Don’t pry from me, Argentina

OPINION:

The World Bank and International Monetary Fund, along with the World Trade Organization, are our most prominent global economic institutions. Their upcoming meetings undoubtedly will draw numerous protests organized around complaints with globalization. If the organizers of this weekend’s annual meetings want to help poor, developing countries, they should focus their attention on the government of a prosperous country.

Nothing closes the door faster to funds reaching developing nations than lenders and investors discovering their loans can be blown off — even when a country can easily afford to repay them.

That is the lesson now being disseminated faster than the leaflets at an anti-globalization rally by Argentina. The country’s president, Nestor Kirchner, had long refused to repay more than $6 billion owed to numerous other governments and has simply repudiated $20 billion in debts owed to thousands of private lenders.

Recently, the Kirchner government received some favorable press for relenting on the matter of repaying other governments. This conflict has been handled by what is called in international sovereign finance circles the “Paris Club,” an organization of governments that lend to other governments. Its members, including the United States, Japan and the Western European countries, hold the $6 billion in unpaid loans to Argentina’s government.

But while Mr. Kirchner has finally said he intends to repay these debts, he wants to write his own rules. For example, he refuses to let the IMF advise the negotiations with the Paris Club, in direct violation of Paris Club rules. He also has tried to cut a separate deal with one Paris Club member, Spain, again in direct breach of Paris Club rules.

Even if these issues are settled, it won’t resolve Argentina’s breach of faith with its private creditors, whose lending to Argentina was encouraged by the World Bank and the IMF.

All this poses a genuine threat to the system and norms of international lending to developing countries. If Argentina can get away with repudiating its debts, there inevitably will be much less lending to other developing countries.

Why has Argentina been allowed to get away with this behavior?

In one sense, it hasn’t. Since repudiating billions in outstanding debt, Argentina has been effectively barred from international credit markets. In addition, a recent study by a group of distinguished Argentine economists found that the country’s debt default and its subsequent repudiation of $20 billion in foreign-held debts have sharply reduced inflows of foreign direct investment. They found that these acts have cost Argentina about $6 billion a year in forgone foreign direct investment, or twice as much as the recent inflows of just $3 billion a year.

Mr. Kirchner and Argentina have gotten by economically because a boom in worldwide commodity markets has bolstered most of Latin America to achieve strong economic growth for several years. But as those markets have cooled, Argentina’s economic problems have mounted, including energy shortages and high inflation.

Now, Mr. Kirchner, while continuing to thumb his nose at other governments and those who loaned him billions in good faith, has sought another benefactor. He found a ready one in Venezuela’s Hugo Chavez. Mr. Kirchner’s new financier has been leading a charge throughout Latin America against the IMF by using Venezuela’s vast oil wealth to inject billions into neighboring countries’ economies and provide them with low-cost oil. Mr. Chavez’s aim is to recruit those countries to join a “Bank of the South” that would purportedly go around the IMF in Latin America.

Argentina would be better off both politically and economically — and retain its independence — by fully reintegrating itself into world financial markets. And President Kirchner and his likely successor following this month’s presidential elections, his wife Christina, know how to do that: by settling Argentina’s outstanding $6 billion debt to Paris Club countries, and resolve the $20 billion owed to private creditors.

As thousands of protesters in Washington this weekend express their dissatisfaction with how the world treats developing countries, they might consider how one country, Argentina, could help not only itself, but many others. They should think seriously about how Argentina’s unprecedented decision to repudiate its debts will affect lending to the world’s neediest nations for years to come.

The most important step the World Bank and IMF could take this weekend to promote development in the world’s poorest countries would be to stand united in urging Argentina to respect the rules of the Paris Club, the IMF and the international lending system, and honor its obligations.

If a relatively prosperous Argentina can walk away from its obligations, the integrity of the world’s financial and trading system is put at greater risk, and when risks are increased, it is usually the poor who suffer most.

Robert J. Shapiro, former commerce undersecretary for economic affairs under President Bill Clinton, is co-chairman of the American Task Force Argentina.