Argentina 2, IMF 0

Alan Stoga*

Nestor Kirchner recently won another round in his continuing struggle with the IMF and the international financial community. Despite the opposition of Japan, the U.K. and Italy and the obvious reservations of the IMF staff, last month the Fund’s board approved its first review of the controversial $13.3 billion loan package. A second review must be completed before the scheduled March disbursement of $3.1 billion that would offset a $3 billion payment due to the Fund on March 9. The odds are–unfortunately–that soon the tally will be 3-0.

Why, unfortunately? Surely there is much to be celebrated in the dramatic recovery of Argentine growth after the devastating post-convertibility depression. Economic growth continues above 7%; inflation is tame; the exchange rate is stable; unemployment and poverty are slowly abating. Perhaps more importantly, the country–which so recently seemed on the brink of social chaos and ungovernability–has regained some of its cohesion, national pride, and stability.

The problem is that the Kirchner government has achieved its evident success in large part on the backs of the country’s foreign creditors and foreign investors. For all practical purposes, Argentina has effectively refused to negotiate over its offer to pay holders of almost $90 billion in defaulted sovereign bonds the equivalent of ten cents on the dollar. In addition, Kirchner has continued to attack foreign-owned utilities and other foreigner investors who participated in the privatizations of the nineties, arguing that they–but not the government–are obliged to abide by the terms of those privatizations, and that the foreigners have already made enough money.

In effect, Argentina has become the TWA of Latin America. Back in the 80s, when that once-proud airline suspended its debt service, it was able to restart its growth, stealing passengers from other airlines who continued to meet their financial obligations. However, TWA’s recovery was artificial and the airline eventually disappeared.

Argentina’s recovery is equally artificial, based as it is partly on the fallacy that its international obligations can be simply ignored. But, since countries don’t disappear, Kirchner is obviously betting that the consequences his country will bear for stiffing its creditors will be borne by future politicians–as they surely will.

It is clear that the President, since the debt was incurred by his predecessor’s predecessors, sees no economic, financial, political, or moral urgency to negotiate. The economy is booming. The country is able to get adequate, if expensive, trade lines. Kirchner–virtually unknown eighteen months ago–has consolidated and expanded his predominant political position. And, the President seems to be sincere in his insistence that the country’s "social" debt should take precedence over its financial debt, and that creditors and investors deserve to bear most of the cost of the crash.

It is equally clear that the IMF, the G-7, and the rest of the international financial community misjudged Kirchner. They assumed that the hard-line Argentine stance was largely a negotiating ploy. They believed that, like every other emerging market country to date, the Argentines feared permanent exile from the international financial club too much not to want to cure their default on market terms. And they could not imagine that Kirchner would make good on his threat to default on the IMF itself, which in their minds risks triggering an international crisis.

The dissension in the IMF board signals that at least some of the people who think they run the international financial system are beginning to understand that their Argentine adversary is for real. They are beginning to understand that Kirchner believes the Fund needs Argentina more than Argentina needs the Fund. They have finally started listening to what Kirchner is actually saying, and they don’t know what to do.

Of course, the United States is partly to blame. As recently as the Monterrey summit, President Bush failed to demand that Argentina get serious about its financial obligations, while the U.S. Treasury is no longer an effective enforcer of financial orthodoxy, perhaps for obvious reasons.

The bottom line is that the IMF and the United States appear unwilling to let Argentina default, however hard it tries and regardless of how it treats its creditors and its investors.

Eventually that will be bad for Argentina, bad for the United States, and bad for the international system. But, meanwhile, it is good for Kirchner.

*Alan Stoga is president of Zemi Communications, www.zemi.com.