The IMF has come under heavy fire for its decision last month to roll over $6 billion it lent to Argentina. The republic has failed to implement or even promise any of the reforms the IMF considers necessary, say critics, and the Fund has lost credibility by caving in to the Argentines’ blackmail tactics.
Those both inside and outside the IMF who oppose this deal essentially see negotiations between Argentina and the Fund as a game of chicken. The IMF wanted several key reforms, including a plan for unfreezing bank accounts without triggering a run on the currency, and some kind of assurance that Argentina’s unpredictable judicial system wouldn’t declare vast swathes of the government’s programme to be unconstitutional.
Argentina, on the other hand, saw the negotiations much more simply: you helped us get into this mess, now you’ve got to help us get out. If you don’t, there’s no reason we should continue to pay you billions of dollars in amortizations every year: it does us no good at all.
The IMF blinked first, under extreme pressure from its big shareholders. Spain, in particular, was a vocal proponent of a new IMF deal, and most observers agree that the final decision to give Argentina the aid was made not by the Fund but by the US government.
Obviously, rolling over Argentina’s obligations helps the IMF in the short term: no financial institution ever wants to see one of its largest debtors go into default. On the other hand, Argentina’s refusal to repay the Fund if it didn’t get a deal was less blackmail than sound economic policy.
As far as the IMF is concerned, however, the questions linger. Will the decision come back to haunt it in the medium and long term? Will Uruguay, sensing weakness, demand that the Fund provides the cashflow necessary to put off a restructuring? Will Turkey, leveraging its geostrategic importance, start going slow on the reform front because it knows, when push comes to shove, that the Fund will always cough up? Will future crises, as yet unforeseen, be worked out under a general assumption that the IMF’s bark is much worse than its bite? In general, once the IMF has loaned money, will it compromise its principles rather than be defaulted on?
The answers depend to some degree on what one considers the IMF’s principles to be. The Fund has an institutional view of what kind of policies it likes and what it doesn’t. Sometimes that view is right, and sometimes it isn’t. But behind those judgments, and often forgotten, is its broader imperative to provide financial help and economic advice to troubled countries.
In this case, the IMF isn’t lending Argentina any money at all: it is simply rolling over the country’s obligations for a few months. Failure to do so would hurt Argentina, since it is always easier to pay the IMF on time than to drag oneself out of arrears. The Fund is adamant that its debts can never be renegotiated or restructured. It would hurt the Fund, which would find itself with an unprecedented level of bad debts. And it would hurt the other countries that the Fund helps, since their interest rates would have to rise under the IMF’s burden-sharing arrangements.
On the other hand, rolling over the debts benefits Argentina, benefits the Fund, and benefits the other recipients of IMF largesse. It also benefits other multilateral development banks such as the World Bank and the Inter-American Development Bank, which are much more likely now to receive their amortizations on time.
If Argentina’s new government wants fresh IMF funds, it should demonstrate that it has a coherent plan and will use the money well. The present administration neither got fresh money nor is it going to receive any. But whoever gets elected president of Argentina will now have one less obstacle to overcome in what has to be one of the most thankless jobs in the world.
Argentina’s present government would have gone into arrears to the tune of many billions of dollars if this agreement hadn’t come through. Preventing that was the right thing to do: a good idea that cost the IMF nothing.
