A New World of Citizen Action, Analysis, and Policy Options

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However, facts and data indicate that the default and crisis were the logical outcome of a massive debt accumulation process which was the direct result of: 1) the negative effects of policy prescriptions by the IMF and the World Bank (WB), enthusiastically implemented by Argentine officials and 2) a series of exogenous shocks which ranged from U.S. interest rate hikes to financial crises in Asia, Russia, and Brazil. These shocks led to spiraling costs of public sector borrowing and to massive capital flight as the system unraveled. The combination of inconsistent macroeconomic  policies and exogenous shocks led to an economic collapse in December 2001 of historical proportions. While the Argentine fixed exchange rate regime had managed to survive the Mexican and Asian financial crises, the Brazilian crisis proved too much for an economy straining under the effects of an overvalued currency. A recession set in during the last quarter of 1998, which was to become a depression. By the end of the depression in the second quarter of 2002, Argentina had lost almost 20% of its gross domestic product (GDP). Under these conditions and as a result of the exponential growth of Argentina’s public debt, sovereign default was not only a logical consequence; it was also a necessity. Economic reactivation would have been uncertain and perhaps impossible in the absence of such a default. Also fundamental to economic recovery was abandoning the fixed exchange rate regime, allowing for a more realistic set of relative prices.

The 1990s Convertibility Regime and The Debt: From Solution to Explosion

The origins of Argentina’s recent debt troubles date back to the 1976 military dictatorship. When the military took power, Argentina’s public debt totaled approximately $8 billion. By the time they left seven years later it had more than quintupled to $45 billion.2But the latest chapter in Argentina’s debt accumulation saga was inaugurated in 1989, when Carlos Menem was elected president in the midst of substantial social unrest and economic instability brought on by very high inflation rates. Menem had campaigned on a traditional populist discourse, promising higher wages and a “productive revolution.”

However, as soon as he took office it became clear that his policies would be diametrically opposed to his campaign promises. Orthodox economic policies implemented to try to control inflation resulted in another hyperinflationary episode toward the end of 1990. As a result, in early 1991 Menem appointed Domingo Cavallo, a Harvard-trained economist, as economy minister. Cavallo promptly implemented a radical stabilization and economic restructuring program known as the Convertibility Plan. The main components of Lessons from Argentina’s Experience with the IMF, Debt and Financial Crises

By Alan Cibils | September 6, 2006

Argentina’s spectacular December 2001 financial crisis and default have received much attention and media coverage, with many interpretations being offered for its causes and consequences. Despite overwhelming empirical evidence to the contrary, the International Monetary Fund (IMF) and the financial establishment still claim that the root cause of Argentina’s crisis was the public sector’s inability to reduce its deficit. this plan were: 1) trade liberalization, 2) financial and capital account liberalization, 3) privatization of all state-owned enterprises, 4) a prohibition on printing money unless it was backed by dollars in the Central Bank’s reserves, and 5) pegging the peso to the dollar by law on a one-to-one exchange rate. The Convertibility Plan’s main stated objective was to reign in inflation and to provide a strong anchor for expectation formation. However, the plan’s objectives went much further. Over the next decade it would produce a profound transformation of Argentine society and economy that would definitively dismantle what was left of the welfare state. The success of the Convertibility Plan hinged upon attracting foreign capital inflows. Once this was achieved, it would allegedly set off a “virtuous cycle” of economic growth and general welfare improvements for the population through “trickle down” effects, which would then lead to further investment flows and so on. Solving the debt problem was seen as key to attracting foreign capital. Therefore, a “once-and-for-all solution” to the debt problem was devised, which hinged on two main components: first, privatization of state enterprises and second, a debt swap of the old loans for new “Brady” bonds (Kulfas and Schorr 2003).

Official faith in such a strategy was such that Minister Cavallo claimed in 1993 that “the public debt will be insignificant by the end of the century.” The first part of the solution to the debt problem consisted of allowing state enterprises to be privatized, purchased partly with Argentine public debt bonds. This was the case of the national telephone company, Entel, and the national airline, Aerolíneas Argentinas. This operation greatly favored holders of Argentine debt, since they were given full credit for bonds that were trading at 15-20% of their nominal value on the open market.

