IMF shares blame for Argentina’s collapse

1 January 2002

Many eyes are now looking to see how Argentina will manage its financial and political crises. The country’s failure to pay part of its US$155 billion public debt due on 3 January has formally put the country in debt default. The Argentina experience may boost the argument for a formal debt standstill and rescheduling mechanism.

Talks in November between the IMF and the government of Argentina failed to reach agreement on the early release of a further US$1.26 billion to cover debt payments coming due. The IMF withheld the money on the basis that the government would not be able to reach IMF budget targets without a further US$4 billion cut. At the time, the country was already operating under a strict budget policy with drastic cuts to social spending. There were also restrictions on citizens withdrawing cash from domestic banks, and limits on the amount of dollars citizens could take out of the country.

“The delay in the debt restructuring dug the hole deeper and deeper until there was blood in the streets,” commented Charles Calomiris, an economist at Colombia University in the Financial Times (22 Dec 2001).

French Foreign Minister Hubert Vedrine was reported in the French media as putting partial blame on the international financial institutions for the economic crisis in Argentina. “There has been a chain of political and economic errors, not just by the Argentines but also by international financial institutions. Demands have been excessive or at the wrong time,” he told French radio.

Peruvian Economy Minister Pedro Pablo Kuczynski also accused the Fund of mismanaging the crisis. He said the Fund “did not sound the alarm in time and then took a very hard line when things were incredibly difficult.” The role and effect of the IMF‘s involvement in the crisis may be an appropriate first area to look into for the new IMF Independent Evaluation Office (IEO) (see story below).

In a letter in Financial Times (24 December 2001), Professor Stephany Griffith-Jones of the Institute for Development Studies, UK, also criticised the IMF for putting “incredible pressure on a fragile democracy.” She called for a debate on a new international financial architecture to prevent further crises. On the issue of orderly debt workouts and standstills she laments the fact that “though there has been recent progress in the discussion, an international framework is still not ready – after so many years – for Argentina to use,” and calls for urgent action by the international community.

The Bush administration and the IMF indicated that Argentina’s new government would have to agree on substantial reform plans before external assistance could be considered. They reacted warily to the appointment of Eduardo Duhalde as Argentina’s president. Duhalde has sworn to end the orthodox free-market economic policies that the country has followed for the past decade, saying he would “end an exhausted economic model” (Financial Times 3 January 2002).

Briefing: Foreign Policy in Focus

Financial Times special report on Argentina