Argentina’s negotiating strategy of threatening to default on its loans to get its own way has underlined the case for greater IMF independence.
The case of Argentina is an example of what happens when the International Monetary Fund’s policies towards countries are guided primarily by the strategic and political motives of G7 governments instead of by technical considerations. If the IMF must support Turkey because of its geo-strategic significance, or water down what it demands from Argentina because the US does not want yet another trouble spot, it should come as no surprise that the IMF risks losing its authority, becoming a joke or, worse, prone to blackmail, which hampers enormously its ability to carry out its primary aim in the international financial system.
Argentina’s relationship with the IMF has been rocky since 2001 but it seems to have become worse in the recent past. Although discussions between the IMF and a country needing to make economic policy adjustments are inevitably difficult, what seems unusual is that in Argentina’s case, dramatic confrontations now take place nearly every three months. Part of the problem, of course is that Argentina, after defaulting on some $100bn of sovereign debt in late 2001, has become an aggressive negotiator. In 2002, it defaulted on a debt repayment to the World Bank to press for an IMF accord that materialised in January 2003. In September 2003, it defaulted on an IMF payment, which it paid once it secured the present agreement. This March, it threatened to default again on the IMF, but finally paid, after the Fund reportedly promised approval of the programme’s second quarterly audit. This is tantamount to blackmail.
Taking advantage
Another reason for the clashes is that the IMF seems to have been pressured to produce an accord with Argentina last September, despite there being little agreement about the policies to be followed. Naturally, Argentina is taking as much advantage as it can from the lack of precision regarding qualitative reforms that it is unwilling to tackle.
The second quarterly audit is currently in progress. Argentina’s critics point out that it seems unwilling to engage in “good will” negotiations with its creditors, and that the Argentine “blackmail” tactics should be punished. The Argentine government says the disagreements with the IMF arise from its constant attempts to change the terms of the September accord. The way the agreement is written provides both sides material to argue their case.
Though details are not yet public, the letter of intent signed a few weeks ago is supposed to be more specific about what Argentina must accomplish in the second quarter of the year, increasing the likelihood of clashes during the June or September audits.
Fear of default
Why was such an agreement produced in September? Was it because the IMF feared a default by its third-largest debtor, because it wanted to give President Kirchner time to consolidate his power, or because the US government didn’t want a trouble spot in South America? Probably all these played a role.
The case of Argentina sets some dangerous precedents. Should a country be allowed to threaten default against the IMF or the World Bank as part of a negotiating process? What exactly constitutes “good faith” negotiations that would allow these institutions to aid a country in default without encouraging similar behaviour by other countries? Think of the internal criticisms that Brazil’s president Lula must be receiving for choosing the hard road of reform, instead of his neighbour’s apparently successful strategy.
The IMF should be allowed greater independence to decide what country policies are worthy of support and to generate strong disincentives against behaviour by governments that is harmful to the global financial system. If some countries must be aided because of non-financial considerations, this should be done through other vehicles, not through the IMF. The change at the helm of the Fund should be used as an opportunity to reinforce its political independence and its technical authority.
Federico Thomsen is the principal of EF Thomsen, a Buenos Aires based political and economic analysis firm, and formerly chief economist at ING Bank in Argentina