(Table 1)

The second component of the solution to Argentina’s debt came with the Brady Agreement, signed in December 1992. According to this agreement, Argentina would swap its $21 billion debt to commercial banks plus $8.3 billion in late payments for 30-year Brady bonds, with lower interest rates and an average capital reduction of 35% (Kulfas and Schorr 2003:20). The main result of this swap, as can be seen in Table 1, was the atomization of Argentina’s creditors from a few northern commercial banks to hundreds of thou- sands or millions of bondholders around the world. How permanent was this solution to Argentina’s debt problem? The data in Table 1 show that Argentina’s public debt continued to grow at an alarming rate throughout the 1990s, reaching explosive levels toward the end of the century and the much publicized default. What were the reasons behind this explosive debt accumulation? Perhaps the most widespread explanation given for Argentina’s December 2001 debt crisis is that the country was unable to reign in its runaway fiscal spending and therefore needed to borrow increasingly large sums to both finance its deficit (since by law it was prohibited from financing its deficit by printing money) and to service its rapidly accumulating debt. According to Anoop Singh, the IMF’s Western Hemisphere Director, “Failures in fiscal policy constitute the root cause of the … crisis.” This view continues to be voiced by high-ranking IMF officials, such as First Deputy Managing Director Anne Krueger, and is mentioned repeatedly in the Fund’s Independent Evaluation Office’s report on the IMF’s role in the Argentine crisis (IMF 2004). Many orthodox economists in Argentina and abroad and much of the business media support this view as well.

However, when examined against actual data, the contention that Argentina’s spiraling debt was caused by runaway fiscal spending becomes untenable. Rather, two main causes emerge for Argentina’s 1990s debt build-up. The first was the growth in debt service due to external shocks, and the second was the privatization of social security.

(Table 2)

External Shocks

Table 2 shows the central government’s revenue, spending, interest payments, and primary and overall budget deficit or surplus from 1993-2001. It is difficult to find evidence that the government’s fiscal policy played a significant role in bringing about the December 2001 debt crisis. Although the government budget does move from a surplus of 2.7 billion pesos in 1993 (1.2% of GDP) to a peak deficit of 8.7 billion pesos (3.2% of GDP) in 2001, this worsening of the fiscal balance is not a result of increases in government spending. Rather, the country was hit with a series of exogenous interest rate shocks that caused a debt spiral and eventually a default. This can be seen from the data on the government’s primary balance (excluding interest payments) in Table 2. The primary balance moves from a surplus of 5.6 billion pesos in 1993 (2.4% of GDP) to a surplus of 1.5 billion (0.5% of GDP) in 2001. But this worsening of the primary balance was not a result of government decisions to increase spending. Primary spending was 19.1% of GDP in 1993, and 18.6% for 2001. Rather, Argentina got stuck in a debt spiral in which higher interest rates increased the debt and the country’s risk premium. Argentina’s unrestricted capital mobility and fixed exchange rate system—a deadly combination—made it impossible for the country to withstand the rising interest rates. A recession that would become a depression began in late 1998, substantially eroding economic activity and fiscal revenues. The government’s response, following IMF prescriptions, was to implement substantial reductions in fiscal spending, which only deepened the recession. This combination of policies and events led to ever-higher interest rates and debt service payments until default became all but inevitable in December of 2001.

Social Security Privatization

In 1994 the Argentine government privatized the public pay-as-you-go social security system that had been in existence since 1967. This decision was strongly promoted and facilitated by the World Bank and the IMF and had a major impact on Argentina’s fiscal accounts.5As Table 3 shows, the lost revenue, plus accumulated interest costs, amounted to nearly the entire government budget deficit in 2001.6

(Table 3)

The reason social security privatization had such a substantial impact on government accounts is really quite simple and should have been easily predicted. The government lost most of the social security contribution revenues which, following privatization, were funneled to the private pension funds. However, the government’s expenditures on social security remained the same, as all of the retirees on the pay-as-you-go system continued to collect their pensions from the government. In this way a gap was created that amounted to one percent of GDP each year between 1995 and 2001. Due to restrictions on deficit financing imposed by the Convertibility regime, the government’s only option was to borrow to cover the gap. This resulted in a debt spiral which, coupled with higher interest rates described earlier, produced the explosive debt accumulation process leading to the collapse in December 2001.

