- The Washington Times - Monday, August 2, 2004

The tenor and timing of a report on the International Monetary Fund’s (IMF) flawed credit policies toward Argentina doesn’t inspire enormous confidence in the prospect of reform at the fund. The report, by the IMF’s Independent Evaluation Office, comes to the obvious finding that the fund was too lenient with Argentina in the years leading up to the financial meltdown of December 2001.

It would be difficult to exaggerate the impact of Argentina’s meltdown on regional perceptions of the role of free-markets and the IMF itself. Latin Americans saw a once-relatively prosperous country brought to its most desperate economic moment in history. It will take time for leaders in Latin America to restore the trust of the people in market forces.

But the crisis in Argentina was primarily precipitated by mismanagement, corruption and cronyism. Privatizations weren’t properly audited, and instead of leading to a windfall, money disappeared. Also, Argentina adopted the much-lauded “Convertibility Program,” pegging its peso to the dollar, which proved disastrously unsustainable.

Still, Argentina was doing much of what the IMF and Washington-consensus wanted, and the IMF kept the lending-pump primed. The report said the fund kept lending to Argentina “even after it had become evident in the late 1990s that the political ability to deliver the necessary fiscal discipline and structural reforms was lacking.”

A review of IMF’s documents illustrates how IMF officials repeatedly changed contingencies and guidelines for loans when Argentina failed to reach them. The fund was even praising Argentina as its debt burden mounted. In May 1999, then-managing director Michel Camdessus said that “as a result of fiscal constraint” the fund expected the provincial deficit to fall to 0.5 percent of GDP. That year, the provincial deficit rose sharply to 1.3 percent of GDP.

There is a growing awareness now that IMF loans should not go towards a kind of speculators’ rescue fund. Argentina’s creditors will have to take a “haircut” on the sovereign bonds they hold, and the IMF has been wise to withhold a $728 million loan payment to Argentina until it negotiates in good-faith with its creditors. Still, the fund should outline a more rigorous system of checks and balances to try more convincingly to prevent another disastrous Argentina-style indulgence program.

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