March 11, 2004
Not so long ago, the International Monetary Fund was fond of lecturing developing nations in financial trouble on the need to undergo harsh structural reforms in order to qualify for assistance. Now the boot is on the other foot: it is the IMF that needs to go through a bout of painful restructuring. Leaderless and now all but rudderless - after a near humiliation at the hands of Argentina - the IMF is in danger of becoming irrelevant unless it makes significant changes.
Certainly, the IMF was quick to claim a victory on Tuesday evening after getting Argentina to make a $3.1bn repayment of debt arrears. But the details that have emerged since suggest that Argentine president Nestor Kirchner remains unmoved on his country's offer to repay its foreign creditors just 25 cents in the dollar on Argentina's outstanding debt. The creditors want 65 cents in the dollar, and it remains to be seen how meaningful Argentina's promise of "meaningful" negotiations with the creditors will be.
The IMF's problem with Argentina is the same as Keynes's famous wisecrack: owe your bank £1,000 and you are at its mercy; owe it £1m and the position is reversed. In this case, Argentina has debts of $30bn due for repayment over the next few months. A default by Latin America's second largest economy would be the last thing that Washington wants in an election year, with Iraq and Afghanistan still demanding its time and energy. As a result, the IMF is caught between Washington's desire for regional quiescence, and demands by the creditors' governments for some tough love.
The Kirchner administration argues that the needs of the half of Argentina's population now living below the poverty line should come before those of its international creditors. In the short term this is valid, but if Argentina continues to recover then its creditors deserve some payback. Since the IMF is the architect of much of Argentina's economic troubles, some will say this is the IMF's chickens coming home to roost - although those chickens may also roost on every developing nation that needs help.
The answer, for the large debtor nations such as Argentina, is for the IMF to issue growth-linked bonds, so that repayments can fit economic circumstance. But the IMF needs more than this: it needs a better method of choosing a new managing director, rather than by unedifying horse-trading, and it must urgently revisit proposals for a sovereign debt restructuring mechanism so that troubled countries and creditors can reach agreements. Otherwise, the IMF may find itself needing rescue.
More Information on The Three Sisters and Other Institutions
More Information on The International Monetary Fund