In sum, a combination of exogenous shocks and the privatization of the social security system were the main factors responsible for the debt buildup of the 1990s. These problems were compounded by the economic recession, which began in the third quarter of 1998, which was to become a full-fledged depression, and the recessionary fiscal policies that the government implemented at the behest of the IMF.

The Role of the IMF

Following the Argentine financial crisis, the IMF went to considerable lengths to try to distance itself from any responsibility for the Argentine catastrophe, claiming that what happened was purely the responsibility of Argentine officials.7However, the IMF participated heavily in Argentina’s macroeconomic policy formulation, before and during the crisis. These policies, many designed from the offices of the IMF and applied not only in Argentina, but in developing countries all over the world, contributed directly to the crisis. First, as the IMF’s Independent Evaluation Office (IEO) report clearly states, the Fund prescribed many of Argentina’s policy reforms during the 1990s, including the privatization of social security. Support went beyond mere words, as privatization was a condition in several of the IMF agreements signed during the 1990s. Second, when the depression began in late 1998, the IMF demanded a series of spending cuts in order to eliminate the fiscal deficit. However, since the deficit was not due to increased government spending, but to rapidly increasing debt-service payments, the cuts implemented at the IMF’s behest actually deepened the debt cycle. Spending cuts led to a drop in economic activity, which resulted in decreased tax revenues and a higher deficit. At this point, further fiscal spending cuts were implemented, and so on and so forth. Third, the IMF tripled its exposure to Argentina (from $5 billion to $15 billion) just three months before the default. This seemingly contradictory measure served to buy sufficient time for those vying to take their capital outside the country, deepening the capital flight process that eventually resulted in the run on deposits in early December 2001.

The IMF’s active participation in the Argentine catastrophe does not end with the December 2001 default. Following the crisis, the IMF committed major errors in all three key areas of policy formulation: a) in its diagnosis of the crisis and its aftermath, b) in its projections about the evolution of key economic variables in the post-crisis months, and c) in its policy prescriptions. These mistakes are clearly laid out in an unprecedented official document (Ministerio de Economía y Producción 2004).

Furthermore, the IMF went considerably beyond its mandate, making recommendations that had nothing to do with the Fund’s purview or supposed areas of expertise. For example, in the months following the crisis the IMF demanded that Argentina change its bankruptcy law to remove protections for firms filing for bankruptcy and to provide better conditions for creditors. The IMF also demanded the repeal of the “economic subversion” law, under which the government could investigate white-collar crimes committed by firms, banks, or individuals.

At the time, the law was being used to investigate capital flight that had violated banking restrictions implemented during the crisis. Both laws were modified according to the IMF’s demands. These reforms led to virtual impunity for many speculators and white-collar criminals and delayed the possibility to restore productive capacity in businesses filing for bankruptcy due to the crisis.

In sum, it is clear that the IMF was at least partly responsible for the Argentine crisis. When the crisis hit, the IMF repeated the same blunders. Argentine authorities concluded in a declaration at the time that “the IMF’s technical staff appears not to be totally up to the task of dealing with a situation where a large crisis has erupted and should, therefore, give local authorities a greater margin to formulate and implement economic policies necessary to deal with the crisis” (Ministerio de Economía y Producción 2004:10, author’s translation).

Debt Restructuring: Did it Solve the Debt Problem?

The process to emerge from default began in September 2003, when Argentina issued a set of conditions to creditors under which it was willing to restructure its debt. These included a 75% capital reduction, considerably lower interest rates, much longer maturities, and no recognition of interest payments accrued since the default. Private creditors and the IMF opposed these conditions and demanded a better offer.

