Argentina's Chaos Raises New Doubts on Monetary Fund

 



  WASHINGTON, Dec. 21 - The deadly riots in Argentina, the 
collapse of its government and another multibillion dollar 
bailout gone awry have raised fresh questions about the 
effectiveness of the International Monetary Fund and the 
financial policies of the United States, the fund's leading 
shareholder.

  Latin American and European government leaders today joined 
protesters in Buenos Aires, Wall Street traders and financial 
experts in putting at least part of the blame for Argentina's 
problems on the lending agency and the Clinton and Bush 
administrations.

  Some say the monetary fund showed callousness by failing to give 
new aid to Argentina early this month, as the country's economic 
program, designed with I.M.F. approval, was forcing painful 
austerity measures on its citizens. Others say the fund made the 
opposite mistake, repeatedly offering loans to Argentina despite 
indications that the country's policies had become unworkable, 
delaying the day of reckoning.

  These criticisms, even if contradictory, increase pressure on 
the I.M.F. and the Bush administration to articulate a clear 
policy toward financial rescue efforts, which often come under 
fire even when they are judged successful.

  Treasury Secretary Paul H. O'Neill came into office publicly 
denouncing multibillion dollar bailouts, saying that either they 
fail outright or they allow foreign governments to get away with 
bad policymaking and investors to get away with bad bets.

  In practice, however, the Bush administration has yet to take a 
clear stance on such bailouts and has made international 
financial policy a low priority.

  Peru's finance minister, Pedro Pablo Kuczynski, complained today 
that the fund bungled its dealings with Argentina by adopting 
inconsistent policies that were at turns passive and inflexible. 
"The fund is partly to blame for this because the fund did not 
sound the alarm in time and then took a very hard line when 
things were incredibly difficult," he told Peruvian radio.

  Hubert Vedrine, the French foreign minister, assailed the I.M.F. 
for abandoning a longtime client and imposing "demands that have 
been excessive or at the wrong time." The French, who like the 
United States are significant fund shareholders, have called on 
the lending agency to step up its involvement to help Argentina 
recover.

  After some hand-wringing about jeopardizing the money of 
American "plumbers and carpenters," Mr. O'Neill supported a 
multibillion loan for Argentina in August. He has also backed 
two large rescue packages for Turkey, a strategic ally that has 
faced tough financial problems.

  When Argentina's crisis worsened in recent weeks, Bush 
administration officials did not take a firm position, allowing 
the I.M.F. to make the call on withholding additional loans, 
people involved in the fund's deliberations said.

  Even the harshest critics of the I.M.F. put most of the blame 
for Argentina's current plight on a succession of governments in 
Buenos Aires. But many say the monetary fund should have called 
government officials to account sooner.

  Argentina adopted a strict fixed- currency regime and overhauled 
its banks in the early 1990's. It tamed inflation and became, 
for a spell, a glowing economic success story.

  But subsequent governments allowed spending to grow out of 
control, building up a foreign debt that became impossible to 
maintain. Argentina also fell into a deep recession four years 
ago. The government beseeched the I.M.F. for help to stay 
solvent as it tried to work through its problems.

  Backed by both the Clinton and Bush administrations, the I.M.F. 
twice came to the rescue, beginning late last year.

  The idea was to help the country defend its fixed currency, 
which had become a political touchstone, while avoiding default 
on $132 billion in foreign debt, allowing it to continue good 
relations with foreign investors.

  The terms of the aid program were wrenching. The government 
agreed to slash spending during a deep recession to increase the 
chances of making debt payments on schedule.

  "If Argentina got its core economic policies right, it would 
have avoided this problem," said Charles Calomiris, a finance 
and economics professor at Columbia University who has been 
sounding the alarm about Argentina for months. "But the I.M.F. 
and both the Clinton and Bush administrations let them stay in 
denial. They all wanted the problem to fall on someone else's 
watch."

  It is always a tough call to cut off aid, Mr. Calomiris said. 
But he argued that by delaying, the fund helped Argentina dig 
itself into a deeper hole.

  "If you do not show leadership and make it happen early, then 
you face a catastrophe," he said.

  Michael Mussa, the I.M.F.'s chief economist until last spring, 
said the fund was justified in providing aid to Argentina late 
last year.

  But he said that he disagreed with the decision by the fund and 
the Bush administration to continue the aid program in August, 
when he said the situation in Argentina had likely deteriorated 
beyond repair.

  "The fund made a mistake in not saying no in August," Mr. Mussa 
said. "The situation might have been more controllable then."

  The difficulty, of course, is that such calls are much easier to 
make in hindsight. Mr. Mussa acknowledged that even when the 
political and economic situation in Argentina was more stable, a 
move to delay debt payments or devalue the currency ran the risk 
of rattling financial markets and even causing a financial 
implosion in the region.

  In contrast, by watching Argentina wrestle with its finances 
over a period of months, financial markets anticipated the 
possibility of a default. The chances of contagion are now 
viewed as minimal.

  Moreover, it is difficult to place blame for Argentina's 
economic program squarely on the fund when much of the policy 
was designed by Argentina itself, sometimes over the objections 
of the fund's economists.

  At an August meeting at I.M.F. headquarters, fund officials told 
Domingo Cavallo, Argentina's economy minister, that the country 
would be better off delaying debt payments.

  Argentina, however, was determined to pay its debts in full and 
keep its fixed currency in place, fulfilling what it viewed as a 
promise to its citizens and creditors who had been told for 
years that pesos were as good as dollars. It outlined strict 
fiscal policies that it claimed would allow it to meet its 
obligations.

  But by December, as Mr. Cavallo resorted to freezing bank 
accounts and raiding pension funds to find enough hard currency 
to make debt payments, collapse looked imminent. The fund 
decided to suspend aid for a program that appeared to have 
little chance of success.

  Though there were unique elements, Argentina's demise seems 
certain to add to the doubts about the wisdom of bailouts, 
doubts that have grown in recent years. Nearly every major 
financial rescue effort, including those in Mexico, Thailand, 
Indonesia, South Korea, Russia and Brazil, has come under 
intense scrutiny from the left and the right, albeit for widely 
varying reasons.

  Fund officials say privately that they cannot avoid financial 
bailouts altogether. The lesson of Argentina, they say, is that 
they need to find a way to say no before the people they are 
supposed to be helping take to the streets.



Copyright 2001 The New York Times Company