- The Washington Times - Tuesday, August 28, 2001

The White House has finally proved that its skepticism of large, international bailouts is more than mythological. And just in the nick of time, because the administration's stated reservations regarding these types of bailouts was becoming disconcertingly incongruent with its support of International Monetary Fund (IMF) loans for Turkey and Brazil. In fact, its support, in practice, of these loans, coupled with contradictory rhetoric, was downright Clintonian.

No, President Bush hasn't called for the abolishment of the IMF or anything that will, in one fell swoop, remedy the inherent inequities these loans create. But the White House has used its geopolitical clout to pressure the IMF to structure a loan to Argentina in a novel way, which will help prevent a wholesale rescue of Argentina's high-wheeling creditors. That's good news for taxpayers around the world. This is a noteworthy achievement, because the IMF and the White House have set an important precedent.

The IMF is extending an $8 billion loan to Argentina. Of that money, $3 billion will be made immediately available to the government only if it is successful in restructuring debt obligations with its creditors. In light of this condition for part of the cash, creditors have started extending the maturity of outstanding debts. This will force investors to face the free market consequences for having made a risky bet on Argentina, to some extent.

So, thanks to the White House, this loan is structured in a way that will help counteract what's known as the moral hazard of big bailouts. This moral hazard is created in two ways. Governments around the world, feeling confident that the IMF will come to the rescue if they overspend or in some other way run into trouble, make mistakes they otherwise would avoid. And investors, in turn, take on high-yielding, high-risk investments in the belief the IMF will bail out the government, and therefore themselves, in times of crisis. This creates market imbalances and volatility, since investors put money in countries they don't believe in over the long run, and high-tail after they've gotten their IMF-backed payoffs, leaving the economies reeling in their wake.

Fortunately for Argentina, it seems its people have pretty much had it with economic crises and public profligacy. The government has set the ambitious goal of bringing its public deficit to zero, and is so confident of public support for the measure, reflected by recent polls, they will conduct a national plebiscite to prove it in order to prod bureaucrats around the country to tighten their belts.

The way the loan has been structured, Argentina's creditors will have to face reality and share in the pain of the country's crisis. The White House should use the loan to Argentina as a building block to continue pushing for IMF reform.


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