On June 1, 2004, a new offer, the “Buenos Aires proposal,” was issued representing a 100% improvement for defaulted creditors: interest rates were doubled, the reduction was lowered from 75% to roughly 45%, and past due payments since the default were acknowledged as part of the debt. The Buenos Aires offer was still not accepted by the IMF or the creditors. The Argentine government stated that the offer was final because it was based on realistic sustainability assumptions. The debt restructuring proceeded even if, for the first time in the history of modern defaults, it did not have the explicit IMF support. The debt-swap process ended on February 25, 2005, with a

76.15% acceptance rate. The Argentine government actively promoted this result as a success and declared the default to be definitively over. Specifically, the debt restructuring results can be summarized as

•Of the $81 billion in defaulted debt, $62.318 billion or 76.15% entered the debt swap. Holders of roughly $19 billion did not accept the terms and conditions of the swap and remain as hold- outs.

•For the $62.318 billion that entered the swap the Argentine government issued $35.261 billion in new bonds. That is, the reduction on the nominal value of the defaulted bonds was 43.4%.

•The maturity of the new bonds is considerably longer (between 30 and 42 years) and the interest rates are considerably lower.

•The currency structure of the new debt also changed considerably. A full 37% of the total stock of post-swap debt is now denominated in pesos.

•The debt to GDP ratio went from 113% at the time of default in December 2001, to 72% after the default. However, if the $19 billion holdout debt is taken into account, total debt-to-GDP ratio is 87%.

A Lasting Solution?

The government presented the debt restructuring swap results as a resounding success, however, there are fundamental problems left unsolved. Acceptance of all pre-default debt as valid: The Argentine approach to debt restructuring unquestioningly accepted all pre-default debt as valid. This meant ignoring not only the substantial irregularities committed by the military dictatorship (1976- 1983) debt build-up, but also validating the financial speculation cycles and huge scams of the post-1990 era.

Critics have rightfully argued that the government should have used the opportunity provided by the default to do an in-depth examination and depuration of the stock of public debt. IFI debt unquestioned: The Argentine government also decided to fully honor the $32 billion in debt with international financial institutions (IFIs), without even seeking more favorable repayment conditions. Official justification for this approach was that the government needed G7 support to carry out a successful debt swap and challenging the validity of IFI debt could have jeopardized the success of the debt restructuring effort. Clearly, the official strategy failed, since the IMF and the G7 never did back the Argentine debt restructuring process.

Paying off the IMF (poster child till the bitter end): If the Argentine official strategy vis-à-vis IFI debt was questionable, the strategy on IMF debt was downright scandalous. Official debt-service sustainability projections had been based on an agreement with the IMF that would have provided for the rollover of 100% of IFI capital payments for the foreseeable future. However, in order to refinance this debt, an agreement with the IMF was necessary. This would have required implementing the same IMF policies that were largely to blame for the 2001 crisis. Submitting to such conditionality would mean putting the economic recovery at risk. Argentina had substantial leverage within the Fund.10With a $10 billion debt,viii Argentina was the IMF’s third largest debtor, behind Brazil and Turkey. As the old adage goes, “If you owe the bank $10,000, you have a problem; if you owe the bank $10 billion, the bank has a problem.” Therefore, Argentina had several options available:

1) Continue to service IMF debt according to the original payment schedule.

2) Unilaterally restructure IMF debt, making its maturity equal to that of restructured bonds (35 years on average).

3) Unilaterally restructure IMF debt, imposing similar conditions to those of the restructured debt

(capital reduction, lower interest rates, and longer maturity).

4) Default to IMF, as a way to recover some of the losses caused by IMF blunders. However, rather than taking any of the above options, the Kirchner administration opted for a solution suggested by the IMF itself: to pay the Fund in full, in advance using Central Bank international reserves. This is exactly what the Kirchner administration did in early January 2006. In this way, Argentina proved that it was the IMF’s poster child till the bitter end. Postdefault debt fully recognized: In the months following the 2001 default and subsequent peso devaluation, the Argentine government issued $35 billion in new debt. As a result of the devaluation, the financial system entered a new crisis as many bank customers had dollar-denominated loans. In order to avoid massive bankruptcies, the government converted all loans to pesos at the old exchange rate of one peso to one dollar, and issued bonds to the banks for the difference with the actual (higher) exchange rate. In the process, the government bailed out countless large corporations, many of which were in no risk of bankruptcy due to the devaluation. Critics maintain that beneficiaries of this bailout should have been identified, and a tax levied against those who benefited unduly. This was not done and, as a result, the Argentine taxpayer and defaulted creditors must pay for this unnecessary corporate bailout.

