Late July, the Independent Evaluation Office (IEO) of the IMF, released its report assessing the role of the IMF in handling the Argentine debt crisis for the decade from 1991 to 2001. The IEO found that the crisis has done sizeable damage to the Fund’s reputation: associating it with inappropriate policies, creating a perception that it lacked even-handedness in dealing with member countries, and putting its role in signalling sound policy environments into question.
The report found Fund surveillance in the pre-crisis period severely lacking. There was no exploration of the implications to debt sustainability of less favourable economic developments. Staff repeatedly overlooked or waived reforms which the government failed to implement. Perhaps most damaging, instead of emphasising the policies needed to make the exchange rate regime viable, the Fund chose “to endorse the exchange rate regime itself.” Many analysts attribute the severity of the crisis to the government’s refusal to abandon the currency peg until it was too late. The report recommends strengthened, more candid surveillance of exchange rate regime choices. It argues that the Fund should avoid prolonged programme involvement if policies are not being undertaken to deal with fundamental problems.
On the Fund’s handling of the crisis in 2001, the IEO argues that what Argentina needed was ‘stronger medicine’. However, it finds that the Fund did not develop an exit strategy in case its assumptions proved wrong (which they did); failed to adequately assess exchange rate and debt sustainability; and was unwilling to discuss alternatives to their preferred strategy. The absence of a fallback strategy led to “repeated attempts to use the same strategy when it was evident that it had failed.”
responsibilities for the Fund stemming from its reckless support of the exchange rate regime
The authors were particularly scathing about the Fund’s second rescue attempt, an $8 billion loan in August 2001. The loan was approved to “ensure that the [Argentine] authorities, not the IMF, took responsibility” for the painful changes that had to be made. The prospects of success were “at most 20-30 percent” and most staff recognised that the loan would disappear to overseas bank accounts in capital flight.
The IEO recommends that a set of criteria be developed – “stop-loss rules” – to determine if an initial strategy is working and to signal whether a change in approach is needed.
Considerable weaknesses were revealed in the decision-making process at the Fund. According to the report, there was “a lack of transparency regarding who is responsible for a particular decision”. The Board was often not provided with sufficient information to make an informed decision on which strategy to adopt. This reflects “a larger problem of governance in the IMF, where important decisions are made by major shareholders outside the Executive Board and chairs representing developing countries hardly, if ever, challenge the proposal brought to the Board by management to support a member country.”
The report recommends strengthening of the Board. Enhanced transparency and accountability are urged, and Directors should be able to formally request “additional staff analysis” on key issues. This would represent an improvement over the current situation where “some Directors seek additional information through informal exchanges with senior staff, which are typically not shared with the entire Board.”
Response to the report
Fund staff agreed with the report’s diagnosis of the crisis and with the analysis that “the Fund erred by not pushing strongly enough for needed reforms.” However, they insisted that the report did not consider informal channels by which the board was given information.
Executive directors felt that defining stop-loss rules would be “difficult or impractical”. They encouraged staff to keep them fully informed of the state of policy discussions, and called for improvements in the provision of full information on all issues relevant to decision-making, and open exchanges of views between management and the Board on all topics, including the most sensitive ones.
Argentine finance minister, Roberto Lavagna, was more candid in his remarks. He characterised Fund surveillance efforts as “ideological assessments” which blur the capacity of the Fund to conduct objective assessments of policy reform. Fund support for the currency board exchange rate was “reckless”. He agreed with the report’s authors that a more participative decision-making process was needed: “the practice by certain prominent shareholders of by-passing the board raises serious transparency concerns”. Lavagna demanded that the Fund bear responsibility for its failures.
Fast forward to the present
Argentina will shortly face a renewal of its stand-by agreement with the IMF. A UK-based alliance of groups called Economic Justice for Argentina is calling on treasury head Gordon Brown to soften the UK stance on debt repayment. The group says that the debts are “unjust, irrational and irresponsible”, highlighting the conduct of banks which sold Argentine junk bonds to unsuspecting pensioners at the height of the crisis. A letter signed by 50 Argentine MPs calling for a “fair, independent and transparent judicial process to resolve the situation” was presented to the chancellor.