The headline on a July 30 Business article overstated the International Monetary Fund's responsibility for Argentina's recent financial crisis. The article that ran under the headline "IMF Says Its Policies Crippled Argentina" reported that the IMF's independent evaluation office concluded that the fund's policies probably exacerbated Argentina's crisis, but it did not say the fund caused it. (Published 07/31/04).
The International Monetary Fund's handling of the crisis in Argentina three years ago almost certainly deepened a recession that threw millions of Argentines into poverty and sparked political chaos throughout the country, according to a report released yesterday by the IMF's internal audit unit.
By overlooking Argentina's growing indebtedness in the 1990s and continuing to lend the country money when its debt burden had become unsustainable, the fund significantly contributed to one of the most devastating financial crises in history, the report concluded.
The crisis peaked when the Argentine government defaulted on nearly $100 billion in debt to private creditors and had to abandon the "convertibility" system that pegged the peso to the dollar at a one-to-one rate. The ensuing crash led to an 11 percent decline in Argentine output in 2002, sent the jobless rate soaring and toppled a series of presidents in a country that the IMF had once hailed as a model of free-market reform and development.
"It would have been an ugly crisis anyway, but perhaps not quite as bad if the fund had supported a change in strategy earlier," said Isabelle Mateos y Lago, an economist from the IMF's Independent Evaluation Office, which produced the report.
The report provides potent ammunition to critics who contend that IMF rescues often fail to save developing countries from investor panic and even make matters worse. It also reinforces the complaint that the IMF's loan packages frequently bail out private lenders without requiring them to accept reductions in their claims, causing countries' debt burdens to build and their problems to fester.
At the same time, the study helps rebut criticism that the fund insists on excessive austerity in developing countries. In Argentina's case, the report concluded that officials were too lenient.
Although it remains to be seen whether IMF policies will change as a result, fund officials have long said that the Argentine debacle taught them harsh lessons. The report echoes criticisms made by IMF staffers, including Michael Mussa, the fund's chief economist from 1991 to 2001.
The report's critique is exceptionally damning, showing how fund officials overlooked vulnerabilities, ignored warnings from some staffers and shrank from confronting the economic forces that brought Argentina to its knees. It goes considerably further than earlier assessments by citing internal IMF memoranda, minutes of meetings and other previously undisclosed facts about key developments in the crisis.
For example, the report questions why the IMF agreed in the late 1990s to a three-year program that would provide loans on a contingent basis if Buenos Aires needed the money. A memo by the fund's research department in November 1997 complained that the program, and in particular the list of reforms required of Argentina, was "not ambitious enough to warrant Fund support," according to the report. Those concerns, however, were downplayed by others at the IMF, especially top management, the internal report concluded.
Although Argentina's yearly budget deficits were not overly large, the government's indebtedness was rising at an alarming rate because of off-budget spending. Yet the size of the debt "became the main focus of [IMF] briefing papers and policy discussions only in late 1999 or early 2000," when it was approaching 50 percent of gross domestic product, the report says. "By then, the economy was in recession, and efforts to reduce the debt . . . were difficult and possibly also counterproductive," the IMF study found.
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."