"All of our economy ministers have gone to Harvard -- to learn what? To rob the country?" said one frustrated woman, voicing widespread anger at a political class seen as corrupt and inept.(FT)
With Argentina devaluing its peso over the weekend,
Since 1991, the peso has been fixed to the dollar
at a one-to-one rate under a currency board system.
Argentina is an economic basket case. It is that simple. The country never seems to be able to emerge from its problems.
I stole the graph from Wikipieda, but you can find a similar graph in any intermediate microeconomic textbook. I suggest that Augusto Costa and his boss president Cristina Kirchner try to get hold of such textbook very soon so this foolishness can come to an end once and for all!
Argentina has been told again it must pay back more than $1.3bn to a group of investors - 11 years after its record debt default.
The decision is the latest twist in the long-running legal saga.
Argentina refuses to pay anything to investors who declined to participate in a previous debt reduction deal involving most of the nation's lenders.
Argentina will have to pay $1.3bn to hedge funds that refused to restructure their debts after the country’s 2001 default
Peter Wolodarski, PJ Anders Linder och Grekland
Precis som i Grekland framkallade krisen i Argentina ekonomiska, politiska och sociala omvälvningar.
Den ordinerade krismedicinen, i praktiken ekonomisk svält, fungerar lika illa i Grekland som i Argentina 2001.
Som den irländske ekonomen Kevin O’Rourke frågade retoriskt häromdagen:
Berlin måste också överge sin egen dogm om att eurokrisen kommer att lösas genom att Sydeuropa svälter sig till återhämtning.
Återstår för omvärlden att fortsätta skriva av skulder, samtidigt som ECB tillåter högre inflation och ser till att det europeiska banksystemet fortsätter att fungera.
Det ligger det i Tysklands absoluta egenintresse att förhindra en större kollaps för valutaunionen.
Om Grekland faller – vilket verkar troligt – kan mycket väl Spanien, Portugal, Italien och Irland stå på tur.
I förlängningen hotas hela EU-samarbetet
For a vision of how the Greek debt meltdown is going to end,
The parallels with Argentina are so strikingly exact as to bear repeating at length.
Here's what happened in Argentina.
Lessons from the Crisis in Argentina
While there are many similarities between the Greek and the Argentine experiences, as a member of the Eurozone,
Argentina’s deepening recession, run on banks and associated social unrest in 2000-1 stemming from its own policy mistakes forced it to default and abandon its US dollar currency peg.
Can Greece learn the economic lessons Argentina missed?
Default, Devaluation, Or What?
What about an outright default? How bad could it be?
Latvia - IMF experts were overruled by Brussels
Latvia’s currency crisis is a rerun of Argentina’s
A market correction is coming, this time for real
The problem was not just that Argentina's monetary and fiscal policies were inconsistent with Argentina's exchange rate policies. That is an easy thing for the IMF to say - if you are willing to contract your economy enough with tight monetary and fiscal policies, and thus bring about enough deflation, a country can squeeze itself into any exchange rate.
The problem was that Argentina's exchange rate policies were inconsistent with growth in Argentina, since the needed adjustment could only come about through deflation. The IMF never said that.
Much of the recent strain associated with globalization can be linked to China's steadfast defense of its dollar peg, and its current policy of spending $300 billion, a bit over 15% of its GDP, to resist RMB appreciation. That has consequences.
Let us think the unthinkable:
The Bush administration could help here by telling the IMF to back off. Putting an end to the Clinton era of IMF bailouts
In the mid-1990s Argentina was lauded as an
economic miracle. Today, after three years of stagnation, it represents one of
the world's most intractable economic trouble spots.
Rolf Englund in Financial Times
(discusion) Argentina and Euroland
Argentina gambled, and the gamble paid off. By bullying private creditors into accepting a pitiful settlement on its $100bn (£52bn) debt restructuring it has rewritten the rules of the game in emerging market finance.
The first priority is to deal with the 24 per cent of creditors who refused to sign up to the deal. Past successful restructurings achieved initial acceptance rates of about 95 per cent. The 24 per cent hold $20bn debt, $25bn with interest. Argentina has threatened to repudiate this. Such a ruinous strategy would invite decades of litigation. The fund /IMF/ would have to walk away. Better to reopen the offer for a limited period. Such an offer must be open to all creditors, not just the Italian retail investors whose plight evokes sympathy and demands an investigation into why they were sold high-risk Argentine debt in the first place.
The debt crisis that has taught lenders nothing
Blustein, a reporter on the Washington Post, has reprised the journalistic approach that made his first book, on the complex issue of the International Monetary Fund and the Asian crisis, unexpectedly readable. Through interviews with the leading figures in Argentina, on Wall Street and within the IMF, he reconstructs the riveting narrative of a nation that in 2001 committed the biggest sovereign debt default in history.
The IMF, wisely as it turned out, was initially suspicious of the dollar peg currency regime that Argentina adopted in 1991 and which proved the country's undoing. But the fund became impressed by the peg's early success...
Accordingly, it suppressed its misgivings about Argentina's inability to balance its budget and its consequent need to borrow dollars from the global capital markets at ever-higher rates to back the dollar peg. Far from imposing the "Washington Consensus" (the first component of which, let us recall, is fiscal discipline) on Argentina, the IMF was fatally complicit in its violation. As the crisis deepened in 2000 and 2001, the fund was so keen to avoid blame for pulling the plug that it continued to lend until all hope was extinguished.
The crisis was not primarily made in Washington. Blustein finds the real culprits in Buenos Aires and New York: the Argentines who peddled a falsely glowing vision of their country's economic renewal and the herd-like investors who believed the story or simply tracked the index of emerging debt.
One solution, which is targeted at private investors, is to swap existing bonds for new ones with the same face value, so a creditor who is owed $50,000 will get $50,000 - but not until 2038.
Investors accepting this offer would have to endure 33 years of low interest rates starting at just 1.3%, gradually rising to 5.25%. The problem is that inflation would rapidly erode the cash pile, making it worth much less in real terms by the time it is due to be cashed in.
Argentina's debt restructuring:
Argentina plans to repay all its $15bn debt with the International Monetary Fund,
The writer is director of the Gailliot Center at Carnegie Mellon University, Pittsburgh, and chairman of the negotiation team of Abra, which represents European hold ers of $1.2bn of bonds in the Argentine restructuring
For the first time in the history of sovereign default, the implicit debt reduction that the official sector will absorb is far exceeded by the loss the private sector will be forced to swallow. If Argentina's restructuring, to be launched this week, goes according to plan, the score will be 20 per cent down for the IMF versus 75 per cent for the markets.
The IMF has always enjoyed a sacrosanct preferred-creditor status - to be paid first and in full before private investors get a penny. Payment is largely theoretical for, when problem loans become due, the IMF simply rolls over the financing without regard for risk or return. But, as creditors compete over a finite pot of money, the fund may be forced to accept write-downs. The IMF could find itself with a balance sheet as questionable as those of its developing-country borrowers and without the support of the rich nations that finance its high-profile rescues.
After years of over-spending by countries and over-lending by capital markets, the international financial system faces serious adjustment. There is now $1,600bn in emerging market sovereign debt with $400bn of government bonds in investor portfolios. Debt levels of 80 per cent to 100 per cent of gross domestic product, which were endorsed by the IMF as recently as 2001, are now deemed unsustainable; the current prescription is 20 to 40 per cent. Politicians now feel an obligation towards a new "preferred creditor" - a "social debt" to provide a better quality of life for a restive electorate.
The IMF prides itself on the fact that there has never been a default on its books. But as over-borrowed nations become unable or unwilling to honour their promises to pay, a series of contentious restructurings - of which Argentina is only the first -risks putting the IMF's senior status and its balance sheet in jeopardy.
