September 10, 2003
Argentina defaults on IMF loan, but growth continues.
The
Economist reports that Argentina has defaulted on a large payment due to the IMF, despite what they describe as "the economy bouncing back quite strongly."
In December 2001, Argentina recorded the largest sovereign-debt default in history. This week, it set another record. On Tuesday September 9th, it defaulted on almost $3 billion it was due to repay to the International Monetary Fund (IMF)—the largest non-payment of a loan in IMF history. For a country to default on its lenders is one thing. To default on the international lender of last resort is quite another. This latest financial transgression puts Argentina in the same ranks as Zimbabwe, Liberia and Sudan.
But the default may be a sign of Argentine self-assertiveness, not desperation. Having hit bottom last year, the economy is now bouncing back quite strongly. The Economist Intelligence Unit predicts GDP will grow by 5.1% this year and by 4.9% in 2004. After a 67% devaluation of the peso, and a 10% contraction in output in 2002, a recovery of some kind was always on the cards. But Argentina has no credit, and credit, as Keynes observed, is the pavement along which commerce runs. Unless Argentina restores normal financial relations at home and abroad, its recovery drive will soon run out of road.
I think this notion that credit is essential to a government, or a business for that matter, is a bit obsolete. In the old economy, an economy of scarcity, capital and credit were essential. But in the new economy, an economy of affluence, cash is cheap and abundant. People have been financing enterprises on a pay-as-you-go basis for millennia. The economics of it are quite sound, and the savings from interest are enormous.
I know that in California, a lot of the budget crisis stems from overcheap money, and how easy it's become for a government to borrow money. It just results in politicians not confronting difficult choices, but passing them on to later generations. And it results in incredible amounts of money being paid, perennially, for interest. Money that could much better be spent on the state's needs.
But the IMF and the other bankers make their living lending money. That's all they do. So they constantly claim that there simply isn't any other way to operate. That this is a basic economic law, and can't ever be changed. But they're wrong.
Another point they may be missing is that Argentina doesn't necessarily need to be doing a great deal of business with the US and Europe. There's a growing economy in global south that offers plenty of business. I'll bet that they are more concerned with trade with Brazil than with the US. Maybe not yet, but the trend is in that direction.
To their credit, the Economist article does point out that the IMF stands to lose as much as the Argentines here.
Some at the IMF might also be reminded of the old saw: "If I owe you a hundred dollars, it's my problem. If I owe you a million dollars, it's your problem." Argentina owes the IMF over $14 billion in total, more than five times its official Fund quota. If Argentina were to walk away from a deal and refuse to repay, the IMF’s finances would take a huge dent. Some think its triple-A credit rating might be put in question.
In a way it reminds me of the situation with Iraq. For all of its global power and wealth, when it comes down to it, the IMF can no more force the Argentines to play by its rule than the US can force the Iraqis.
And, by the way, if Argentina's $14 billion dollar debt is so staggering and dangerous, then what about America's multi-trillion dollar one? The article points out that Argentina is in the same class as Zimbabwe, Liberia and Sudan. If you just look at the figures so is the US; with Japan not far behind. America is the world's biggest debtor.
