Kevin Curran
Monday, Dec. 24, 2001

In his inaugural address, interim president Adolfo Rodriguez Saa said, "The Argentine state will suspend payment of foreign debt. This is ... the first move by a rational government to deal with the foreign debt correctly."

With billions of dollars likely lost, new questions are being asked about the wisdom of the IMF bailing out the economies of countries like Mexico, Thailand, Turkey, South Korea and Russia.

What went wrong in Argentina?

Government changes

When the IMF program started, Argentina overhauled its banking system and implemented a fixed-currency policy. As time passed, new governments could not control spending and looked to the IMF for more loans, eventually totaling $132 billion.

By last August, Buenos Aires leaders still insisted on repaying the loans and maintaining the value of the peso.

Washington’s indecision

The United States is the largest shareholder in the International Monetary Fund and strongly influences its decisions. The Clinton administration provided additional aid to Argentina late in 2000.

With the change to the Bush administration, treasury secretary Paul O’Neill said foreign bailouts would either fail or allow governments to continue bad policies. Yet in August, O’Neill backed more money for Argentina.

The economic policies that had made Argentina strong in the early 1990s were impossible to maintain as the country went into recession four years ago. The IMF had put strong terms on continuing aid packages, including deep cuts in government spending so there would be more money available to repay the increasing debts.

"If Argentina got its core economic policies right, it would have avoided this problem," Columbia University professor Charles Calomiris told the New York Times Dec. 22. "But the IMF and both the Clinton and Bush administrations let them stay in denial. They all wanted the problem to fall on someone else’s watch," he added. Calomiris said the IMF should have rejected the call for aid in August.

Former IMF chief economist Michael Muss agrees with Calomiris’ assessment that the Bush administration made a mistake in August, and that "the situation might have been more controllable then."

The problem with holding back on aid, Mussa said, was delaying debt payments or devaluing currency could lead to unstable markets or financial problems in neighboring countries.

Argentine finance minister Domingo Cavallo ignored the advice of IMF fund managers last August who suggested the country delay debt repayments. Cavallo said that would send the wrong message to citizens and creditors who had been told the country would both repay its debts and maintain the value of its currency.

Four months later, Cavallo was raiding pension funds and freezing bank accounts in an effort to find cash to make loan payments. Cavallo and President Fernando de la Rua eventually resigned.

The future of IMF bailouts is uncertain. The Bush administration has generally attached a low priority to international financial policy. Yet money can be a very important component of foreign policy.

Turkey is facing its own economic crisis. Despite his stated misgivings about the wisdom of bailouts, treasury secretary Paul O’Neill has supported two economic rescue packages for the Ankara government. Turkey is a strategic ally of the U.S. in the Middle East.