Posted on 22/12/2001

Argentina v World Banks
Edited by Alan Marston

Argentina is in the news again, after receiving two multi-billion-dollar
International Monetary Fund `rescue' packages in the past 12 months
Argentina still looks like it's heading for default on its $132 billion
debt. Note, New Zealand's external debt - $123 billions - is even greater
per capita debt than Argentinia.

I was in Buenos Aires during the final coup of the Peron era in 1976, the
coup against his last wife's rule. I experienced first hand the chaos of
monetary collapse when the $US becomes king while local currency and with
that local people's economic lives become paupers. It dawned on me then
that Argentina is a unique state. On the one hand it is much like Europe,
full of people with Italian, German, English decent and on the other hand
it is typically South American, i.e., exploited to the hilt and treated as
a banana or in this case beefsteak republic by North America.

Once again worlds collide in Argentina. Will the people of Buenos Aires
(that's where most people live) riot hard enough and long enough to get the
puppet politicians to tell the World Bank and all other private commercial
banks to get lost or will the country be humiliated again by going down on
its knees, taking on yet more debt and promising to pay?

Big question, one that many other countries will have to answer too, NZ
included. Argentina is the unlucky first country to face the issue of debt
as either a mortgage (literal translation = grip of death) or a
convenience. I mean by the latter, debt is an invisible handshake that
turns into a very visible ball and chain ... debt is a state of mind. The
real question facing not just Argentina (though most urgently there) is who
and when will the first leader of a country say to the banks, no, no pay.
It really is who and when not if and maybe.

If Argentina were a company like Enron Corp. it could seek Chapter 11
bankruptcy protection while sorting out its books and negotiating with
creditors. But sovereign debtors can't do that, or can they. If the IMF gets
its way, entire nations may be able to seek the protection from creditors
that most corporations can use. The IMF wants to do that not because it is
a good guy, but because it knows the debts it has put countries in are not
repayable, are not morally right and eventually a country will say so to
the world by telling the IMF to, `get lost'. Then the dogs are out, the
whole debt/money global structure will start collapsing and that collapse
of confidence would bring the global economy back to earth with a hell of a
crash.

That's the flip-side of debt, confidence in money and confidence is the
single foundation on which economics stands or falls. That's why Anne
Krueger, the IMF's No. 2 and U.S. representative, recently suggested
embracing an international bankruptcy proceeding for countries with ``truly
unsustainable'' debts. The proposal, while novel, isn't unique. Harvard
economist Jeffrey Sachs first floated the idea more than a decade ago, but
it never developed, things weren't bad enough then, they are now. The Bush
administration seems to be seriously seeking an alternative to the current
options: bailout or default.

History shows that defaults tend to be chaotic and their effects can easily
cross national borders and drag down other economies. It happened in 1994
during Mexico's tequila crisis, again in 1998 when Russia experienced its
unilateral default and, perhaps most visibly, the Asian crisis of
1997-1998. In a recent speech to the National Economists' Club in
Washington, Krueger proposed that countries in difficulties could
request a ``temporary standstill'' on debt repayment. They could then
impose exchange controls to stop capital flight, buying time to negotiate
debt restructuring.

In Argentina, Economy Minister Domingo Cavallo has said an international
Chapter 11 process would ``undoubtedly be useful.'' The rioters don't
agree, they don't know the intricacies of debt-money, but they do know when
they have had enough of being treated like serfs. Economists on the other
hand do agree because, they say, it spreads the blame for default,
economists accept debt as real, the bread they eat. ``Argentina is to blame
without doubt, but so are the creditors who kept on lending money,'' said
former economy ministry official Eduardo Curia. Ordinary people can't eat
debt.


When a business goes under, an impartial adjudicator - normally a
bankruptcy judge - is named to oversee the case. To make sure the company
is negotiating in good faith and will follow sensible financial policy, its
management is often changed. As a last resort, its assets can be stripped.
``In this case, who would be the judge?'' asked Cardoso. Although the IMF
is probably best-suited for this role, Cardoso said the lending agency is
``hardly a neutral court: it's made up of 183 member countries, some of
which carry much more weight than others.'' ``And how do you replace the
administration of a country? Governments are elected, countries are
sovereign,'' said Cardoso. ``It's also difficult to imagine countries
allowing creditors to strip assets: a piece of land here, a strip of beach
there,'' she said. In Argentina's case, Cardoso says there seems to be
little consensus yet among IMF officials.

Michael Mussa, the IMF's former chief economist during the Asian crisis,
has urged Argentina to devalue its peso and pull itself out of the slump.
Treasury Undersecretary John Taylor has backed continued IMF bailouts.
``The difference in opinions is wide,'' said Cardoso. ``It's like a hot
potato: Nobody wants to accept responsibility.'' In short, the old ways are
at an end. In any case, any new IMF plan will likely come too late to help
Argentina. Krueger said that ``even with unanimous political support, this
approach could not be put in place for at least two or three years.''_

At the root of the economic disease is ignorance of what modern money is.
When people realise money is an agreement, a contract, and that they are on
the losing side, they will annul the contract. Then what? The future may be
seen in Argentina.