Tuesday, January 03, 2006

Kirchner's Full Payment

Today January 2, 2006, the media in Buenos Aires and elsewhere in Latin America and the United States, call attention on the decision of the Argentine government to pay in full the country's debt with the International Monetary Fund.

The IMF was informed of President Ernesto Kirchner's decision to pay in full in mid December. At that time, the IMF released a brief statement on the issue with little or no comment on the reasons and the consequences of the decision, which is, by itself, a good sign of the ability of the Argentine economy to recover .

In Argentina, the decision has polarized the opinions of economists, politicians, and journalists who have expressed in some cases satisfaction and in some others caution with a decision that leaves the Argentine Treasury with little more than 18 thousand 500 million U.S. dollars in reserves after paying little more than 9 thousand 500 million to the IMF.

To my mind there are two issues that one needs to pay attention to try to understand the reach of this decision and its possible consequences in Argentina and elsewhere in Latin America. More so, because Mr. Kirchner and his ministers have emphasized the idea, rather ludicrous, that they have decided to pay in full as a way to have more "freedom" to pursue their own economic policies.

First, it is necessary to take into consideration that those 9,500 million are only little more than 10 percent of the overall Argentine debt, which—as with most of the Latin American countries—comes from credits with private banks, and not with multinational institutions as the IMF or the Inter-American Development Bank . This is relevant because, actually, the credits with the IMF usually are less abusive than those with the private banks. That is something that has remained absent in most of Kirchner's statements on the issue.

To my mind, if one really wants to achieve more freedom in the design of the economic policy, what is really important is to repay the debt with the private banks and not to seek the easy applause that comes out of slapping the IMF's face. More so, when it is clear that the measure appears as designed to achieve two goals. On the one hand, to fascinate certain leftist media in Argentina and Latin America (one only needs to pay attention to Página 12's take on the issue to understand it) than to pursue a major goal and, on the other, to insist in the rather ludicrous idea that the crises that Argentina and other countries in the region confront are the consequence of the "tight" controls that the IMF impose on the countries.

The fact, however, is that such controls have been rather loose and that is why it has been possible to witness the abuses as that of former President Menem and his one-peso-to-one -dollar policy of the 1990s. One only needs to go over the files of the IMF and other multilateral financial institutions to see how even if at one point the IMF praised the fixed-parity as a way to address the hyper-inflation of the 1980s (5000 percent yearly in 1988-9), there were many warnings about the negative consequences of the policy.

Moreover, many in Argentina and elsewhere insisted in the need to change the monetary policy, but Menem was unwilling to do so out of fear of the possible consequences. Something similar can be said of the rather dumb decision of the Mexican government to pursue a semi-fixed parity in the early 1990s while reducing the fiscal revenue by lowering the VAT rate from 15 to 10 percent in the last two years of the Salinas administration. Neither Menem’s nor Salinas’s policies were imposed by the IMF.

The same can be said of the unwillingness of many governments in Latin America to pursue sound fiscal policies during the 1980s and 1990s. Otherwise, all the countries in region would be either disasters as Bolivia or buoyant economies as Chile. In actuality, however, there are variations that go from the performance of Chile and Mexico to the failure of Argentina, Bolivia, and Ecuador.

However, in contemporary Latin American blaming the IMF for all the wrongdoings of irresponsible politicians is the best way to secure an ovation.

In any case, the question now is what Argentina will do with the “freedom” that— if one accepts Kirchner’s hypothesis—comes after the decision to pay in full the debt with the IMF.

One discouraging sign can be found in the decision of the Venezuelan government to increase its role as financier of Kirchner. Because that is the aspect of Kirchner’s move that has not been really taken into consideration in the analysis. Only during the last three months of 2005, Venezuela bought 1,500 million dollars of Argentine bonds and the expectation is that Caracas will lend more money to Buenos Aires. It will be naïve—to say the least—to think that Hugo Chávez’s government will do it without seeking to impose its own economic agenda on Argentina.

In any case, questions about the future of the Argentine economy remain open. Hopefully, for the sake of the millions and millions of Argentines who have survived the economic catastrophe co-authored by Menem and De La Rúa, Kirchner will pursue sound policies to guarantee a better distribution of the wealth in that country.

Technorati Tags: , , , , , , , ,