Argentina has unveiled a new offer to the creditors it stopped paying almost three years ago.
The true extent of the haircut may not be clear until the new bonds first come on the market. But they are unlikely to be worth much more than 30% of the original value of the bonds they replace. By comparison, Ecuador offered creditors between 33% and 62% after its default in October 1999. Even Russia offered 35% after its 1998 default.
Several structural issues remain unresolved, including reforming the banking system, finalising revenue-sharing agreements with the provinces and, most saliently, concluding negotiations with private investors who hold more than $100bn in defaulted sovereign debt. The Argentine economy's short-term recovery has given the authorities enough revenue to cope without rollover payments from the IMF for now. But if and when the tortuous debt negotiations are resolved and the programme resumes, the fund's problems will return.
In the absence of Argentine access to private capital markets or the willingness to run a bigger surplus before then, there is little that the IMF can do if Argentina threatens to default to it as well. The IMF's dominant shareholders have generally proved to have backbones as soft as marzipan when it comes to dealing with the Argentines.
The most important meeting between the Argentine government and
its private creditors over how to settle the world's biggest sovereign
More than two years have passed since the country defaulted on almost $100bn of debt, and the hundreds of thousands of European, Japanese and Argentine retail investors who bought the bonds have not seen a cent of their investments since.
"We want to start negotiating with the Argentines, to compare our [macroeconomic] assumptions with theirs and arrive at a mutually agreed settlement," Nicola Stock, co-chairman of GCAB, told the Financial Times this week.
Everything suggests he is likely to be disappointed. Since the beginning of March, when as part of the stand-by agreement Argentina promised it would "engage in constructive negotiations" with all representative groups, including the GCAB, the government has avoided the word "negotiation" altogether.
Instead, President Néstor Kirchner's administration has preferred more non-committal words such as "consultations", "talks" or "meetings". It has also said it will not discuss changing its initial offer to write off 75 per cent of the nominal value of the defaulted bonds - a proposal dismissed by investors.
The government pretends it will not
repay, while the IMF pretends it will not lend.
If the Fund is to be the lender of last resort to countries in difficulty, it needs to be confident of being repaid. But, after the collapse of its pegged exchange-rate regime and default, Argentina fell into political and economic chaos. The IMF's hopes of repayment were deferred. In 2003, disbursements to Argentina covered 98 per cent of the repayments due. This year, again, disbursements from the Fund should cover the bulk of the repayments from Argentina.
The most controversial question outstanding has been Argentina's take-it-or-leave-it attitude to its creditors. "The authorities," noted Ms Krueger, "will work with the assistance of investment banks to establish a timetable and process that will ensure meaningful negotiations with all representative creditor groups." This appears to mark significant progress. If so, it also justifies the IMF's decision to make the disbursement of $3.1bn now due.
But Argentina gets something in return: later this month the IMF will recommend to its board that Argentina is paid the money back again, part of a $13.5 billion facility agreed last September. Relief all round.
Dissatisfaction with Argentina grew for other reasons. It attempted to deal only with bondholders prepared to sign a central register, and it refused formally to recognise the biggest creditor group, the Global Committee of Argentina Bondholders, who speak for owners of nearly half of the defaulted bonds. Now, as part of its deal with the IMF, Argentina says that it will recognise the committee, and that it will give formal powers to the banks it has appointed to deal with creditors. Mr Lavagna says that he will begin talks with creditors as soon as this month, and hopes to conclude negotiations by May or June.
Argentina on Tuesday agreed to make a
$3.1bn payment to the International Monetary Fund, narrowly avoiding what would
have been the biggest single default in the fund's history
Argentina is already in default with its private creditors after the country stopped servicing almost $100bn of debt in December 2001.
It is expected IMF management will recommend that the fund's board members formally approve Argentina's second review under the current standby programme. Formal approval, expected within about two weeks, would unlock funds about equivalent to yesterday's payment.
The agreement comes as the IMF searches for a new managing director after Horst Köhler, the fund's current head, resigned last week after he was proposed as Germany's next president. Jean-Claude Juncker, Luxembourg's prime minister, said on Tuesday he would back the nomination of Rodrigo Rato, Spain's economy minister, to spearhead global attempts to head off financial crises.
By late 2003, just three countries - Brazil, Turkey and
Argentina - accounted for 72 per cent of all IMF outstanding general
Total amounts outstanding to these countries are now 45.8bn Special Drawing Rights ($67.5bn), of which $28.1bn is to Brazil, $23.7bn to Turkey and $15.8bn to Argentina. The sums outstanding to these borrowers are 21 per cent of the IMF's total resources. Mr Köhler bet the ranch. In doing so, he also made big mistakes, notably in the loans made to Argentina in 2001. Above all, the Fund is underfunded for lending on this scale. As a result, it is at the mercy of its biggest borrowers. Argentina has proved brilliant at exploiting its knowledge of the IMF's vulnerability.
Finally and most important of all, the Fund needs to display convincing leadership on the issue that remains its reason for existence: global balance of payments adjustment. At present, that adjustment is working, or rather not working, in the most peculiar way: the world economy achieves a reasonable macroeconomic balance only by driving the US into ever-increasing current account deficit. This seems perverse in itself and is in all probability unsustainable as well.
Mr Köhler did his best as managing director. But everybody knew he was nobody's first choice. His successor needs the authority that can come only from a more open and transparent selection procedure. Unfortunately, that will not happen. The appointment seems unlikely to be quite as controversial as that of four years ago. But it will be the outcome of squalid horse-trading within the European Union, that self-proclaimed bastion of idealistic multilateralism. It should go without saying - but apparently does not - that this method of selecting the IMF's head is grotesque for an institution whose board prates about improved governance everywhere else.
On Tuesday, Argentina must repay $3.1bn
to the International Monetary Fund
The problem is that the disbursements are dependent on Argentina's continuing to negotiate "in good faith" with its private creditors. Many IMF board members believe the country is not meeting that condition and argue that the programme should be suspended.
Argentina is therefore teetering on the edge of another default - one that could leave bondholders without a deal, the country without access to capital markets and the IMF with substantial defaulted debts on its books (see below).
Mr Lavagna also defends the Dubai offer on the premise that the Argentine case is qualitatively different from others and that the old rules no longer apply. One reason for the difference is the sheer scale of the restructuring. With more than $100bn currently in default, Argentina accrues $700m - about 0.5 per cent of gross domestic product - in past due interest every month.
Further complicating the process is the fact that during the 1990s, when Argentina was held aloft by the Group of Seven industrialised nations as the model for other emerging markets, it issued debt in every conceivable form. The result today is 152 types of defaulted bonds issued across eight jurisdictions in seven currencies.
If the debt is unpaid
Argentina is playing a game of chicken over its obligations to the multilateral financial institutions, above all the International Monetary Fund. So what would happen if neither side swerved and the game ended in a head-on crash?
The IMF has never suffered a loss on its lending, since that can happen only if a country ceases to be a member. But lengthy arrears are not unprecedented. Since the mid-1980s, 25 members have gone into arrears, while five were still in arrears this January - namely, Iraq, Liberia, Somalia, Sudan and Zimbabwe.
Where Argentina differs from the others is in scale, since it is the Fund's third largest debtor, after Brazil and Turkey, owing 15.2 per cent of the Fund's outstanding credit at the end of October 2003.
The head of Argentina's Central Bank has
Argentina bank freeze partly lifted
Är den keynesianska ekonomin död?
Mauricio Rojas berättelse om hur välståndslandet Argentina omvandlades till avgrundslandet Argentina. Sjuttio år av snabb tillväxt mellan 1860 och 1930 förbyttes i sjuttio år av stagnation och kaos. Landet, som vid 1900-talets början var rikare än både Frankrike, Italien och Sverige, är i dag en bankrutt nation.