Nothing Certain but Debt and Taxes

How much of a solution to Argentina’s decade-long debt problem does this latest debt swap represent? The answer to this question depends on the debt service structure in the years ahead, and on other factors such as economic growth, fiscal revenue, the exchange and inflation rates, the balance of payments, foreign interest rates, etc. Table 4 contains a schedule of Argentina’s debt service obligations for the period 2006-2016. Although there are important omissions which

make the debt service schedule considerably more

onerous,13several conclusions can be drawn:

1)Argentina’s debt service obligations through 2011

exceed three percent of GDP. Furthermore, through 2009 Argentina’s yearly debt service obligations exceed four percent of GDP. Even with IMF debt service out of the picture, the government will have to issue new debt in order to meet its debt service payments. New debt issues and growth rates above three percent will result in heftier debt service payments in the short and medium run, which means that the debt service load will be considerably heavier than what Table 4 shows.

2)Argentina’s debt service schedule, augmented by new debt issues, implies that the government will need to have large sustained primary fiscal surpluses for many years to come. Indeed, a recent publication by University of Buenos Aires economists concludes that for Argentina not to have another debt crisis, it will have to maintain a primary surplus of three percent of GDP and positive growth rates for the next 25 years (Schvarzer et al., 2006). This would represent a

significant break with Argentina’s 200-year history, since it was never able to obtain such results.

(Table 4)

3)Furthermore, obtaining a primary surplus of this magnitude on a sustained basis will depend on:

a)High rates of growth: Argentina’s tax structure is highly dependent on economic activity; therefore, in order for fiscal revenue to keep up with debt service, high rates of growth are necessary. However, high growth rates also impact debt service, as much of the restructured bonds have “GDP-linked” coupons.

b)Tight control over fiscal spending: In order to obtain and sustain a surplus, fiscal spending must be kept under check. This means continuing to postpone public sector wage increases and other urgent needs, such as alarmingly high rates of poverty, indigence, unemployment, and dealing with the profound crises in the education and public health care systems.14

c)Export growth: Fully one-third of fiscal revenues come from export taxes. In other words, maintaining a primary sur- plus means that exports will need to continue to grow apace. Furthermore, since two-thirds of Argentina’s public debt is denominated in foreign currency, maintaining a trade surplus will be key to getting the foreign exchange needed to meet debt service payments.

4)Maintaining a trade surplus depends on being able to maintain price competitiveness, and price competitiveness depends on being able to maintain a competitive exchange rate and low salaries in relative terms. In other words, this means being able to continue to postpone long-delayed real wage improvements for Argentine workers who have seen their income consistently eroded in real terms for the last three decades of neoliberal economic policies.

5)Inflation control is another key component of the government’s policy agenda. Inflation has two major potential impacts with regards to debt service. Firstly, inflation affects consumer and investor expectations and can eventually impact negatively on economic growth. Secondly, one- third of Argentina’s restructured public debt is denominated in domestic currency and is linked to inflation. An increase in inflation directly impacts on the country’s debt service commitments. The government’s main effort to contain inflation is to maintain the set of relative prices that resulted from the 2002 devaluation. This means keeping wages repressed, an increasingly

difficult task as demands increase for redistributive policies to make up for many years of real-wage decline.

6)The overriding conclusions are that a)In the “best case” scenario, for the next 30 years debt service will continue to be a dominating factor of Argentina’s economic, social, and political life, and

b)There is no chance that the regressive effects of three decades of neoliberal policies will be undone in the short or medium run.

In sum, even after the devastating crisis of 2001, Argentina still has not left its cycles of debt accumulation, crises, and restructuring behind. Argentina’s debt-service schedule, especially in the short to medium term is hefty and being able to keep up with it depends on maintaining the highly unequal economic structure of the past decades.

Lessons From the Argentine Case

Argentina’s experience with debt and financial crises over the last decades provides important lessons:

1)Default can be a viable option: Clearly default should not be taken lightly, but it has been and will likely continue to be an option for sovereign borrowers. The Argentine case shows that defaulting was not as disastrous as many had predicted. Indeed, the default helped Argentina to end the unviable fixed exchange rate regime and it freed up resources to deal with the multiple dislocations that resulted from the devaluation. Whether the time and resources were put to their best use in Argentina is a different matter, but it is unquestionable that the default was the correct and most efficient option, given the circumstances.

