The Hindu : Dealing with debt

Online edition of India's National Newspaper
Saturday, Sep 13, 2003

Opinion

Opinion - Leader Page Articles

Dealing with debt

By Tony Smith

Argentina has got away with a less-than-stringent deal on its debt burden with the International Monetary Fund; and Brazil looks to follow suit.

AFTER THE International Monetary Fund's agreement to help Argentina raise itself from its economic sickbed without having to follow a full fiscal discipline regime, could other debtors in the region be tempted to adopt a tougher stance with the Fund? In neighbouring Brazil, where orthodox policies have stifled inflation and stabilised markets, a debate has already started as to whether the country needs to renew its current $30 billion package with the Fund that expires in December.

The administration of President Luiz Inacio Lula da Silva has indicated that it will want a new deal only on more favourable conditions, and the Finance Minister, Antonio Palocci, said last week that any new deal with the Fund should allow the Government to increase spending on social needs and infrastructure.

In Ecuador, meanwhile, the authorities could be forgiven for wondering why the Fund is demanding more belt-tightening from them than from Argentina. Analysts said that the Argentine deal was probably a one-time thing. Brazil has the clout — it is a big enough debtor — to play hardball with the fund, though it probably will not, analysts say. Smaller debtors like Ecuador, though, do not have the leverage to extract concessions from the IMF.

As the dust settled on Thursday, most analysts agreed that the pact announced on Wednesday night by President Nestor Kirchner of Argentina and the IMF's Managing Director, Horst Kohler, was a victory for Argentina.

Argentina said on Thursday that it had repaid about $3 billion in defaulted debt to the IMF, according to Reuters. That default on Tuesday was the biggest single missed payment in the Fund's history.

After being abandoned by the Fund as its economy collapsed in late 2001, Argentina felt justified in resolutely refusing to make a series of concessions that negotiators for the IMF wanted in exchange for refinancing $21.6 billion in debt that Argentina owes multilateral institutions over the next three years.

Argentina's requirements, considered less than orthodox by Wall Street, included limiting its budget surplus to 3 per cent of gross domestic product next year, while leaving goals for the following two years open to further negotiation. By contrast, Ecuador's Fund-set surplus goal this year is 5 per cent, while Brazil is aiming for 4.25 per cent.

The deal also failed to lock in, as the Fund had wanted, compensation for banks and largely foreign-owned utilities operating in Argentina that were hard hit by last year's sharp devaluation of the peso. "Did the IMF cave in? Yes and no," said John Welch, chief Latin American economist at WestLB in New York. "But on these issues it certainly did."

Mr. Welch points out that a 3 per cent surplus, by Argentine standards, is gargantuan. Before Argentina defaulted on its private debt in 2002, it had not ended the year with excess cash since 1993, and that surplus was a meagre 1 per cent, he said. Mr. Welch said he doubted that other countries would follow Argentina's lead because there were very few debtors of that magnitude.

Brazil's Left-leaning Government is debating whether it needs another agreement, not out of any animosity to the Fund — although that does exist in some quarters of Mr. da Silva's Workers Party — but because it feels it has proven its economic credentials by putting prudent economic policies into effect.

Two former heads of Brazil's central bank, Arminio Fraga and Gustavo Franco, have both said recently that the country no longer needs to prop itself up with IMF cash, and many analysts agree. "Brazil is light years ahead of where the Argentines are," said Doug Smith, chief economist for the Americas at Standard Chartered in New York. "They have developed this credibility by themselves." "These days nobody has a bad word to say about Brazil," he said, "so why put that in jeopardy?"

And although Mr. Kohler said in a statement that the Fund would work hard not only to help Argentina grow, but also to reduce poverty, analysts said that did not mean the IMF was suddenly going to start condoning non-orthodox economic policies in poor countries.

"The United States and the G-7 in general ultimately didn't want to have to be bothered with another international crisis, albeit economic rather than military," said Mr. Smith at Standard Chartered. "I think the deal was done in a fairly unique set of circumstances." — New York Times

Printer friendly page
Send this article to Friends by E-Mail

Opinion

News Update

Stories in this Section

The future of CAS

Boosting the religious right

Clouds over panchayati raj