För att denna osannolika utveckling skulle kunna inträffa behövdes både Juan och Evita Perón, och alla de misstag och felgrepp som populismen, nationalismen, protektionismen och en allt mer korrupt statsapparat lyckades genomföra. (RE: Undrar om Rojas nämner något om fast växelkurs?)
Argentina on the road to ruin
Citigroup Inc. and six other international
banks have lost $8.5 billion in Argentina
Argentina 'risks financial collapse'
orders bank freeze
Cavallo Gets the Bill For IMF and Argentine
IMF 'to ignore' Argentina cash
Argentina battles spread of poverty
ARGENTINA AND THE FUND:
Argentina's President, Eduardo Duhalde, has signed a decree that
outlines a plan to end the controversial and unpopular freeze on bank deposits.
The government imposed restrictions six months ago to stop an anticipated run
on bank accounts which would have triggered the collapse of the entire banking
Vi lär av misslyckanden såväl som av framgångsrik ekonomisk politik. När Internationella valutafonden (IMF) tvingade fram stora utgiftssänkningar i Ostasien föll produktionen - precis som keynesiansk teori förutspådde. Tidigt 1998, när jag var chefsekonom på Världsbanken, debatterade jag med det amerikanska finansdepartementet och IMF om Ryssland. De sa att varje stimulans av den ryska ekonomin skulle leda till inflation. Detta var ett anmärkningsvärt medgivande: genom sin övergångspolitik hade de lyckats, på bara några år, minska produktionskapaciteten hos världens andra supermakt med mer än 40 procent, ett för-ödande resultat värre än det av något krig!
IMF lärde läxan anmärkningsvärt långsamt. Medan den sent omsider erkände sitt finanspolitiska misstag i Ostasien, upprepade man det i Argentina och tvingade fram utgiftssänkningar som fördjupade recessionen och drev upp arbetslösheten - till en nivå där allt slutligen föll samman. IMF har ännu i dag inte tillstått sambandet: som villkor för krediter kräver man fortfarande ytterligare nedskärningar. IMF fortsätter att insistera på den alternativa ekonomiska "teori" som Keynes kämpade mot redan för över 60 år sedan. Keynes argumenterade mot föreställningen att om bara länder sänkte sina skulder så skulle "förtroendet" återställas, investeringar öka, och ekonomin återgå till full sysselsättning. Under "IMF-teorin" flockas investerare kring länder där regeringarna föresätter sig att sanera statsskulden, ekonomin får ett uppsving och politiken på så sätt blir rättfärdigad. Regeringens budgetmål uppfylls mer än väl. Den tillfälliga "smärtan" belönas rikligt. Jag känner inte till något land där detta scenario har utspelats framgångsrikt, för det finns två nyckelproblem som belastar "teorin".
Argentina is on the edge of an abyss. The peso has sunk from one-to-the- dollar to three-to-the- dollar. From deflation, the country has moved into inflation, with a rise of 4 per cent in the consumer price index for March. The consensus forecast is for inflation at more than 60 per cent from December 2001 to December 2002 and for an 11 per cent decline in gross domestic product this year.
The fiscal revenue position is deteriorating. Given the resistance to cuts in public spending, the public's unwillingness to pay taxes and the government's loss of creditworthiness, the monetary printing press is almost all that remains.
Citigroup Inc. and six other international banks have lost $8.5 billion in Argentina, 60 percent more than what the banks reported in January, an analysis of first-quarter earnings showed. With $23.6 billion of Argentine loans on their books at yearend, the banks face more losses in the months ahead from the government's peso devaluation and debt default, analysts and investors said.
Argentina's entire financial system could collapse if the run on
its banks continues, President Eduardo Duhalde has warned.
His comments come a day after all foreign exchange and banking transactions were halted indefinitely.
Cavallo Gets the Bill For IMF and
Under the Fund's traditional three-monkeys approach to assessing a
member's performance -- hear no evil, see no evil, speak no evil -- such
transgressions would often be ignored."
The highly politicized arrest this week of former Argentine finance minister Domingo Cavallo on contraband charges dating back to the early 1990s looks like another sign of how far gone Argentina is. In any just universe, the arrest should be the final nail in the coffin of IMF lending to the Argentine government.
Even before Mr. Cavallo went before the judge Wednesday, bad economic news was tumbling out of Argentina like clowns from a circus car. Last week the government tried hard to prop up the battered peso -- which is supposed to be floating -- but the currency remains weak. It now sells for about 35 cents, down from $1 less than four months ago. Prices for staple foodstuffs such as meat and flour are sharply higher; there are shortages of hospital supplies and medicines. Unemployment is close to 25%. Bank deposits are still frozen.
Earlier this week, in a move that reflected the general business environment, Telecom Argentina announced it would suspend principal payments on $3.2 billion in debt.
The International Monetary Fund (IMF) is unlikely to release new funds to help Argentina's struggling economy, a report has said.
"This is for their own good and they should understand that."
Argentina's president, Eduardo Duhalde, has announced fresh measures to relieve poverty. Under the new plan, each unemployed household will from 15 May receive 150 pesos ($50.5) a month.
An economic crisis has rocked Argentina, leaving almost half of the population below the poverty line. And an estimated one-in-five of the country's 36 million people are unemployed.
FT Editorial comment: Argentina on the edge Published: March 26 2002 19:20 | Last Updated: March 26 2002 19:21 Argentina's drift towards default and devaluation lasted the whole of 2001; the subsequent economic implosion has occurred much more quickly. Since one-for-one convertibility with the dollar was abandoned, the peso has fallen by about 70 per cent. After four years of recession, the economy has slumped: output is expected to drop by at least 8 per cent this year. And the economic crisis has further undermined the government's already dreadful fiscal position. Argentines expect the peso printing presses to start rolling; so they naturally clamour for dollars; and this lack of confidence threatens to become self-fulfilling. A collapsing currency guarantees hyperinflation.
Krugman: The natural answer is to float the currency. Some have proposed an alternative - devalue, then dollarize. But it was always strange to peg the peso to the dollar, when the U.S. is by no means Argentinas dominant trading partner. The peg made sense only as a way to provide clarity and credibility. Since that credibility will be lost anyway by devaluation, why lock the country into an inappropriate currency regime? Argentinas location and export composition suggest that it should emulate other southern-hemisphere primary exporters, like Australia, and have a floating exchange rate. Now comes the hard part. Isnt it dangerous to devalue?
peso hits new low
In Argentina, the peso has slipped to a record low amid gloomy predictions that the country's worst ever economic crisis will deepen further this year. Until devaluation in January, the peso was tied to the US dollar at one-to-one for a decade. It has now slipped to 2.5 to the dollar.
Argentina is an economic mess. Its banks are broke, surviving by not paying depositors. Its federal and state governments cannot pay employees and suppliers; foreign debt payments are suspended; economic activity has slowed to a crawl; unemployment is heading toward 30 percent; and the nation's health and education systems are reeling.
Argentine crisis shakes faith in democracy
Politicians are unpopular the world over, but Argentina's rulers have sunk to a level of disrepute probably unparalleled in the country's history. Eduardo Menem, a national senator and brother of the former president, Carlos, recently got a taste of the popular disdain for his profession on a flight to Buenos Aires from his native province of La Rioja. Recognising him, a young man stood up and began shouting: "What an awful smell of shit in here." In the ensuing scuffle, Mr Menem punched the man in the face and the cabin crew had to place the men at opposite ends of the aircraft.
Mr Menem is not the only Argentine politician to feel the ire of a nation enduring its worst economic crisis in recent history. Passengers travelling to Europe recently complained about having to share a flight with Carlos Ruckauf, the foreign minister.
In a nationwide address, Jorge Remes Lenicov said the government planned to fully float the national currency on Wednesday, ease a hated banking freeze and drastically reduce its budget deficit.
