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Report Looks Harshly at I.M.F.'s Role in Argentine Debt Crisis

Todd Benson

The International Monetary Fund was too lenient for too long with Argentina and made a series of
mistakes in the 1990's that contributed to that country's spectacular economic implosion in late
2001, according to a report released on Thursday.
The 193-page report by the Independent Evaluation Office of the I.M.F., which serves as a sort of
ombudsman's office for the fund, criticized the international lender for supporting Argentina's
exchange rate policy that pegged the peso to the American dollar for too long -- a policy that caused
the country's debt to balloon out of control and ultimately forced the government to declare the
largest sovereign debt default in history in early 2002.
In the crisis that followed, President Fernando de la Rúa was forced from office, as were three more
presidents in two weeks before Eduardo Duhalde took over. Argentina defaulted on most of its $141
billion in public debt, abandoned its currency peg and imposed draconian limits on bank deposits.
Millions of Argentines were pushed into poverty in a crisis that has been compared to the Great
Depression in the United States.
The I.M.F. contributed to this outcome by failing to recognize early on that Argentina was running
up an unsustainable debt, the report said. Even though Argentina had repeatedly missed
macroeconomic goals agreed upon with the fund, I.M.F. officials did not press the Argentine
authorities for significant changes and even hailed the country at times as an example for other
emerging market countries.
''The I.M.F. remained engaged in a program relationship with Argentina too long, when the policies
being supported were inadequate,'' the report said.
The report also says that the fund was wrong to have increased its lending to Argentina to as much
as $22 billion from late 2000 to late 2001, just as analysts were increasingly warning that the
country was heading toward a collapse. Instead of searching for ways to minimize the costs of
devaluing the peso, the report went on, the I.M.F. scrambled to find ways to preserve the currency
peg until it was too late.
But the report stops short of laying the ultimate blame for Argentina's demise on the I.M.F., and
instead points a finger at the Argentine authorities.
''The crisis resulted from the failure of Argentine policy makers to take necessary corrective
measures sufficiently early,'' it said. ''I.M.F. surveillance failed to highlight the growing
vulnerabilities in the authorities' choice of policies.''
The report draws 10 lessons from the Argentine crisis, and urges the fund to strengthen its
surveillance of loan programs by making exchange rate and debt sustainability the core focus. It
also concludes that the I.M.F. should always have a contingency strategy, with clear-cut criteria to
determine if the initial approach is working, and if and when a policy shift is in order.
The report was released as the I.M.F. appeared to be taking a harder line with Argentina, which has
a $13 billion loan deal with the fund. An I.M.F. team visited Buenos Aires in June to review the
government's compliance with the agreement, but has yet to disburse a $728 million installment
under the loan. If the revision is not completed by the end of next week, when the I.M.F. staff
members break for summer recess, Argentina may have to dip into reserves to make payments to
lenders.
Argentina's economy minister, Roberto Lavagna, asked the fund last week to release the loan
payment before the recess, noting that the country had met goals stipulated in the agreement. But
the I.M.F. has dragged its feet in what many analysts say is a sign of its displeasure with the hard
line that the government has taken with private bondholders in its latest debt restructuring proposal.
''I was not expecting this shift in attitude from the I.M.F. to take place so soon,'' said Alberto Bernal,
chief economist at IDEAglobal, a Wall Street research firm. ''The only thing I can point to is that the
creditors appear to have done a good job of selling the idea that Argentina can afford to pay more.''
The government of President Néstor Kirchner needs I.M.F. backing for its plan to renegotiate some
$100 billion in defaulted debt. But the fund has been reluctant to support it, insisting that Argentina
negotiate with its creditors in good faith.
The I.M.F.'s delay may also stem from a change in leadership. Rodrigo Rato, Spain's former
economy minister, became managing director earlier this month and has suggested that he intends to
take a wait-and-see approach with Argentina.
The Global Committee of Argentina Bondholders, which claims to represent about $37 billion in
Argentine debt, has criticized the restructuring plan announced in June. Under the offer, Argentina
would cut its debt by $60.9 billion and issue $38.5 billion in bonds. That would amount to about a
75 percent reduction in the market value of the debt.
But with the Argentine economy growing at a fast clip and tax revenues booming, bondholder
groups think the country can pay more.