2)As a corollary, public debt should be subject to strict scrutiny and rules, to avoid excessive indebtedness and financial cycles and crises which are costly and undesirable. Debt acquisition should be scrutinized by representative institutions and be subject to extensive sustainability analysis.

3)It is easier to default on foreign borrowers than on domestic borrowers: It is clear from the bailouts to privatized pension funds, banks, and the corporate sector that it is easier to default on foreign bondholders than on powerful domestic economic actors. The main consequence of a default on foreign borrowers is political and perhaps financial. Defaulting on domestic borrowers would almost certainly have substantial political repercussions in addition to economic and financial consequences.

4)Pleasing financial markets should not be the aim of debt restructuring processes: For a debt restructuring process to result in a sustainable and serviceable debt load in the long run it must be based on an economy that grows thanks to a strong internal market and an equitable distribution of income. This is opposite to the Washington Consensus prescriptions, centered on fiscal austerity, financial liberalization and the free flow of speculative funds—precisely the policies that feed financial cycles and crises.

5)Ending financial stop-and-go cycles and debt-led capital accumulation should become a priority: Argentina is a prime example of the failure of financial liberalization and “debt-led” development policies. Since dependence on foreign capital flows and indebtedness do not lead to sustainable development, it is of prime importance to abandon these policies in favor of economic policies that promote sustainable and egalitarian growth. It is essential to reclaim much of the language, ideas, and theory of development economics that neoliberal economists discarded for the last 30 years, beginning with a strong State capable of efficiently intervening and regulating economic activity.

6)The success of a debt restructuring process cannot depend on prolonged, large primary fiscal and trade surpluses: In the Argentine case, the success of the debt restructuring process depends on high primary fiscal surpluses for a prolonged period of time, a questionable strategy with dubious chances of success. Market economies are subject to economic cycles, and Argentina is certainly no exception. To assume that an economy will indefinitely have positive growth and primary and trade surpluses is unrealistic. Unfortunately, this is precisely the assumption made in the government’s sustainability analysis.

7)The IMF is incapable of predicting financial crises and lacks the tools or knowledge to deal with the crisis once it erupts: Despite the IMF’s refusal to admit this, its “one size fits all” approach to economic policy and crisis resolution has failed repeatedly around the world. Furthermore, the Fund’s policies do not result in sustained growth or economic development, as the Argentine experience shows. Rather, deindustrialization, increased income inequality and poverty, and persistent, high unemployment are the hallmarks of IMF policies. Therefore, if sustained growth is a policy objective, the IMF’s advice should be ignored.

8)The international financial institutions must be redesigned: The IMF’s substantial mishandling of the Argentine (and other) financial crises clearly points to the need for institutional redesign. The Fund’s and World Bank’s grossly mistaken policy prescriptions point in the same direction. It is clearly desirable to create a true international lender of last resort that will pro- vide financial assistance to countries experiencing a crisis. Additionally, IFIs should be account-

able for the policies they prescribe and the results they produce.

History will tell if the lessons from the Argentine debt debacle will help to modify the current process of international economic integration and the development policies of peripheral countries. If debt default is simply used as a shortcut to return to the liberalized international capital markets, then clearly not much will have been learned. Rather, the task ahead should be to define a development strategy that leaves behind the model of spasmodic debt- accumulation cycles and focuses on sustainable and egalitarian growth.

ENDNOTES

i “In our view, failures in fiscal policy constitute the root cause

of the current crisis,” declared Anoop Singh, IMF Director for

Special Operations, in Buenos Aires on April 10, 2002, 4 ½

months after the default. This view is repeated by IMF offi-

cials to this day, and is a central part of the IMF’s

Independent Evaluation Office’s report (IMF 2004).

ii For a description of the reasons behind the military dictator-

ship’s debt accumulation, see Basualdo (1987), Olmos

(1989), and Cibils and Lo Vuolo (2005) and the works there

cited.

iii Much has been written on the Argentine default. See for

example Lo Vuolo (2003) and Cibils et al (2002).