För en handfull
No right answer?
The turmoil in Argentina and the collapse of the ten-year link between the peso and the dollar has revived the debate about currency regimes for emerging-market economies. Was Argentina wrong to adopt the link in the first place, or wrong to try so hard and so fruitlessly to maintain it?
What do Argentina, Hong Kong, Bulgaria and Bosnia have in common? Not that much, in terms of politics, culture or standard of living. But until a few weeks ago, they did share a controversial economic policy: during the 1990s, all of them introduced currency boardsessentially a system of legally-binding fixed exchange-rates. It is hard to remember just how radical this approach to exchange-rate policy seemed when currency boards came back into fashion many decades after they had last been used. But earlier this month, after weeks of growing political unrest which toppled the government of President Fernando de la Rua, Argentina finally abandoned its currency board and the fixed-parity link between the peso and the dollar.
For months, Argentina had been staring catastrophe in the face. Expectations that the government would devalue the peso and default on the countrys huge public debt were rife. But few could have predicted just how great the crisis would be. Domingo Cavallo, the countrys economy minister until late December, is now a fading memoryeven though he had been the driving force to preserve the currency peg, and had indeed been its creator back in 1991. The new President, Eduardo Duhalde, is the fifth man to hold the job in a matter of weeks and has yet to establish a grip on the countrys enormous economic problems. Argentina is now formally in default, and the peso has been devalued by around 40%. But policies to stimulate the economynow in its fourth year of recessionand to stabilise the banking system have yet to be put in place.
Argentine Banks Insolvent, Face $54 Bln Loss
Argentine banks are insolvent and face $54 billion of lossesmore than twice earlier estimatesafter the government devalued the peso and stopped most financial transactions, Moodys Investors Service said.
The rating agency said President Eduardo Duhaldes only chance to avert a collapse of the banking system may be to convert all dollar deposits into pesos, a plan opposed by most Argentines. Otherwise, the government will be forced to take control of banks, turn deposits into peso bonds and try to sell the banks, Moodys said in a report.
Argentina visar att EMU inte
Rolf Englunds anmälan till
Granskningsnämnden för radio och TV av
Argentina lashes out at IMF
Duhalde's wrong turn
En hårdhänt läxa för
Argentina Freezes More Than a Third of
Argentina ett fiasko för
anledning att gråta för Argentina.
Argentina är en annan
Argentina devalues currency by 29%
The Economist 2001-03-22
Argentine banks stare bankruptcy in the
Godmorgon världen, P1, 2002-01-13, inslag om Argentina; fråga om saklighet
Inslaget handlade om Argentinas akuta ekonomiska kris. Inslaget inleddes med ett reportage från Buenos Aires där intervjuade argentinare uttalade sig om sin syn på krisen. Därefter intervjuades två experter - en forskare vid Stockholms Universitet och en internationell ekonomisk politisk rådgivare. De redovisade sin syn på orsakerna till krisen och anförde därvid bl.a. den politiska krisen och Argentinas sätt att låna pengar på världsmarknaden genom att utfärda obligationer. Argentinas fasta växelkurs mot USA dollarn nämndes inte särskilt i kommentera och analyserna.
Anmälaren anser att inslaget strider mot kravet på saklighet genom att Argentinas fasta växelkurs mot dollarn inte nämndes som en orsak till landets ekonomiska kris.
Granskningsnämnden kan inte finna att enbart den omständigheten att Argentinas fasta växelkurs mot USA dollarn inte angavs som en orsak till den ekonomiska utvecklingen i landet innebär att inslaget strider mot kravet på saklighet i Sveriges Radios sändningstillstånd.
Detta beslut har fattats av Granskningsnämndens direktör Greger Lindberg efter föredragning av Hack Kampmann.
Granskningsnämnden för radio och TV
God morgon Världens inslag om Argentina 2002-01-13
Aldrig hade jag väl trott att jag skulle anmäla Godmorgon Världen för Granskningsnämnden. Godmorgon Världen är ju enligt min mening radions bästa program.
God morgon Världens inslag om Argentina ställer emellertid också en viktig principiell fråga om hur man skall tolka reglerna om saklighet.
När det gäller reglerna för opartiskhet brukar det hävdas att ett program visserligen kan vara vinklat på ett sätt som kan vara partiskt, men att detta uppvägs av radions program i övrigt.
Frågan är om detta synsätt även kan användas på ett program vad avser kravet på saklighet. Kan ett program måste vara osakligt även om det finns andra program i samma ämne som är sakliga?
Bristen på saklighet i det aktuella inslaget är att det inte nämner Argentinas fasta växelkurs. Det var inte ens en påannons av typen det har talats mycket om den fasta växelkursen som orsak till Argentinas kris, men det finns även andra förklaringar....
Förvisso råder det korruption i Argentina. Likaledes är den politiska kulturen inte lika framstående som i Sverige. Det kan väl ha sin betydelse. Men det är väl inte mycket bättre i grannländerna Brasilien, Uruguay och Bolivia.
I programmet nämndes inte någonting om att Argentina har haft en fast växelkurs, liknande den Sverige hade fram till hösten 1992.
Som framgår av den allmänna debatten har utvecklingen i Argentina också diskuterats i samband med EMU, som innebär den fastaste växelkurs man kan tänka sig.
I den allmänna debatten, såväl i Sverige som internationellt, har den fasta växelkursen mot dollarn enligt teorin 1 Peso = 1 Dollar varit avgörande för de senaste årens ekonomiska utveckling i Argentina.
En del av debatten kan man nå via
Att i programmet helt utelämna detta står således i bjärt, jag tvekar inte att använda ordet eklatant, kontrast mot övriga seriösa analyser och strider därför, enligt min mening, mot reglerna om saklighet.
Härmed anmäls därför rubr. program för brott mot reglerna om saklighet.
Om Argentina hade varit ett europeiskt land, skulle argentinarna inte haft några problem med att kvala in i den europeiska valutaunionen EMU redan från starten. Eftersom Argentina nu befinner sig i ekonomiskt kaos väcker det frågor om stabiliteten i EMU.
Argentina klarade samtliga fem inträdesprov med god marginal 1997, det år som gällde som provår för kandidatländerna:
Högst 2,7 procents inflation.
Priserna i Argentina steg med 0,5 procent. Inget europeiskt land hade lägre inflationstakt.
Budgetunderskott på högst 3 procent av BNP.
Det samlade underskottet i Argentinas offentliga finanser motsvarade 2,4 procent av landets bruttonationalprodukt. Hälften av de blivande euroländerna, bland dem Tyskland och Frankrike, hade större underskott.
Offentlig bruttoskuld på högst 60 procent av BNP.
Argentina hade en offentlig skuld motsvarande 40 procent av landets BNP år 1997. Bland de elva blivande euroländerna var det bara Luxemburg som var mindre skuldsatt.
(Italien och Belgien låg skyhögt över 60-procentsstrecket. De blev ändå insläppta i valutaunionen med argumentet att skuldkvoterna utvecklades åt rätt håll.)
Högst 7,8 procents lång ränta.
Detta är det enda konvergenskrav Argentina hade svårt med. Under provåret betalade landet i genomsnitt 8,0 procents ränta på sina långfristiga obligationslån i tyska mark. En högre räntenivå än i något EU-land med undantag av Grekland.
Men Argentinas låga inflation hade hjälpt landet att klara även detta inträdesprov.
Enligt Maastrichtfördraget får långräntan vara "högst 2 procentenheter över den genomsnittliga räntenivån i de tre länderna med den lägsta inflationen".
Eftersom Argentina platsade bland dessa tre, skulle landets kandidatur ha höjt maxvärdet till 8,4 procent. Därmed hade argentinarna klarat även ränteprovet med hygglig marginal.
Fast växelkurs i två års tid.
