IMF Says Its Policies Crippled Argentina

IMF and Argentine officials met in January. The IMF last week approved the first review of Argentina's financial aid agreement with the fund. (AP)

The report also disparages the IMF's strategy for the two rescues it marshaled for Argentina beginning in late 2000, when investors began pulling money out of the country and interest rates spiked.

The first rescue included a $14 billion loan package from the fund, and IMF officials knew the risk of failure was high, according to the report. At a meeting of the 24-member board, which represents member countries, several directors "articulated the view that, under realistic assumptions, the debt dynamics were unsustainable and therefore the program was very unlikely to succeed," the report states.

The report does not fault the board for giving Argentina the benefit of the doubt so late in the crisis, because the alternative -- forcing the country into default and devaluation -- would have been painful. But "the critical error," according to the report, was that the IMF didn't prepare an exit strategy that could have been used once it became clear the rescue wasn't working. Such a strategy -- presumably including a change in currency policy and a restructuring of debt, bolstered by fresh IMF assistance -- might have limited the fallout if it had been used before the recession deepened and the country's banks were weakened in 2001, according to the report.

The report is especially scathing concerning the second rescue, an $8 billion loan in August 2001. At a meeting of senior staffers, management sided with advocates of the loan who argued that giving the country one last chance would "ensure that the [Argentine] authorities, not the IMF, took responsibility" for the painful changes that might have to be made, including a deep devaluation of the peso.

The loan was granted, the report says, despite an assessment that the chances of success were "at most . . . 20-30 percent," and even though a majority of staffers had concluded that "the additional few billion dollars would not buy enough time to make a difference, but would be more likely to disappear in capital flight." The net result, IMF staff members argued, would simply be more government debt, not a more stable economy -- which is precisely what happened, the report noted.

The report makes six recommendations for changes in IMF policy, strongly urging the fund to design alternative fall-back plans when it mounts rescues of countries.

An appended response from the staff agrees with many of the findings but takes issue with others, saying, "some of its conclusions depend very much on hindsight."

The report comes at a time when the IMF and Argentina are again at loggerheads over the country's policies, and it could have an impact on the dispute, although officials of the evaluation office said they have no position on the situation.

The fund this week delayed a loan disbursement to Buenos Aires, and although Argentine officials didn't respond as they have in the past -- by threatening to withhold scheduled debt payments to the IMF -- Economy Minister Roberto Lavagna suggests he might use the findings to justify a hard line.

Noting the report that Argentina is not solely responsible for its "huge debt," Lavagna writes: "It should be recognized that this institution has the courage to expose and analyze its own mistakes. This should be commended. Recognizing errors is, however, just the first step in a healthy self-criticism exercise. The second step is bearing responsibility for failures, namely sharing the burden of redressing their consequences."