FINANCE-ARGENTINA: IMF Stands its Ground, Plays Down Contagion Fears

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Dec 7 2001 (IPS) - The International Monetary Fund (IMF) said Thursday it would advance no new bailout money for Argentina’s ailing economy until Buenos Aires made good on a pledge to implement an austerity programme and eliminate its budget deficit.

Thomas Dawson, the Fund’s chief spokesperson, said the agency continued to watch the Latin American country’s performance under an IMF-backed deficit-reduction programme. It would expect the government to push through tax reforms, clamp down on public spending, and increase sales of state assets to foreign investors.

“That’s a framework that we are looking at to see how they can accomplish the goal set under the present programme which, in terms of short hand, is working around a zero percent deficit,” Dawson said.

Dawson’s comments followed Wednesday’s announcement that the IMF’s executive directors, meeting in informal session to hear a report from the agency’s latest mission to Buenos Aires, had decided to block further disbursements from the Fund’s 21.6-billion-dollar credit line for Argentina.

Argentina needs the money to make an interest payment on its debt by the end of the month and to avoid default on 132 billion dollars of debt in the form of government bonds. The alternative could be the largest sovereign default in history.

“The practical effect of yesterday’s announcement is that the Fund’s board will not meet to complete a review of the Argentina program,” said the IMF’s David Holly. “What it does not mean is the IMF will not support Argentina’s efforts to reach a sustainable programme.”

International investors, other emerging markets, and economists have been following the saga closely for clues in calculating their next moves.

In the event of a default, foreign investors probably would blacklist Argentina for years to come. Having taken losses in one country, lenders also might refuse to lend to other emerging markets and developing countries, even those in more stable condition than Argentina has been, fuelling global contagion and recession.

Holly, however, ruled out such a scenario, saying that local conditions differ from one country to another.

Dawson added that Argentina’s case was not uncommon in that the IMF had withheld payments to various countries on at least 30 other occasions. “This often happens,” he said. “Maybe not with quite the same kind of publicity but this is not an unusual occurrence in a Fund programme.”

Anti-poverty activists, market analysts, and officials alike û here and in Argentina û have assailed the IMF for demanding a politically untenable degree of austerity.

IMF officials, however, countered that government spending had risen 90 percent, sparking the current crisis in the first place. According to Holly, Buenos Aires was lulled into a false sense of security during the first half of the 1990s, when the economy grew by 43 percent largely on the strength of a 1991 IMF bailout.

Over the weekend, Argentine authorities imposed limits on cash withdrawals from bank accounts to 250 dollars per week for at least the next 90 days, sparking fears that Argentina was in fact one step closer to ruin. Argentineans also are restricted to taking no more than 1,000 dollars in cash out of the country.

The government also said from now on local banks could not lend money in pesos, the local currency, but only in U.S. dollars.

“These are measures that neither the authorities nor the Fund like to be able to take but they were taken in the belief that they [Argentine officials] have few alternatives,” said Dawson.

Argentina’s beleaguered Finance Minister, Domingo Cavallo, reportedly has resisted outside pressure to float the peso or adopt the dollar as the country’s formal currency for fear both scenarios would mean even more dire consequences for Argentines. Cavallo was due in Washington later Thursday, Holly said.

Buenos Aires has been under the IMF’s tutelage since the early 1980s, when the country was in the throes of a foreign-debt crisis. The government adopted Fund and World Bank prescriptions for trade liberalisation, deregulation, and privatisation. In 1991, it pegged the peso to the dollar.