Argentina kunde upprätthålla sin fasta växelkurs mot dollarn under åren 1996 och 1997 utan några allvarliga störningar.
Då dollarn överlag stärktes under denna period, hade det till och med varit lättare för argentinarna att i stället hålla en fast växelkurs mot någon europeisk valuta.
Då är frågan: Hur kan ett land, som var överkvalificerat för EMU 1997, drabbas av statsbankrutt och ekonomiskt kaos bara några år senare?
Alla länder har förstås sina egna unika problem, men vad som är uppenbart i Argentinas fall är att de egna problemen förvärrats av att landet inte kunnat föra någon självständig ränte- och valutapolitik.
Argentina har haft sin peso helt låst mot den amerikanska dollarn. Båda valutorna har använts parallellt. Den som betalat med pesos har kunna få växel i dollar och tvärtom.
På så sätt påminner Argentina om euroländerna, som också gett upp sin självständiga penningpolitik då de avskaffat sina egna valutor till förmån för euron.
Syftet med konvergenskraven och stabilitetspakten har varit just att förhindra "tangokriser" i EMU. Länder vars finanser är misskötta, eller vars ekonomier är helt ur fas med de övrigas, ska inte släppas in i valutaunionen.
Framför allt Tyskland har hållit hårt på konvergenskraven. Detta av djupt rotad rädsla för inflation.
Skulle ett EMU-land drabbas av en statsbankrutt i argentinsk stil, kan Europeiska centralbanken tvingas låta sedelpressarna rulla i syfte att rädda landets fordringsägare och hindra finanskrisen från att sprida sig över hela Europa.
Men om konvergenskraven inte kunda hindra tangokrisen från att bryta ut, vad är det då som säger att de skulle kunna hindra en "flamencokris"? Eller varför inte en "Riverdance-" eller "valskris"?
Exemplet Argentina visar att de nuvarande säkerhetsarrangemangen i EMU, med konvergenskrav och stabilitetspakt, inte räcker för att hindra ett medlemsland från att köra sin egen ekonomi i botten.
The IMF had asked Argentina to come up with what it called a more coherent economic policy.
The Argentine Government needs the IMFs support to tackle its economic crisis. But at the same time it is trying to placate an angry and impatient population which probably would not take much more of the kind of hard monetarist policies the IMF would recommend.
The IMF has said that Argentina must present what it called a more coherent economic policy if it is to gain its support.
Foreign investors have already expressed their concern at what they see as the governments protectionist policies and others have said that Argentinas new dual currency system is unworkable.
The case for devaluation is clear enough. The Argentine peso was not only under attack; it was overvalued. For once, the speculators had a clear foothold in macroeconomic reality. Once Brazil's overvalued currency was allowed to depreciate in February 1999, Argentina's currency board simply lost its credibility.
The economy plummeted into recession as manufacturers shut up shop or shifted operations to Brazil. The refusal by Fernando de la Rua's government to adjust the currency board left the economy in free fall.
It is true that past breaks from pegged rate systems have led to renewed economic growth, most notably in Mexico in 1994, Russia in 1998 and Brazil in 1999.
But Argentina's remarkable history of monetary mischief makes it an exceptional case. I do not know another nation with Argentina's capacity to abuse, manipulate, freeze, confiscate and periodically replace the national currency and the contracts set in it. The currency board was introduced precisely to break this record.
Dollarisation would have ended it decisively.
Joseph Stiglitz är professor i ekonomi vid Columbiauniversitetet, har varit ordförande i president Clintons ekonomiska råd och chefsekonom och vice ordförande i Världsbanken
Kollapsen i Argentina har lett till den största konkursen i världshistorien. Att förstå vad som gick fel kan lära oss mycket inför framtiden.
Problemen inleddes med hyperinflationen på 1980-talet. För att få ner inflationen måste Argentina förändra förväntningarna på ekonomin, och genom att knyta peson till dollarn försökte man göra just detta. Denna modell fungerade under en tid i vissa länder, men inte utan risker. Det har vi nu sett tydligt i Argentina.
Internationella valutafonden uppmuntrade detta system. Nu är de mind-re entusiastiska, även om det är Argentina och inte IMF som får betala priset. Den bundna pesokursen minskade visserligen inflationen, men den minskade också tillväxten.
Argentina borde ha uppmuntrats till ett mer flexibelt växelkurssystem eller åtminstone en växelkurs som bättre stämde överens med dess handelsmönster.
Detta var emellerltid inte det enda misstaget i Argentinas reformprogram. Landet prisades länge för att det tillät stort utländskt ägande i banksektorn. Under en tid skapade detta ett stabilt banksystem, men bankerna lånade i liten utsträckning ut pengar till små och medelstora företag.
Krisen i Sydostasien 1997 var det första slaget. Delvis därför att krisen där på grund av IMF:s dåliga handhavande blev en global kris, som höjde räntorna i alla tillväxtmarknader, inklusive Argentina.
Argentinas växelkurs överlevde, men till priset av en dubbelsiffrig arbetslöshet. Snabbt kvävde också de höga räntorna landets finanser.
Trots att Argentinas statsskuld aldrig var mer än 45 procent av BNP, betalade man 9 procent av BNP årligen på lånen.
Den globala krisen ledde också till att växelkurserna i världen omvärderades. Dollarn, som peson var knuten till, stärktes kraftigt.
Samtidigt föll grannlandet Brasiliens valuta kraftigt. Löner och priser föll, men inte tillräckligt för att Argentina skulle kunna konkurrera, speciellt som många av dess exportprodukter inom jordbruket är högt tullbelagda i rika länder.
Världen hade knappt hämtat sig från finanskrisen 97-98 förrän den globala lågkonjunkturen började sätta in 2000-2001, vilket gjorde Argentinas situation än mer prekär. Då gjorde IMF ett fatalt misstag.
Organisationen uppmuntrade statsfinansiell åtstramning, samma medicin som ordinerades under Asienkrisen, med samma fruktansvärda följder.
Strängheten förväntades återskapa förtroendet för ekonomin. Men siffrorna i IMF:s kalkyler var fantasier, vilken ekonom som helst skulle ha sett att åtstramningar i detta läge skulle förvärra konjunkturvändningen och leda till budgetunderskott.
Kanske skulle en militärdiktator, som Chiles Pinochet, ha kunnat undertrycka den sociala och politiska osäkerhet som uppstår när en ekonomi råkar i fritt fall. Men i Argentinas demokrati gick inte det. Det är närmast en överraskning att det tog så lång tid innan de usla levnadsförhållandena ledde till de upplopp som nu tvingat bort flera presidenter.
LÄXOR MÅSTE vi dra av detta:
1. I en värld med flytande växelkurser är det extremt riskfyllt att knyta sin valuta till exempelvis dollarn. Argentina borde ha manats att bryta dollarbindningen för flera år sedan.
2. Globaliseringen gör att länder kan utsättas för stora chocker. Länderna måste hantera dessa chocker och förändringar i växelkursen är ett sådant sätt.
3. Att ignorera sociala och politiska faktorer sker på egen risk. En regering som för en politik som lämnar stora delar av befolkningen arbetslös har misslyckats med sitt huvudsakliga uppdrag.
4. En ensidig inflationsbekämpning, utan tankar på arbetslösheten, är riskabel.
5. Tillväxt förutsätter finansiella institutioner som lånar ut pengar till lokala företag. Att sälja alla banker till utländska ägare och mista kontrollen kan minska tillväxt och stabilitet.
6. Det är svårt att återskapa ekonomisk styrka med en politik som driver fram en djup lågkonjunktur. Genom att insistera på åtstramningar har IMF ett stort ansvar.
7. Det krävs bättre sätt att hantera kriser som den i Argentina. IMF har föredragit att lösa ut krisdrabbade länder med stora lån. Nu har de äntligen insett att man måste ha alternativ.
