from Follow the Money

Fantasy based opeds in the Wall Street Journal

June 21, 2005

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The Wall Street Journal oped page clearly has discovered the joys of post-modernism. Facts are a social construction -- and inconvenient facts can be changed to fit your preferred narrative.

That is the only way to make sense of the Wall Street Journal ’s Tuesday oped "The IMF’s Debt Ambitions."

It is premised on the following argument:

" ... investors were conditioned by bailouts in Mexico, Thailand and South Korea, and by the IMF’s ever expanding loan portfolio in Argentina to believe that no matter how many times Buenos Aires broke its promises it would not be allowed to fail. The money poured in, not irrationally, until the Bush Administration ended the bailout habits of the IMF."

The Bush Administration ended the bailout habits of the IMF. Hmm.

Let us hold that statement up to the standards of the reality-based world.

1. In early 2001 the Bush Administration approved a $10 billion IMF loan to Turkey. That loan was augmented the fall of 2001 and again in 2002. Last I checked, the Bush Administration was in charge of the US government then. All told, Turkey got about $23 billion from the IMF -- a bailout that was far larger, in relation to Turkey’s GDP (total disbursements were equal to 11.5% of pre-crisis GDP), than the Clinton Administration’s bailout of Mexico (total disbursements, including direct disbursements from the US, equal to 7% of pre-crisis GDP). And Mexico paid its loan back far faster than Turkey has been able to repay.

Don’t believe me? Check out the IMF’s financial data, which shows its outstanding exposure to Turkey quite clearly (data in SDR). Full disclosure -- I worked for the Treasury in 2001, so I know this story quite well.

2. In the summer of 2001 the Bush Administration supported an IMF loan to Brazil in an effort to protect Brazil from "contagion" from Argentina. That loan was expanded significantly in the summer of 2002 when Brazil came under intense pressure prior to the election of Lula. All told, Brazil received an IMF credit line of $35 billion, and most of that -- $30 billion -- was lent out. That is far more than Brazil received in 1998-99 with the backing of the Clinton Administration (peak lending then was about $17 billion). This bailout has worked pretty well -- Brazil recovered and is now making significant payments back to the Fund. But so did the bailout of Mexico. A successful bailout is still a bailout.

Want to verify -- follow this link.

3. Uruguay. It got about $3 billion from the Fund in 2002, along with a (very short-term) bilateral bridge loan from the US. $3 billion does not sound like a lot, but it is about 15% of Uruguay’s small GDP. That’s a big bailout in my book.

4. In the summer of 2001, the Bush Administration backed a $8 billion augmentation of the Argentina’s existing $15 billion IMF package -- a decision that the IIE’s Mike Mussa has called one of the worst in Fund history. That $8 billion -- $5 billion of which was disbursed immediately-- effectively provided about 1/2 of the total net financing that the IMF provided to Argentina from the end of 2000 on. Look at the surge in IMF lending to Argentina in September of 2001 -- a surge that was the direct product of a decision make by the Bush Administration.

Remember that part of the initial $15 billion package just refinanced maturing IMF debt, and the $15 billion was more backloaded than the $8 billion augmentation, so not all of it was disbursed.

All in all, the Bush Administration consistently backed bigger loans to more indebted countries that the Clinton Administration. Those IMF loans have been repaid more slowly. Those are the facts. Verifiable on the IMF’s web page. Or, if you trust Roubini and Setser, nicely packaged in Bailouts or Bail-ins. Bailouts or Bail-ins? also presents all the data in dollars, not SDR.

When will the news side of the Journal manage to divorce itself from the oped page? Or at least require that the oped page hire a fact checker?

The Wall Street Journal oped page also conveniently ignored a couple of points about the Clinton Administration’s IMF policy than ran contrary to its preferred "Bush Administration end Clinton-era policy of bailouts" narrative:

a) The Clinton Administration pulled the plug on Russia in the summer of 1998 after Russia failed to do take the steps needed to control its fiscal deficit. Robert Rubin took deficits seriously. The IMF program was suspended after only $5 billion of the $15 billion in IMF funding has been disbursed. The Bush Administration, in contrast, refused to cut Argentina off in 2001 even though Argentina repeatedly missed its fiscal targets (in large part because the economy had to deflate to bring about the needed real exchange rate adjustment, and deflation contributed to a broad economic contraction). Indeed, it augmented the IMF program.

Saying no to Russia was far harder than saying no to Argentina. Read Rubin’s memoirs. Anyone who bet Russia was "too nuclear" to fail ended up betting wrong.

b) The Clinton Administration did not just bailout South Korea, it also bailed-in the banks who had lent to South Korea. The Clinton Administration twisted the arms of international banks with a bit over $20 billion coming due at the end of 1997/ early 1998 to extend the maturity of their loans. The banks -- at least those with claims coming due after December 25 -- did not get out scot free. Compare that with the Bush Administration’s decision to sit passively as the banks massively cut their exposure to Turkey throughout 2001 (the banks’ "exit" was effectively financed by the IMF) and cut their exposure to Brazil in 2002.

The Wall Street Journal oped does make one point that I agree with. The IMF should not pressure Argentina to offer holdouts the exact same deal everyone else received in Argentina’s recent exchange. But I don’t think that is what the Fund is demanding under its "lending into arrears policy." I suspect the Fund simply wants Argentina to give the remaining holdouts a chance to come in, presumably at a small penalty. The Journal even seems to say as much: the oped notes that the Fund "says that it is not insisting that Argentina settle with holdouts by offering them the same price they already turned down."

Reopening the deal to try to reduce the number of holdouts is nothing more than a reflection of reality. 24% of something like $80b plus about $20 billion in arrears is a big number -- there are lots of Argentine bonds still in default, and their holders retain valid (if unenforceable) legal claims to full payment. Plus, lots of the holdouts were poorly advised Italian retail investors. Realistically, some of these bonds need to be brought into the deal, one way or another.

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