IFIs Latin American Monitor
Fri Dec 02 2005
The request for resignation made by President Néstor Kirchner to Economy Minister Roberto Lavagna, can be construed in different ways and casts doubts for the future. Among these doubts is the Argentine government–IMF relationship and the possibility of reaching a new debt refinancing agreement.
Lavagna’s initiatives for the elimination of the peso-dollar convertibility, the economic recovery, and his performance in engineering the 2004-2005 debt swap are facts that have been acknowledged at international level. Although he had strong political power within the government, he was identified as “an ally” of Eduardo Duhalde, former president and strong rival of Kirchner within the Justicialist party.
During Lavagna’s last few weeks in the government, his clashes with Kirchner became evident and press rumours pointed out the lack of dialogue between the two of them. Following the declarations made by the former minister severely questioning some of the President’s men (among others, the Planning Minister Julio De Vido), tension was intensified. However, beyond contextual reasons, Kirchner’s decision can be regarded as a change of policy, a move that may raise concern over the interests of the IMF and local political leaders.
As it has been analysed by the Argentine media, at political level it is feared that this may be “consolidating Kirchner’s populist and personalist style” which does not leave room for dissent. They consider that “the newly appointed ministers are men and women with no independent political power, who will not dare to disagree with Kirchner.” At the economic level there is certain instability regarding a new agreement with the IMF and while this alternative becomes increasingly unlikely, the possibility of Argentina’s eventual disaffiliation from the Fund grows.
Argentina’s current debt with the IMF amounts to US$ 11.1 billion, placing the country among the main debtors of the institution. A non-renewable obligation of US$ 1.9 billion is due in 2006 and another of US$ 4.4 billion is due in 2007. The idea being considered by the Economy Ministry since the end of the debt swap, is to refinance these maturities through a 3-year economic programme allowing to roll over payments for 5 years.
The government has punctually met all IMF deadlines, notwithstanding the debt swap, the haircut it meant to creditors and the strong rethoric against President Kirchner’s institution.
The country’s economic indicators turn out to be positive; the fiscal surplus for the closing year is near 4% and over 6% growth is expected. Social indicators, on the other hand, are not sufficient to reduce poverty and extreme poverty rates to the more manageable rates registered before 1998 - year in which the country entered a strong recession (according to information provided by the National Institute for Statistics and Census, INDEC, poverty levels stood at 24.3% in 1998, 53% in 2002 and 38.5% in 2005).
From the economic point of view, a new agreement with the IMF is of crucial importance in order to consolidate the economic situation, since failing to sign it could result in significant financial costs.
The tasks of the new Economy Minister
The initial local reviews about the newly appointed Economy Minister Felisa Miceli highlight the fact that she has defined herself as being “kirchnerista”. According to her own words, her economic thought “is based on a Keynesian and local developmentalism approach”. She advocates for industry and a better income distribution, and relies on a serious and responsible capitalism. She disagrees with the 1990s model and emphasizes the State’s role in the economy. Some of her objections to Lavagna’s strategies in the debt restructuring process are recalled - she argued that they could and they should be tougher on creditors and on relationships with the IMF.
Miceli is in favour of a tough attitude towards the Fund. She called for a stricter relationship with privatized companies and greater firmness upon the request for tariff increase. She disagrees with the institution with regards to its insistence on the downfall of the dollar as a tool to contain inflation.
Among Miceli’s priorities are: inflation control, defence and/or increase of fiscal surplus, the efforts to maintain a high dollar price and the redefinition of relationships with the IMF.
Along those lines, the main highlight has been the appointment of a new Finance Secretary within the Economy Ministry. This strategic position will be held by the current secretary of the Buenos Aires Stock Exchange, Alfredo Mac Laughlin, who will go ahead with the management tasks of Guillermo Nielsen. His key tasks will be focused on administering the public debt and on developing - together with the Minister and the President - the relationships with the Fund.
Another important step was to call Héctor Torres, Argentine representative to the IMF, to a meeting held in Buenos Aires in order to account for the current situation and review the strategy to be followed with the IMF, an initiative that can be regarded as a good indicator of political will.
What was the state of relationships with the IMF at the end of Lavagna’s term in office?
Before the changes in cabinet, the government was evaluating the possibility of not signing an agreement with the IMF throughout 2006, although spokespersons for the cabinet claimed that the government was working towards a renegotiation with the institution. Therefore, the government’s strategy was not clear at all, even more so after the failed attempts to get the support of the US government to start negotiations.