IMF KOMMER ATT försöka lägga skulden på Argentina - det kommer att bli anklagelser om korruption och om att Argentina inte vidtagit rimliga åtgärder. Självfallet behövde landet genomföra andra reformer, men genom att följa IMF:s råd om åtstramningspolitik gjorde man illa värre.
Devaluation's downbeat start
The measures leave the banksmost of the big ones are foreign-ownedstaring at huge losses. To compensate, they will receive the proceeds from a new tax of up to 20% on oil and gas exports (the main exporter, Repsol, is Spanish). That will not be enough to save many of the banks. As well as having many of their loans but not their deposits devalued, the banks will lose in other ways.
Their bad debts will rise, as many larger debtors (whose loans remain in dollars) default. And secondly, the banks hold many government bonds, now worth little. The bankers claim they will lose more than $10 billion from turning loans into pesos, or more than half their total capital of $17 billion.
After a decade in which Argentina lived with a fixed exchange rate and an increasingly dollarised economy, a devaluation of the peso was always going to be traumatic. That was why it was put off for so long.
Jose Maria Aznar, Spains prime minister, pointedly called this week for Argentina to agree with the IMF on a credible new plan. He is right, even if both he and Felipe Gonzalez, a former prime minister, have been foolish to act as lobbyists for Spains national champions, the banks and utilities that have reaped rich rewards from their investment of $40 billion in Argentina over the past decade.
Nonetheless, the main cause of Argentinas troubles was homegrown: the combination of a fixed exchange rate, fiscal profligacy and mounting debt is not neo-liberal. It is simply bad policy-and all the more reason to avoid a different set of bad policies now.
Kollapsen är ett misslyckande, inte bara för argentinarna utan också för USA, IMF, G7 och flera andra inblandade parter utanför Latinamerika. Men den är inte ett misslyckande för en liberal ekonomisk politik. Tvärtom. Krisen bygger i mångt och mycket just på bristen av kapitalism och ekonomisk liberalism.
Rapporteringen från krisen i Argentina har ofta handlat om dess sedelfond. Mycket riktigt har sedelfonden också varit ett av de stora problemen i Argentina de senaste åren. Men det var inte som ett problem den tillkom, utan som lösningen på ett problem Argentinas hyperinflation.
Sedelfonden är en fast växelkursregim som bygger på att en växelkurs mellan två valutor ska hållas konstant. Men den skiljer sig från det monetära system Sverige hade med knytning till ecun fram till början på 1990-talet. Den svenska regimen, liksom många andra valutaregimer under samma tid, var snarare en halvfast växelkursregim som bygger på att ett land knyter valutan till en annan storhet, vanligtvis en annan valuta, och använder penningpolitiken till att försvara att det värdet behålls.
En sedelfond innebär en starkare knytning till en annan valuta, genom att det land som inför sedelfonden ger upp stora delar av en centralbanks arbete, för att i stället bygga på principen att, som i Argentinas fall, varje peso som ges ut också har ett motsvarande värde i centralbankens reserver.
Med andra ord: Argentina försvarade inte knytningen av peso till dollarn genom att stödköpa eller -sälja argentinska pesos, utan genom att varje peso som fanns i omlopp kunde inväxlas mot en dollar.
IMF:s relation till Argentina är ett typiskt exempel på hur IMF inte bör uppträda. Inte på grund av att de stundtals gett dåliga råd till hur Argentinas ekonomi bör skötas, utan på grund av att institutionen själv bidrar till en oansvarig ekonomisk politik.
Om man räknar på hur stor del av tiden sedan det första IMF-programmet kom 1957 som IMF har funnits på plats med lån i Argentina blir resultatet alarmerande. I 37 år, cirka 75 procent av tiden sedan dess, har IMF lånat pengar till Argentina.
Sedan 1983 har 15 olika räddningspaket givits.
Syftet med IMF är inte att vara en ständig långivare, utan en sista långivare som länder kan vända sig till om de står inför finansiell kollaps som hotar betalningssystemet och den finansiella stabiliteten. Man har snarare sett till att omvärlden blivit beroende av IMF, inte minst efter Bretton Woods-systemets fall i början på 1970-talet, då IMF:s uppdrag egentligen försvann, och med räddningsaktioner började skapa vad ekonomer kallar för moral hazard (moralisk risk), det vill säga att investerare och politiker inte behöver ta konsekvensen av att agera riskfyllt och oansvarigt.
Bush-administrationen ville ändra på den av Clinton och Robert Rubin fastslagna policyn för räddningsaktioner (bailouts) som växte dramatiskt i antal under 1990-talet.
USA:s finansminister Paul ONeill torgförde också under sin första tid en djupt grundad skepsis mot IMF; den finns förvisso kvar, men den har dämpats av att Vita huset gått emot finansministeriets rekommendationer i fallet Argentina och givit förnyade lån till landet, senast i augusti i fjol.
Argentina froze certificate of deposit accounts, or more than a third of the nation's $67 billion savings, to protect banks from collapse and avert a plunge in the peso once trading resumes tomorrow.
The government, which published the plan in its official bulletin, banned withdrawal of dollars in CDs for as long as 21 months. Peso-denominated CDs can't be accessed for a year.
According to many analysts, the country's banking system will shortly be bankrupt itself.
"Our worst-case scenario would see the capital of all local banks wiped out," said Inigo Lecubarri, banks analyst at Schroder Salomon Smith Barney. "That does not look so unlikely now. The financial system is not looking pretty."
But even a relatively benign estimate of the costs the banks face would leave them unable to function. Merrill Lynch estimates the losses at $10bn-$12bn, wiping out most of the $17bn of capital the banks have.
"It is at a stage where the financial system cannot operate," said Jose Luis de Mora, banks analyst at Merrill. "They need an international bail-out."
RE: Otherwise Merrill may lose a lot of money
How Argentina Got Into This Mess
How Argentina Got Into This Mess
It is fashionable now to blame Argentina's problems on the free market. The country's latest president, old-school Perónist and unabashed protectionist Eduardo Duhalde, has joined the anti-market chorus by vowing to break with the "failed economic model" of the past decade. But Argentina's tragic crack-up occurred not because pro-market reforms went too far, but because they did not go nearly far enough.
Note: Check in the full article if You can find the words fixed exchange rate or peg or 1 Peso = 1 Dollar. I could not.
Se även Mats Svegfors http://www.internetional.se/sveg9409.htm
Argentina on Sunday devalued its currency by nearly 29 per cent as European governments appealed for their companies to be protected from the fallout.
The new "official" peso rate will be 1.40 to the US dollar - broadly in line with expectations - with the currency floating on unofficial markets from Monday. The government said its objective was to free the currency entirely in less than six months.
Jorge Remes Lenicov, economy minister, conceded that the International Monetary Fund had objected to the dual exchange rate plan.
"I spoke with the people from the Fund . . . who said that, philosophically, they consider that a float [of the peso] is preferable," he said.
Argentinas desperate choices
The Economist 2001-03-22
IT IS fitting that Domingo Cavallo should have been drafted in this week as Argentinas new economy ministerthe third person to hold that job this month. He is now seen as the only man capable of maintaining the currency-board system that he set up a decade ago.
That system pegs the peso by law at parity to the dollar and, in effect, hands monetary policy over to the United States Federal Reserve. Not only has the device killed hyperinflation; for much of the 1990s, it delivered strong growth. But Argentinas economy has now been locked in a recession for almost three years. The currency board has become a straitjacket.
In January, President Fernando de la Ruas Alliance government thought it had at last found the key. An agreement with the IMF, involving loans and credit guarantees amounting to $39.7 billion, seemed to offer a respite. So did cuts in American interest rates and a (temporary) weakening of the mighty dollar, and thus the peso.
