The Hindu : GETTING PRIORITIES RIGHT

Online edition of India's National Newspaper
Wednesday, Mar 24, 2004

Opinion

Opinion - Editorials

GETTING PRIORITIES RIGHT

SHOULD THE INTERESTS of international lenders come before those of citizens when a country is struggling to recover from economic distress? The question has been asked many times before — from Mexico in 1994 to Brazil in 2003 — and governments have invariably had to impose harsh domestic measures in order to fulfil their loan commitments. This has been the conditionality for receiving financial assistance from the International Monetary Fund and other multilateral institutions. The drama is being played out all over again in Argentina, which is being asked to come up with better terms for repayment of bonds worth $88 billion it owes an estimated 700,000 institutional and retail lenders in the global capital market. After the South American nation repaid $3.1 billion to the IMF earlier this month, averting what would have been the largest default in the history of the institution, it has been sanctioned an identical amount as a loan instalment. This will keep the country's foreign exchange reserves in reasonably healthy shape. The future of the IMF loan, however, depends on the private lenders and Argentina coming to an agreement on repayment of the bonds.

The fastest growing economy in the world last year was neither China nor India — but Argentina, which clocked 8.7 per cent. The economy is expected to maintain its momentum and expand by a healthy 5.5 per cent in 2004. This would not have seemed possible even a year ago when the country was emerging from four years of economic contraction. While the independent domestic policy the Government was determined to follow has been the most important factor behind the turnaround, the decision in 2001 to stop servicing foreign bonds helped by freeing up resources for investment and the social sector. In the 1990s, when Argentina was one of the poster boys of the emerging markets, global investors fell over themselves to buy the bonds. They did so thinking that the debt risks were covered by the multilateral institutions, which would step in with multi-billion dollar bailouts should a financial crisis erupt. The first charge on these rescue packages would be repayment of private external debt. This `moral hazard' has been responsible for the herd mentality that has driven global investors to make reckless investments and loans in the developing countries. Argentina, however, marks a break in the terms of sovereign bailouts. The IMF provided in 2003 a $12.5 billion loan, but this was a small rescue package compared with the $60 billion South Korea received when it was in trouble in 1997. As the Argentine Government has pointed out, if big rescue packages are going to be a thing of the past so too must be the notion that debts will be serviced irrespective of the burden they place on a struggling economy.

Argentina has only suspended debt service; it has not repudiated what it owes the bondholders. It offered last year to repay 25 per cent of the value of the bonds. Accustomed as foreign private capital is to having its way in emerging markets, the lenders have been stunned by the offer. They have chosen, as might be expected, to put pressure on the IMF to act tough with the South American country. This strategy is unlikely to work. In a new development, Argentina and Brazil, currently two of the biggest borrowers from the Bretton Woods institution, have come together to demand better loan terms. The IMF has been arguing for years that private capital markets must pay for their irresponsible lending decisions. It now has an opportunity to demonstrate that it is serious about a change in policy.

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

Opinion

News Update

Stories in this Section

GETTING PRIORITIES RIGHT

THE BURDEN OF HIGH OIL PRICES

Where have all the jobs gone?

End of the road to peace?

Socialists versus socialists