1991-2002
310
1991:
January 30 Domingo Cavallo takes office as Minister of Economy. An
exchange rate band is established, with the lower band of 10,000
australes and the upper band of 8000 australes to the dollar.
March 27 Argentina, Brazil, Paraguay, and Uruguay sign treaty establishing
Mercado Común del Sur (MERCOSUR).
March 28 The Convertibility Law is approved by Congress.
April 1 The Convertibility Law takes effect, with the parity of 10,000
australes per dollar.
July 29 IMF Executive Board approves Stand-By Arrangement with
Argentina.
November 1 President Carlos Menem announces a broad program of economic
deregulation and trade liberalization.
November 14 The Employment Law is approved by Congress, authorizing
temporary contracts and capping indemnity
1992:
January 1 The peso replaces the austral at the conversion rate of 10,000
australes per peso.
March 31 IMF Board approves extended arrangement with Argentina.
May 27 Port services are privatized by decree.
September 23 The new Central Bank Law is approved by Congress, establishing
the Bank’s independence and mandating price stability as its
primary objective.
September 24 Sale of State Oil Company (YPF) is authorized by law.
November 11 An agreement is reached with creditor banks.
December 6 Argentina enters the Brady Plan. The IMF Managing Director
congratulates Argentina on the agreement.
1993:
March 10 The Radical party, labor unions, and retirees demonstrate in protest
of the pension reform.
September 23 Senate approves the pension reform law.
October 3 Lower House elections. Peronists increase seats in Congress.
1994:
August 1 Constitutional Convention approves the new Constitution
permitting a second presidential term.
November 22 Senate approves the privatization of Encotesa (Federal Post and
Telegraph Company).
December 23 Mexico devalues its currency.
310
Most of the information in the timeline come from IMF, Independent Evaluation Office, The IMF and
Argentina, 1991-2001, Shinji Takagi, team leader and compiler (Washington, D.C.: IMF, 2004): 98-100.
134
1995:
March 11 VAT rate is raised to 21 percent from 18 percent.
March 14 Government reveals plans to borrow up to $7 billion, primarily
from the IMF, the WB, and the Inter-American Development
Bank.
March 27 IMF Executive Board approves extension of Argentina’s extended
arrangement.
April 14 Government suspends five banks with liquidity problems.
May 14 Presidential elections. Carlos Menem is reelected as President.
November 29 Lower House grants Minister Cavallo special powers for a year to
balance federal budget.
1996:
April 12 IMF Executive Board approves SBA with Argentina.
July 18 Minister Cavallo threatens to resign if his fiscal adjustment
program is not approved.
July 26 Domingo Cavallo is replaced by Roque Fernández as Minister of
Economy.
1997:
March 24 Postal system is privatized by decree.
April 24 National and provincial airports are privatized by decree.
May 9 A labor reform plan is accepted by unions, introducing flexibility
in labor contracts, but protecting union medical systems from
competition.
August 2 The Radical and FREPASO parties make an alliance, subsequently
to be known as Alianza.
September 15 President Menem promises an increase in pension benefits.
September 21 President Menem promises an increase in teachers’ pay.
November 19 Alianza expresses public support for the convertibility regime.
1998:
February 4 IMF Board approves extended arrangement with Argentina.
March 28 Alianza launches a campaign against a second presidential
reelection.
April 3 Fernando De La Rúa is proclaimed presidential candidate for 1999
elections in Radical party convention.
July 8 Alianza rejects the labor reform plan.
July 12 President Menem seeks Peronist support for a popular referendum
regarding a second reelection. The idea is rejected by both the
Alianza and the Peronist party.
September 2 Labor reform is approved by Congress and becomes law.
October 1 The IMF Managing Director praises the Argentine economy.
October 5-7 President Menem attends the IMF-World Bank Annual Meetings.
Late October Recession begins.
November 29 Fernando De La Rúa wins the nomination of the Alianza as
presidential candidate.
135
December 2 Carlos Álvarez is chosen as the Alianza’s vice presidential
candidate.
Late December Brazil devalues its currency.
1999:
January 11 The court denies President Menem constitutional permission for a
second reelection.
January 15 Press reports of President Menem reaffirming commitment to
maintain the peso-dollar parity.
February 8 Press reports of President Menem proposing dollarization.
October 24 Presidential and Lower House elections. Fernando De La Rúa and
Carlos Álvarez of the Alianza win, with 48.5 percent of the votes.
Alianza increases its seats to 125 (from 105), while the Peronist
party retains 101 seats, a loss of 19 seats.