The economy, however, did not pick up, though the fiscal deficit did. With markets twitchy, Mr de la Rua turned to Ricardo Lopez Murphy, a free-market economist from his Radical party. Mr Lopez did as he was asked: on March 16th, he announced budget cuts of $2 billion this year, and $2.5 billion in 2002. But over half the proposed cuts were in education spending, prompting three ministers, and six other senior officials, to resign, and Frepaso, the Alliances junior (and more left-wing) partner, to walk out of the government.
Argentinas drama is that it has almost run out of room for economic manoeuvre. On the one hand, the strength of the dollar has made it hard for Argentinas exports (only 11% of which go to the United States) to compete, especially after Brazil, its main trading partner, devalued in 1999. The economy has had to adjust through deflation: prices and wages have fallen. That has simply prolonged the recession.
Nor can the government freely use fiscal policy to kick the economy into action. Fiscal profligacy in the later years of Mr Menem, Mr de la Ruas predecessor, meant that Argentina piled up debt, which now stands at close to 50% of GDP. Argentina is now in a vicious circle.
The political fragility of Mr de la Ruas government has worried investors, forcing up interest rates, which depress growth and add to the debt burden, while the recession means tax revenues are falling.
So what can Mr Cavallo do? Abandoning the currency board would still be the most expensive option, because the economy is already partly dollarised. Firms would be destroyed by the burden of their dollar debts, intensifying the recession.
Mr Cavallo may seek to use his reputation to persuade Wall Street and the IMF to back a rescheduling of Argentinas debts (or, if you prefer, a default).
Wish him well, though. Failure would mean that Argentina would almost certainly find itself heading for a unilateral debt default, which might increase the cost of credit in all emerging markets. Meanwhile, if some bright economist should argue that currency-boards are a miracle cure for any unstable third-world country, irrespective of its circumstances, show him the door.
Cavallo's reforms may have removed exchange rate risks but economic and political instability are less susceptible Martin Wolf, Financial Times, March 21, 2001
The arguments for tight currency arrangements - such as a currency board, use of another country's currency as one's own, or membership of a currency union - are that they guarantee monetary discipline and eliminate currency risk. But these risks are merely transformed. In Argentina, inflation and currency risk have turned into credit risk.
What has gone wrong? Adverse external events - the emerging market financial crises of 1997 and 1998, a sharp deterioration in the terms of trade, the devaluation of the Brazilian real and the strength of the US dollar - have hit the economy. Given the pegged
exchange rate, these shocks delivered a big loss of competitiveness: on the basis of relative unit labour costs, the real exchange rate appreciated by about a third between early 1998 and the middle of 1999.
The link with the dollar has generated deflation. Between September 1998 and February of this year, US consumer prices rose by 8 per cent. Over the same period Argentinian prices fell by 3 per cent.
Given enough time, the adjustment in relative prices will restore competitiveness. But the time has been long and hard: at the end of 2000, GDP per head was about 8 per cent lower than at its peak in the second quarter of 1998.
This long deflation is not caused by loss of competitiveness alone. Just as important are high real interest rates. Real prime interest rates, in pesos, have been running at about 10 per cent.
At the long end, real interest rates in dollars have been still higher. At a spread over US treasuries of 850 basis points, the Argentinian government would be borrowing at a real rate of nearly 15 per cent against movements in the domestic price level.
Such high real interest rates are not just contractionary; they are unsustainable.
Argentina's public and external debt are both just a little over 50 per cent of GDP. This would be manageable at the rates of interest paid by high income countries but not at those paid by Argentina.
These high interest rates reflect perceptions of Argentina's political fragility. But that perception is, in turn, worsened by recession. Thus the system that eliminated inflation and exchange-rate risk creates a vicious downward spiral of worsening credit risk, deepening recession and back to credit risk again.
In the long run, exchange-rate and inflation risk re-emerge. Today, not only are spreads on dollar borrowing vis-a-vis US treasuries soaring but so is the gap between rates on borrowing in pesos and dollars.
If the exchange rate were certain, these would be the same. But the day before yesterday, the spread on three-month inter-bank borrowing was 481 basis points, against a usual spread of about 100 points.
Argentina's currency board is solid. The government can also survive without new borrowing for a time. But if it does not come up with a credible and politically acceptable programme, the country will be driven to default, choose to devalue, or even do both.
Can Mr Cavallo do better? The short answer is "yes, but with difficulty". Conceptually, Argentina has just three options: to struggle on; to default; or to devalue.
The second option is default. As I argued in a previous column (Argentina and the debt trap, November 22 2000), debt is unsustainable at current real interest rates and prospective growth rates, without implausible improvements in the fiscal and external balances.
While it is perfectly reasonable to try to devise a package designed to support growth and make fiscal sustainability credible in the medium term, this may not work. An orderly debt restructuring would then be preferable to chaos.
The third option is devaluation. Most outsiders would consider a floating exchange rate preferable to this peg. But Argentina is so dollarised - and bound to become still more so if confidence weakens - that it is hard to see how it could get from here to there without wrecking much of the private sector.
But if devaluation seems horribly difficult, the polar opposite - dollarisation - is simply irrelevant. The economy's chief problem is now credit risk, not currency risk. Dollarisation would do nothing about the former.
The wider lesson is that very hard exchange-rate regimes do not eliminate risks. They change them.
Aid for Argentina
ONCE again, a biggish emerging-market economy is in trouble. After yields on Argentinas bonds soared last week, its government said it had approached the IMF for help. With contributions from other multilateral institutions, and perhaps help from private banks, it could be in line to receive loans amounting to as much as $20 billionthe largest bail-out for an emerging economy since Brazil got into difficulties over its devaluation of January 1999.
Were Argentina to default on its debts, other emerging economies would suffer, especially those in South America. That is the first reason for helping it. It is also a deserving case. In many respects, it has been a model of market reform; its economy grew by an annual average of 6.2% between 1991 and 1998, and its current troubles look manageable.
They stem largely from external blows under which weaker economies would have buckled. These include not just the devaluation by Brazil, its biggest trading partner, but low prices for its farm exports and the soaring dollar, to which the Argentine peso is fixed under a currency-board arrangement introduced in 1991. Lastly, investors made risk-averse by the frailty of technology shares in the United States have demanded high premiums on all emerging-market debt.
Despite all this, Argentinas exports have risen. But the country is stuck in a low-growth trap. After shrinking by 3% last year, the economy will expand by perhaps 0.5% this year. In such circumstances, economics suggests two possible remedies: either a devaluation, or a modest fiscal stimulus. Argentinas drama is that neither is easily available. The currency board rules out devaluation; a largely dollarised economy means that the costs would anyway far outweigh the benefits.
Because of the profligacy of its predecessor, the government of President Fernando de la Rua felt obliged, on taking office last December, to tighten fiscal policy, even though the budget deficit was relatively modest (and was due partly to the transition costs of switching to a private pension system). The aim was to reassure investors, and so prompt capital inflows and lower interest rates. But tax increases helped to push a recovering economy back towards recession, increasing investors worries about Argentinas debts.
The helping hand of the IMF offers a way out. Investors will, with luck, no longer have to fret about how the country will cover its financing needs next year. And in return for a commitment to medium-term reform of the public finances, especially those of the provinces, Argentinas fiscal policy can safely be looser in the short term.
All that makes sense. But the rescue will work only if it restores economic growth. For that, Mr de la Rua must use the respite gained to restore confidence in his government and its economic policy. A new economic team might have eased that task, though the main fault of the current one is merely to be unlucky. As it is, growth will probably require early cuts in tax rates, balanced by lower spending. And pushing the all-important fiscal reforms through an opposition-dominated Congress will require decisive leadership from Mr de la Rua. That is not something that Argentines associate with their president. It is time for him to surprise them.
