Time to cry for Argentina
Gregory Palast, The Guardian ,12/08/ 2001
There are few tears from the IMF when a South American economy dies, but the latest cut, cut, cut reforms are the unkindest of all

The news last week in South America was that Argentina had died, or at least its economy had. One in six workers was unemployed even before the beginning of this grim southern winter. Millions more have lost work as industrial production, already down 25 per cent for the year, fell into a coma induced by interest rates which, by one measure, have jumped to more than 90 per cent on dollar-denominated borrowings.
This is an easy case to crack. Next to the still-warm corpse of Argentina's economy, the killer had left a smoking gun with his fingerprints all over it.
The murder weapon is called a 'Technical Memorandum of Understanding'. Dated 5 September 2000, it is signed by Pedro Pou, president of the Central Bank of Argentina, for transmission to Horst Kohler, managing director of the International Monetary Fund.

Inside Corporate America received a complete copy of the understanding, along with a companion letter from the Argentine Economics Ministry to the IMF, from... well, let's just say the envelope had no return address. Close inspection leaves me in no doubt that this understanding fired fatal bullets into Argentina's defenceless body.
To begin with, the understanding requires that Argentina cut its budget deficit from $5.3 billion last year to $4.1bn in 2001. Think about that. Last September, Argentina was already on the cliff-edge of a deep recession. Even the half-baked economists at the IMF should know that holding back government spending in a contracting economy is like turning off the engines on an aeroplane in stall. Cut the deficit? As my four-year-old daughter would say, 'That's stooopid.'
The IMF is never wrong without being cruel as well. And so we read, under the bold heading, 'Improving the conditions of the poor', an agreement to drop salaries under the government's emergency employment programme by 20 per cent, from $200 a month to $160.

But you can't save much by taking $40 a month from the poor. For further savings, the understanding also promised, 'a 12-15 per cent cut in salaries' of civil servants and 'rationalisation of certain privileged pension benefits'.
In case you haven't a clue what the IMF means by 'rationalisation', it means cutting payments to the aged by up to 13 per cent. Cut, cut, cut in the midst of a recession. Stooopid.
Salted in with the IMF's bone-head recommendations and mean-spirited plans for pensioners and the poor are economic forecasts bordering on the delusional. In the 'understanding' the globalisation geniuses project that, if Argentina carries out its plans to snuff consumer spending power, somehow the nation's economic production will leap by 3.7 per cent and unemployment will decline. In fact, by the end of March, the nation's GDP had already dropped 2.1 per cent below the year-earlier mark, and it has nosedived since.
What on earth would induce Argentina to embrace the IMF's goofy programme? The payoff, if Argentina does as it is told, is that this week the IMF will lend $1.2bn in aid. This is part of an emergency loan package of $26bn for 2001 put together by the IMF, World Bank and private lenders announced at the end of last year.
But there is less to this generosity than meets the eye. The understanding also assumes Argentina will 'peg' its currency, the peso, to the dollar at an exchange rate of one to one. The currency peg doesn't come cheap. American banks and speculators are charging a whopping 16 per cent risk premium above normal in return for the dollars needed to back this currency scheme.

Now do the arithmetic. On Argentina's $128bn of debt, normal interest plus the 16 per cent surcharge by lenders comes to about $27bn a year. In other words, Argentina's people probably won't net one penny from the $26bn loan package. Little of the bail-out money escapes New York, where it lingers to pay interest to US creditors holding the debt, big fish such as Citibank and little biters such as Steve Hanke. Hanke is president of Toronto Trust Argentina, an 'emerging market fund' that loaded up 100 per cent on Argentine bonds during the last currency panic, in 1995.
Cry not for Steve, Argentina. His annual return that year of 79.25 per cent put the Toronto trust at the top of the speculation league table. This year he'll do it again.
Hanke, it seems to me, seems to profit on the failure of the IMF's policies. In his day job as professor of economics at Johns Hopkins University, Maryland, he freely offers straightforward advice to end Argentina's woe, advice that would put him out of the speculation game: 'Abolish the IMF.'
To begin with, Hanke would do away with the 'peg' - that one-peso-for-one-dollar exchange rate - which has proved a meat-hook on which the IMF hangs Argentina's finances.

It's not the peg itself that skewers Argentina, but the peg combined with the four horsemen of IMF neo-liberal policy: liberalised financial markets, free trade, mass privatisation and government surpluses.
'Liberalising' financial markets means allowing capital to flow freely across a nation's borders. Indeed, after liberalisation five years ago, the capital has flowed freely and with a vengeance.
Argentina's panicked rich have dumped their pesos for dollars and sent the hard loot to investment havens abroad. Last month alone, Argentines withdrew 6 per cent of all bank deposits.
Once upon a time, government-owned national and provincial banks supported the nation's debts. But in the mid-Nineties, the government of Carlos Menem sold these off to Citibank of New York, Fleet Bank of Boston and other foreign operators. Charles Calomiris, a former World Bank adviser, describes these bank privatisations as a 'really wonderful story'. Wonderful for whom? Argentina has bled out as much as three-quarters of a billion dollars a day in hard currency holdings.
There's more cheer for creditors in the understanding, including 'reform of the revenue sharing system'. This is the kinder, gentler way of stating that the US banks will be paid from drawing off tax receipts that could otherwise benefited education and other provincial services. The understanding also finds cash in 'reforming' the nation's health insurance system . Cut, cut, cut.

But when cut cut cut isn't enough to pay the debt holders, one can always sell 'las joyas de mi abuela' (grandma's jewels), as journalist Mario del Carvil describes his nation's privatisation scheme. The French picked up a big hunk of the water system and raised charges in some provinces by 400 per cent. The understanding's final bullet is imposition of 'an open trade policy'. This means Argentina's exporters, with their products priced via the 'peg' in US dollars, are forced to compete with Brazilian goods priced in a devaluing currency. Stooopid.