Come Bail Us Out, IMF: The Argentine Fiscal Tango

Question: How many international banks does it take to ensure economic stability in Argentina? Before you answer, be advised that this is not a trick question or a sarcastic joke. If you do know the answer, please notify the pertinent international banks now.

Another year, another financial crisis in South America. It seems almost as predictable as the order of the months on the calendar. This is "deja vu all over again".

During the last few years Argentina seemed like the grand success story of South America. Then in October 2000 everything collapsed.

The deterioration officially began as a consequence of the 1998 Asian financial crisis. The currency value drifted; interest rates rose to combat inflation. The government vigorously debated ways to control the economy. In mid-October 2000 the vice-president resigned to protest the lack of sound economic policy. Interest rates continued to rise; all attempts to control the exchange rates and the money supply seemed in vain. In late October 2000 Argentina frantically appealed to the International Monetary Fund (IMF) and the World Bank for relief. These organizations analyzed the situation and rendered a "yes, but" response.

The help came in the form of USD15 billion of economic aid. The condition was that the Argentine provinces would pay part of these loans. The provincial governors firmly opposed this condition. The Argentine Parliament debated the relief package and tentatively accepted it despite the provincial protests. On 24 November 2000 the situation took a rather drastic turn when Argentine labor unions declared a general strike. Transport, commerce, almost every business activity in the country completely stopped. There were no picket lines, no signs of staunch protests. The atmosphere more resembled a long national holiday. Union leaders vowed the strike would remain in effect until the financial aid plan was clarified.

Argentina has hiked this boom-and-bust trail many times. During the late nineteenth century European states poured millions of dollars into Argentina to build Westernized infrastructure such as railways to benefit foreign investors who in theory would create thousands of jobs for Argentine workers. In the midst of all this investment came the 1873 and 1893 depressions in Europe. The investors sold their factories and railways to local buyers who lacked the funds to pay the debts. These debts were rescheduled and ultimately ignored as World War I and its war loans preoccupied European bankers. Argentina did not participate in combat in either world war. It seized that opportunity to solidify its treasury. By 1945 Argentina was a very wealthy country, but its leader Juan Peron and his wife Eva rapidly depleted that wealth. Within a short time after Peron was ousted, Argentina acquired new foreign debts and new foreign investors who sought to exploit the low cost of labor there. Relying on import substitution assembly programs for its economic success, Argentina briefly prospered but soon yielded itself to another era of military tyranny and curious accounting methods. By the 1980s debt again proliferated. Again these loans were rescheduled and partially forgiven when Argentina could not cover the costs. International lenders insisted that Argentina adopt structural adjustment programs which required privatization of major industries. This situation gave the IMF and the World Bank de facto control of Argentine finances. The capital markets gained value, and the currency stabilized. The success story was almost complete. Enter here the current crisis.

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