December 10 Fernando de la Rúa, from Alianza, succeeds the Peronist Carlos
Menem as president with José Luis Machinea as Minister of
Economy. Economy in recession since October 1998. Later in
December, new government passes tax increases.
2000:
March 10 IMF approves US $7.2 billion stand-by loan to Argentina.
April 26 Labor reform is approved by the Senate with some modifications.
Labor unions call for a national strike.
May 11 Labor reform is approved by the Lower House and becomes law.
August 17 Responding to public denunciations, President De La Rúa creates a
special commission, chaired by Vice President Carlos Álvarez, to
investigate the bribery charges associated with the Senate approval
of the labor reform law.
September 4 President De La Rúa affirms that the government has not paid
bribes to get the labor reform law approved.
October 6 Vice president Carlos Alvarez resigns, weakening the government.
December 18 IMF assembles $39.7 billion loan package to Argentina.
2001:
January 12 IMF Board approves augmentation of Stand-By Arrangement and
completes second review.
March 2 Minister of Economy José Luis Machinea resigns.
March 4 Ricardo López Murphy is appointed Minister of Economy.
March 16-18 FREPASO members of the cabinet resign in protest over a
proposed fiscal austerity program. Alliance between the FREPASO
and the Radical party is broken. Labor unions call for a strike.
March 19 Minister of Economy López Murphy resigns.
March 20-21 Domingo Cavallo appointed economy minister and unveils a plan
to increase taxes.
March 26-28 International rating agencies lower Argentina’s long-term
sovereign rating.
136
March 29 Minister Cavallo secures “emergency powers” from Congress.
April 14 Minister Cavallo announces a modification of the convertibility
law, with the replacement of the dollar by an equally weighted
basket of the dollar and the euro.
April 16 Minister Cavallo requests major businesses to purchase “patriotic
bonds” for $1 billion.
April 25 De la Rúa replaces “hard money” central bank president over
alleged money laundering charges.
May 8 Standard & Poor’s lowers Argentina’s long-term sovereign rating
further from B+ to B.
May 21 IMF Board completes third review of Argentina’s Stand-By
Arrangements.
June 3 Mega-exchange of $29.5 billion takes place.
June 15 Minister Cavallo announces package of tax and trade measures,
including a trade compensation mechanism for exporters and
importers of nonenergy goods and a preferential exchange rate for
exports.
June 20 The Senate approves the revised convertibility law, which pegs the
peso with a 50-50 blend of the US dollar and the euro.
June 25 Cavallo’s bill to link peso to euro and dollar is enacted.
July 11 A zero deficit plan is announced, with a mandatory reduction in
expenditure to balance the budget.
July 30 Congress passes “zero deficit” law, legislating more tax increases.
August 10 Press quotes market sources to report that an IMF package will
only delay the default.
Aug. 21-Sept. 7 IMF increases $14 billion stand-by loan to $22 billion to
strengthen the reserves of the Central Bank.
August 21 IMF announces planned augmentation of SBA.
September 5 Press reports that FREPASO is proposing an end of the
convertibility regime.
September 7 IMF Board approves augmentation of Stand-By Arrangement and
completes fourth review.
October 14 Opposition Peronist party wins mid-term congressional elections.
The Peronist party now controls both houses of Congress.
October 30 FREPASO breaks the Alianza coalition in the Lower House.
November 1 New measures, including swap for most of $132 billion public
debt.
November 6 Standard & Poor’s lowers Argentina’s long-term sovereign rating
from CC to SD (selective default).
November 30 Overnight interest rates in pesos average 689% on fears of
devaluation and deposit freeze. Bank run.
December 1 The government and Cavallo introduce a partial deposit freeze
(corralito) and capital controls.
December 5 IMF does not complete the fifth review of the SBA and cuts off
lending.
137
December 6 Cavallo travels to the United States to meet with IMF
management.
December 8 Private pension funds are forced to buy national bonds.
December 12-13 A national strike is called, setting off a series of demonstrations
against the government’s economic policies. Riot and looting
follow.
December 19 Cavallo resigns as the Minister of Economy.
December 20 President Fernando De La Rúa resings over death of
demonstrators. Ramón Puerta, President of the Senate, becomes
interim President.
December 23 Adolfo Rodríguez Saá is elected president by the Legislative
Assembly. He announces partial default on external debt.
December 30 Rodríguez Saá resigns. Eduardo Camano, head of Lower House,
becomes interim president (as Ramón Puerta resigns as Senate
president).
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