iv Press briefing, Buenos Aires, April 10, 2002 (at

http://www.imf.org/external/np/tr/2002/tr020410.htm).

v For a detailed analysis of how Argentina’s social security pri-

vatization failed and a proposal for reform, see Lo Vuolo and

Goldberg (2005).

vi See the Baker and Weisbrot (2002) appendix for the assump-

tions behind the calculations in Table 3.

vii The prime example of this is the extensive report produced

by the IMF’s so-called Independent Evaluation Office (IMF

2004).

viii The restructuring conditions and other official debt-related

information and data can be found at: http://www.argen-

tinedebtinfo.gov.ar/.

ix If one adds interest payments due since the default, holdout

debt becomes roughly $24 billion.

x At the time of the default, Argentina owed the IMF $15 bil-

lion. Between January 2003 and August 2004, there were

two successive agreements in place which provided for the

rollover of capital payments. However, when in August 2004

the IMF inexplicably delayed approval of an agreement

review, Argentina unilaterally decided to suspend the agree-

ment. From that point on, Argentina paid the IMF in full and

on time each time a payment came due.

xi On June 20, 2005, the IMF concluded its Article IV

Consultation with Argentina. In the press release, it explicitly

stated that “most Directors considered appropriate that the

authorities should have the flexibility to draw on their inter-

national reserves to finance the significant levels of debt

service, including repurchases to the Fund …”

(http://www.imf.org/external/np/sec/pn/2005/pn0583.htm).

xii In reality, Argentina’s net stock of public debt did not change, since the Argentine Treasury had to compensate the Central Bank with bonds for the reserves it was taking to pay off the IMF.

xiii The data in Table 4 does not include: 1) the January 2006 $10 billion pay-off to the IMF; 2) $5.3 billion which the Argentine Treasury owes the Central Bank and was supposed to pay in 2005; 3) debt service payments for the $10 billion in bonds issued to the Central Bank to make up for the reserves used to pay off the IMF; 4) debt service payments for new debt issued in 2006, which by May totaled $2.3 bilion;

5) the $24 billion holdout debt; and

6) the $2.5 billion debt to the Paris Club and other official creditors, which is still in default and pending restructuring later this year. xiv While the poverty rate has dropped from 54% in 2002, it is still at 34% and 10 points above the May 1998 poverty rate, before the last depression began. Indigence (basic needs unmet) is 12.2%, down from 27.7% in 2002, but more than double its May 1998 level (5.3%). Finally, while unemployment is down from 24% at the peak of the crisis, it is still at 14.1%. Underemployment is currently at 11%, which means that 25% of the economically active population has trouble finding full-time work.

xv Ilene Grabel (1995) has wittily and ironically called this

“speculation-led development.”

Alan Cibils is a research associate at the Centro Interdisciplinario para el Estudio de Políticas Públicas (www.ciepp.org.ar) in Buenos Aires, Argentina and an analyst for the IRC Americas Program at http://www.americaspolicy.org.

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su reestructuración, Buenos Aires, CIEPP-Fundación

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Olmos A. (1989), Todo lo que usted quiso saber sobre

la deuda externa y siempre le ocultaron: Quienes y

cómo la contrajeron, Buenos Aires, Ediciones

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Argentina, Notas de Coyuntura Nº22.

Published by the Americas Program of the International Relations Center (IRC, online at http://www.irc-online.org). ©Creative Commons – some

rights reserved.

The Americas Program

“A New World of Citizen Action, Analysis, and Policy Options”

Founded in 1979, the IRC is a nonprofit policy studies center whose overarching goal is to help forge a new global affairs agenda for the

U.S. government and people—one that makes the United States a more responsible global leader and partner. For more information,

visit http://www.americaspolicy.org or email americas@irc-online.org.

Recommended citation:

Alan Cibils, “Till Debt Do Us Part: Lessons from Argentina’s Experience with the IMF, Debt, and Financial Crises” (Silver City, NM: International Relations Center, September 6,

2006).

Web location: http://americas.irc-online.org/am/3489

Production Information:

Writer: Alan Cibils

Editor: Laura Carlsen, IRC

Layout: Chellee Chase-Saiz, IRC

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