from Follow the Money

First Brazil, now Argentina

December 18, 2005

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Both Brazil and Argentina now want to repay the IMF before the end of the year.  Call it contagion of a different sort.  Turkey may not be far behind, given how much private money is now flooding into Turkey.

Kirchner announced on Thursday that Argentina would pay its entire $9.8 billion debt to the International Monetary Fund by year's end. Two days earlier, Brazil pledged to pay its $15.5 billion to the lender this month.  "Let's be sincere. If Brazil hadn't taken the first step, Argentina wouldn't have been able to advance on its own," Kirchner is quoted as saying to leading newspaper Clarin.  The Peronist leader said wiping out the IMF debt was the "most important" thing he had done since taking office in 2003, adding that it had "vast internal and external consequences."

Paying the IMF offers obvious political benefits for both Brazil's Lula and Argentina's Kirchner.  The IMF is not terribly popular in Brazil, let alone Argentina -- even though Brazil would almost certainly joined Argentina in default without the IMF.  

The whole idea behind IMF lending to countries facing financial pressure is to provide a bridge to the return of financial stability.  Brazil got a ton of IMF money in 2002 and 2003.  It should be paying it back now.  By the end of 1997, Mexico had repaid most of the money it received in 1995.  In Bailouts and Bail-ins, Dr. Roubini and I used repayment of the IMF as a sign of success.   The IMF lends in bad times, and should get paid back in (relatively) good times.   The problem comes when the IMF doesn't get paid, not when it does!

Argentina got a ton of money in 2001, and after it defaulted, many wondered when it would be in a position to repay the Fund.   But with $27 billion in the bank, Argentina is now in a position where it can pay.

That too is a success of sorts.  It also means that the IMF will not be in a position to shape the Argentina's future policies.  That will disappoint some - particularly those who were hoping that IMF pressure would force Argentina to reopen its exchange and give those still holding Argentina's defaulted bonds a second chance to go into the deal.

On the other hand, the IMF has not played much of a role shaping Argentina's policies over the past few years in any case.  

The IMF backed the wrong horse back in 2001, when it lent to support Argentina's (quasi) currency board.   And the IMF lost even more influence when it bet that Argentina would print pesos to finance fiscal deficits after the (quasi) currency board collapse an Argentina defaulte.   That too proved to be the wrong bet:  Argentina ran an responsible fiscal policy after its default, and ended up stabilizing the peso on its own, with no help from the IMF.  Kirchner certainly doesn't believe Argentina's current success comes from following the IMF's advice.  And to date, predictions that Argentina's growth would fizzle out have not been born out.  Argentina is growing far faster (around 9% y/y) than Brazil right now.

But I am still worried.

In 2002 - and indeed for most of the period that followed - Argentina maintained its independence from the IMF in part by pursuing a responsible fiscal policy.    That was the irony: Argentina's government ran the primary fiscal surplus the IMF wanted, even as the government positioned itself as an opponent of the IMF.

Now, though, some of the pressure that demanded a responsible fiscal policy immediately after the default is dissipating.   Spending rose prior to the election, helping to drive Argentina's current growth.

To be clear, Argentina still has a primary fiscal surplus, unlike the US.  Any relaxation in fiscal policy is relative.  But the government also has refused to let the peso appreciate, and has not wanted the central bank to sterilize (at least not fully) the resulting increase in Argentina's reserves either.  Sterilization requires selling central bank bills to take the pesos issued to buy dollar reserves out of circulation, and extensive sterilization would drive interest rates up.   And the government neither wanted higher rates nor a stronger peso.

But now inflation is ticking up; it is now well above 10% y/y.   That could auger future trouble.  

Of course, if Kirchner's IMF-free policies scare capital off, that will reduce the central bank's need to intervene to keep the peso from rising.   And that may mean less money creation.   Freeing Argentina from the IMF also may offer Kirchner a way to sell continued fiscal surpluses.  You never know.

One thing will be clear though.  If Argentina ends up making a new set of economic policy mistakes - mistakes that this time will come in part from buying dollars to defend a weak peso, not from selling (borrowed) dollars to defend an overvalue peso - Argentina's government will bear full responsibility for those errors.

The IMF though must be asking what its role will be in world where, generally speaking, emerging economies are financing the US and (in some cases) running up large reserves in the process.  I think it is premature to argue that the era of large IMF rescue loans to emerging economies is over for goo - emerging economies are tested when times are bad and the money flows out, not when times are good and the money is flowing in.    But the IMF's role in many emerging economies certainly is shrinking - at least for now.

Venezuela's financial influence though seems to be rising. Chavez is not terribly keen on lending Venezuela's oil windfall back to the US.   Rather than buy US Treasury bonds, he will buy Argentine Treasury bonds.  Reuters:

The government will draw from the Central Bank's foreign reserves, which on Friday totaled $27.3 billion, to make the payment, but says the money will be quickly replaced, with a little help from a strong budget surplus and a promise by Venezuela's Hugo Chavez to buy government bonds.

"Between now and the first half of next year we will have revenues: $2 billion from the 2005 budget, another $2 billion from the fiscal surplus and $2.4 billion from the bond purchases Venezuela will make," the president said.

China's financial influence is also rising, particularly in countries with oil.  But that is a topic for a different time.

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