The support of US President George Bush was of the utmost importance, on account of which Kirchner took advantage of the opportunity raised at the Summit of the Americas to request it. The answer given by the United States was influenced by the lack of agreement regarding the Free Trade Area of the Americas (FTAA), and by Kirchner’s opposition to this project. The possibility of starting negotiations with the IMF without the initial support of the United States gave the government another reason to consider the possibility of not negotiating with the IMF.
The situation in Argentina has remained the same for a year, and within this period there was limited dialogue between Lavagna and Rato, as well as indirect opinion exchanges between representatives of the Fund and the Argentine government, among which Kirchner’s statements and his confrontation with the institution should be highlighted.
In this sense, Lavagna’s position laid emphasis on how disadvantageous IMF conditionalities were for the Argentine economy, but appeared to be willing to start prompt negotiations that could bring about a positive outcome. Anyway, in his speeches he always highlighted the need for a “useful dialogue”.
Lavagna was working on a letter to be sent to the IMF in which he requested the restarting of negotiations. These steps remained unfinished as a result of his resignation and now it will be up to Miceli and the President to define a position in this regard.
The IMF asks for a change in economic policy in order to make progress in the discussion of a new programme; however, this request has been rejected by the government and even more strongly by President Kirchner. As a strategy to contain inflation, the institution demands monetary restriction measures, strong tax changes and a policy aimed at liberalizing and letting the dollar exchange rate fall. This added to the concern for the interests of those bondholders who did not accept the debt swap.
As for inflation control, one of the last measures approved by Lavagna was an anti-inflationary package which in general terms includes measures requested by the Fund. However, the demands concerning monetary policy and exchange market regulation are still considered as “unacceptable” by the government.
For the IMF, the starting point for negotiations is the document on the evolution of the Argentine economy drawn up by Anoop Singh (Director of the Western Hemisphere Department) in mid-2005 (revision of Article IV). The critical view proposed by this document is not shared by the Argentine government; therefore, changes are deemed essential in this regard.
The first (non-official) reaction of the White House, the IMF and Wall Street has been one of uncertainty and concern, terming the change as “bad news”. According to IMF representatives, “we were acquainted with Lavagna and Guillermo Nielsen. This change raises uncertainty. We don’t know what to expect now”.
“This has been an effort made by Kirchner and his advisors aimed at consolidating the power in his hands, which reduces the possibility of reaching an agreement with the Fund. Lavagna was more in favour of working with the Fund than Kirchner”, said Walter Molano, of BCP Securities (private investment bank).
Meanwhile, at the IMF some officials claim that there is a more war-like sector within the institution which mostly seeks to sanction countries such as Argentina, which do not fulfil conventional demands. “Without the support of the United States there are more possibilities for Argentina to disaffiliate from the IMF”, said Manuel Suárez Miers, of the Bank of America.
This alternative, known as Kirchner’s “plan B”, could be regarded as an act of aggression by the international financial community. In that case, Argentina would not be granted credits from the World Bank, thus bringing about a much more complicated situation.
According to analysts, all political signals point out to the fact that Kirchner is looking towards Venezuela and Hugo Chávez, and that an agreement with the IMF is very unlikely, at least until the end of 2006. However, future negotiations are on hold, depending on the decisions to be made by the new economic team.
Until now, the new Economy Minister has only expressed in this regard that the government is in no rush. “We have already discussed it with Kirchner and it is clear that there is no rush to force a negotiation or have one imposed on us. This is going to be a long story”, pointed out Miceli.
Both at the Fund and at the US Department of the Treasury they are waiting to see how negotiations are going to be approached. Although Lavagna was very well respected in Washington, he was considered a tough negotiator by the IMF.
A first indicator would be to know whether Héctor Torres (Argentine representative to the IMF) and Federico Molina (chief of Financial Representation in the United States) will remain in their posts, considering that they were appointed by Roberto Lavagna. The fact that Torres has been summoned to Buenos Aires suggests that he will remain in office, but there has been no official ratification to this respect.
Finally, it is worth wondering what will be Miceli’s attitude regarding the IMF. Will the policy of making punctual payments to the IMF have come to an end? Will the strategy of making alliances with countries of the region prevail in order to carry out a stronger negotiation? Or will the financial pressure be strong enough to make Kirchner give in to a new agreement following long discussions?
Source: Newspapers La Nación, Clarín and Página 12 (Argentina)
Argentina and the IMF: Learning lessons from our experience (pdf format), by Héctor Torres