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Argentina and the IMF Making It Up?

Argentine centavos. (photo: morrissey via Flickr)

Historically the International Monetary Fund has often been seen, with no little justification, as the front-line policeman for enforcing the economic demands of the neoliberal Washington consensus. It has the ability to make emergency loans to governments in financial difficulty in a relatively short response time and in turn its evaluations and recommendations carry substantial weight with longer term lenders such as the World Bank and major private financial institutions. It is an important gatekeeper for the financial markets that have been dominated by the US and Europe. Those nations have controlled its governing board and policies.

Argentine president Nestor Kirchner became the international poster boy who mounted a rebellion against the IMF. In 2006 he paid off  $9.8B in debt to the IMF and refused to have any further dealings with them. Argentina had experienced a period of truly tumultuous financial crises between 1999 and 2002. Adherence to the economic austerity policies prescribed by the IMF is often cited as a major contributing cause of this devastating crash. One major problem was that Argentina was following a policy of maintaining the exchange rate of the peso in parity with the US dollar. This resulted in an extremely tight domestic monetary policy. When that policy was terminated in 2002 the peso was devalued by 70% and there was domestic inflation of 40%. The country defaulted on $132B of debt.

Argentina entered on a complex debt restructuring program. One thing that enabled them to repay the IMF loans was that Venezuela bought $1.6B of their bonds. After paying off the IMF they were able to reenter the international credit markets, but about $6.7B of debt obligations still remain in default. They have continued to rely heavily on Venezuela as a source of credit. . . .

After essentially pulling the plug on the international credit markets Argentina has been able to improve its economic circumstances.  They experienced economic growth of an average annual rate of 9% from 2003 – 2007. This growth was export driven and sustained a large positive balance of trade. Kirchner became a very active and vocal opponent of international neoliberal policies. When his term of office ended in 2007 he was succeed by his wife Cristina Fernandez de Kirchner. It was understood that Kirchner would remain a very active participant in running the government. Argentina was impacted by the global recession but an aggressive stimulus program was able to return the economy to slight modest growth.

On October 26th of this year Kirchner died suddenly of coronary complications. That leaves President Fernandez on her own to run the country. There are indications that she may already be altering course to some extent.

Default Risk Sinks Most in World on Paris Club, CPI Plan: Argentina Credit

Argentine bond risk is falling the most in the world this week after President Cristina Fernandez de Kirchner pledged to open talks with the Paris Club on $6.7 billion in defaulted debt and redesign the consumer price index.

Fernandez said Nov. 16 the Paris Club group of creditor nations accepted Argentina’s request to start talks to restructure the debt without International Monetary Fund oversight. The government also asked the IMF this week to help revamp the national consumer price index amid concern the data doesn’t reflect the true inflation rate.

The request to the IMF at this point is for technical assistance only. However it is being widely reported by international media today. It may or may not represent to possibility of a closer relationship developing. Argentina has been experiencing the same pressures from international credit markets as many other nations that are driving up the cost of borrowing. These moves seem to be an effort to placate those markets to some extent. The article quoted above reports that these preliminary moves have resulted in a modest decrease in the yields on Argentine debt.

As other countries such as Ireland are finding themselves under great pressure to negotiate bailout deals with the IMF, the precedent of Argentina is frequently raised to suggest that there are viable alternatives available. Argentine policies seem to be undergoing a review following Kirchner’s death. It will be very interesting to follow the developments.

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Richard Lyon

Richard Lyon