There is a further lesson from Argentinas troubles. It is that currency boards are not a panacea, nor do they necessarily force countries to reform. For all its achievements in other areas, Argentina has done less than, say, Brazil to reorder its public finances, especially those of the provinces, and to increase the efficiency of the central-government bureaucracy.
Certainly, the currency board underpinned Argentinas boom during the 1990s. And even today it may not in itself be the main obstacle to the countrys economic recovery, which, with the IMFs help and a lower dollar, may eventually arrive. But the board is proving painful, and is no longer bringing growth. Argentina is stuck with it, and it still has its benefits. Even so, the countrys plight ought to give pause to those who preach that Latin American countries should eagerly adopt the dollar, whatever their circumstances or trading patterns: green-backed does not necessarily mean copper-bottomed.
By most reasonable standards, the economy seems sound: the fixed exchange rate is not under pressure, the banking system is solid, exports are up 13% so far this year and the fiscal deficit, at 2.8% of GDP, looks manageable. But unemployment stands at 15%, many of those in work have suffered wage cuts, and investment has slumped. After two years of stagnation and deflation, and two months of political infighting within President Fernando de la Ruas coalition government, the nerves of investors have snapped.
When the yields on Argentinas bonds had soared to ten percentage points above those of the United States Treasury, officials confirmed on November 10th that they were negotiating a new bundle of loans from the IMF. Including extra help from the World Bank and the Inter-American Development Bank, and some contingency financing from private banks, the total might be $15 billion-20 billion.
The agreement is intended to assuage fears that Argentina might be heading towards either devaluation or default on its debts. In fact, officials and their critics alike agree that devaluation is out of the question. Under Argentinas rigid currency-board scheme, not only is the exchange rate fixed by law, but in many respects the economy has already adopted the dollar. So, even if it wanted to, the government could not achieve a real depreciation of the peso, since local businesses would simply increase prices in line with any nominal devaluation. Opinion polls suggest that some 70% of Argentines still support the currency board, which they credit with banishing the hyper-inflation of the 1980s.
An unpleasant combination of disappointing growth and higher interest rates has sent Argentinas ratio of debt to GDPthe main indicator of a countrys solvencyto over 50%. But much of the debt is long-term and officials insist that their debt difficulties are merely temporary. All it would take for the debt ratio to start falling again is annual economic growth of 3% and a two-point drop in interest rates, says Mario Vicens, the treasury secretary.
The loan agreement would remove any worries that Argentina might be unable to raise the $19.5 billion it needs from financial markets next yearthough a growing share comes from local pension funds, and only some $5 billion of this would involve new international bond issues. In return, Argentina would undertake further fiscal reforms, beyond those envisaged in an existing agreement with the IMF. The overall aim is to reassure investors that Argentinas fiscal position, and thus its debt, is under control, while not choking off growth.
Some of the details remain vague. But as well as structural changes in the public finances, the proposed measures include a short-term loosening of fiscal policy, to take account of lower growth. The government has cut its estimate of economic growth next year to 2.5%. The target for this years fiscal deficit will be relaxed, perhaps to $6.0 billion (2% of GDP), and to $6.4 billion in 2001.
The structural reforms would include tightening up pension rules (raising the retirement age for women from 60 to 65, and obliging all workers to take out a private pension, for example), and privatising some tax collection. But the most important of them, on which the IMF is insisting, involves tighter restrictions on the central governments payments to the provinces.
News of the loan talks has calmed markets. But Mr de la Rua must now win political support for the fiscal reforms. His governing Alliance lacks a majority in Congress, and has been shaken by squabbles, culminating in the resignation last month of Carlos Alvarez, the vice-president. Some of the fiscal proposals can be pushed through by decree. But not a new formula for financing the provinces. Officials were this week in difficult negotiations with provincial governors from the Peronist opposition over a proposed five-year freeze on most spending.
With ever more public discontent over the stagnant economy, and groups of unemployed activists staging protests, the governors were said to insist on increasing social spending. In fact, much more could be done with less money, since Argentinas social programmes are notoriously wasteful.
In the end, a political deal is probable. With a congressional election due next October, the Peronists do not want to be blamed for sabotaging an IMF loan. Even so, it could be tricky to shepherd the measures past Congress and the courts.
Getting the economy moving again will depend on the governments ability to restore confidence among investors and consumers. To that end, Jose Luis Machinea, the beleaguered economy minister, last month offered modest tax breaks on new investment. Officials claim that reform of the labour laws, the deregulation of telecoms and health schemes, and steps to boost private investment in infrastructure will all help.
But critics argue that Mr Machineas approach is too cautious. The fixed exchange rate means that Argentinas adjustment to external blows must take the form of falls in prices and wages, at the risk of a downward spiral of consumer confidence.
Under a currency board, the only way to get out of recession is to lower government spending and taxes, argues Martin Redrado of Fundacion Capital, a think-tank. Tax increases last December helped to smother a nascent recovery (see chart). Investment, which boomed from 1991 to 1998, has dried up; consumer demand is stagnant. Given the strength of the dollar, turning Argentina into an attractive place from which to export means cutting costs or increasing productivity by around 20%, according to Jorge Forteza of Booz, Allen & Hamilton, a consultancy.
After the flamboyance of Carlos Menem, who presided over Argentina for a decade, the voters seemed deliberately to choose a grey and cautious leader in Mr de la Rua. Yet many now complain that he is weak and indecisive; his approval rating has plunged to around 30%.
The presidents defenders point out that Argentina has no experience of coalition government. They say that Mr de la Rua has now consolidated his power within the government and is a natural consensus-builder. If so, now is the time for him to show it.
A bailout for Argentina
Having withstood the global financial crisis of 1997-98 with its fixed exchange rate intact, Argentina has been forced to turn again to the International Monetary Fund to help combat a loss in investors' confidence. After its expression of general support on Friday, the Fund should act promptly.
An IMF bailout can only be justified if a country is suffering a temporary liquidity crisis that can be remedied - not when the problems are deep rooted and a government appears incapable of taking remedial action. Argentina clearly falls into the former category. Its government has pursued an ambitious reform programme and has been praised for its economic management.
However, a series of adverse shocks has prevented it from recovering from the global financial crisis. The fixed exchange rate between the dollar and the peso eroded competitiveness, weak commodity prices have caused strains and the recent increase in risk aversion among investors was the final straw.
Under normal circumstances the government's debt position would be sustainable. Debt is about 50 per cent of gross domestic product - lower than in several western European countries - but it has been rising quite fast. Given Latin America's economic history, this has made the country vulnerable to a loss in confidence among investors. Borrowing from the IMF would ease the immediate crisis and attention could then turn to a resumption of strong growth.
Restoring confidence will require stronger political leadership than Fernando de la Rua, the president, has yet shown. The most important task will be to build on the fiscal adjustment already put in place since the new government came into office in December. The further reforms proposed on Friday move in the right direction.
Tax rises would not be sensible, as the country's tax take is already relatively high. The 2001 budget, now being approved, includes some spending cuts but more are needed. In particular, Mr De la Rua needs to impose firmer controls on spending by the provinces. This will be a difficult political task but the IMF must insist on it.
The country is stuck with the current exchange rate - any attempt to unwind the currency board would be disastrous - but it need not be a major obstacle to competitiveness. Exports are set to rise by about 16 per cent this year and recent reforms should eventually make wages more responsive to economic changes.
Argentina's leaders have made some mistakes but their policy direction has been sound. The country does not deserve to be abandoned to the whims of the markets. Timely intervention by the IMF should prevent a temporary collapse of confidence from becoming a regional crisis.
Argentina is now, via the currency board, in the same position as a land inside Euroland. When the dollar rises your own currency, if you still have one, rises too. So Argentina is a good example why the whole Euro-project should be abolished - before we all live in Argentina.