Source:
IFIs Latin American Monitor
María José Romero
Tue Dec 27 2005
The decision announced by the governments of Brazil and Argentina in the last month of 2005 represent the culmination of a process which through different paths headed both countries towards the same fate: paying off the IMF. This decision faces both governments with important challenges in the year to come.
The Latin American and global scenario was astonished by recent announcements made by Brazil and Argentina with regards to their cancellation of debt to the International Monetary Fund (IMF). The crises both countries went through at the end of the 20th century and early 21st century forced governments to resort to the IMF and thus increase their degree of indebtedness as well as the exposure of their economies. This came to such point that they started to be included in the ranking of biggest debtors together with Russia and Turkey.
At the present time, the prevailing strategy in the region, earnestly supported by the IMF, is that of “dis-indebtedness”. In this way, Latin American governments – to the extent of their possibilities and also beyond them – resort to the purchase of external debt through internal indebtedness, such as in the case of Colombia and Uruguay; or to debt cancellation by using their international reserves, such as in Mexico and Venezuela.
However, in spite of the regional context, it is possible to identify some peculiarities in the announcements made by Argentina and Brazil. While challenges ahead and the political use of an economic resource could be similar, the courses of action taken by both countries in order to arrive at the present situation are showing clear differences.
Argentina: How to get to say “enough of external debt!”?
Since the resignation of Economy Minister Roberto Lavagna and cabinet changes that took place in early December, Argentina was faced with a major challenge: how to continue its relationship with the IMF.
Throughout 2005, the economic team stoically endured pressures exerted by the institution. According to repeated statements of its representatives (Rodrigo Rato, Anne Krueger and Anoop Singh), Argentina should decrease its exchange rate, increase the tariffs of privatized public companies, raise interest rates to fight inflation and review the situation of those bondholders who refused to enter the debt-swap, amounting to US$ 23.4 billion, among other demands. The government headed by President Néstor Kirchner systematically rejected all “suggestions”, warning that he was not willing to change an economic policy that had allowed for the recovery of the economy’s current conditions.
Kirchner’s discourse towards the IMF was always one of confrontation and reproach on account of the attitude of the institution during the serious 2001 economic and financial crisis. The former Economy Minister complained about the bad treatment of IMF officials, and Rato, meanwhile criticized the political use that Argentina made of the negotiation with the Fund, ahead of the legislative elections of October 2005.
Thus, the (forced) estrangement of Lavagna from the Economy Ministry gave the relationship between Argentina and the IMF a break. Rato, in his last conversation with Felisa Miceli - Lavagna’s replacement – suggested the need to take advantage of the new economic stance to open a new dialogue with the institution. This new context placed a question mark over the future, which was finally removed upon the sudden announcement made by Kirchner: “enough of external debt!”, “Argentina frees itself”.
Following this decision, Argentina will pay 9.81 billion dollars to the IMF during the first days of 2006, thus cancelling its total debt to the institution, which accounts for 8.9 per cent of its public debt.
The current situation of the Argentine external debt shows that besides the debt owed to the IMF, the country is indebted to the Inter-American Development Bank (IDB) and to the World Bank, accounting such debts for 6.9 per cent and 5.8 per cent, respectively.
According to the official discourse, this decision leaves the country “free of conditions” and allows to save 842 million dollars in interests. However, beyond the large political and social support granted, including congratulations from the IMF and Lavagna himself, the decision made has been subjected to criticism and poses challenges ahead.
From the opposition, political leaders are opposing this action, stating different reasons. Elisa Carrió, leader of ARI (Alternative for a Republic of Equals), affirms that “a dis-indebtedness policy is always correct with an exception: this payment, as it has been announced, implies agreeing to the demands of the IMF, whose global policy was to get out of those countries that are highly exposed in terms of debt. This implies that Argentina waives the possibility of making the IMF share the costs of the crisis, in spite of having openly said that it was jointly responsible” (Clarín, Dec 16, 2005).
Likewise, many analysts have highlighted the privileged creditor treatment granted to the IMF, since once default was declared Argentina never stop punctually paying to the three multilateral institutions (IMF, WB and IDB), but started a debt-swap negotiation with bondholders, applying haircuts close to 66 per cent; being among them nine million contributors to the system of Retirement and Pension Funds Administration (AFJP) and both Argentine and foreign bondholders.
With regards to the form of payment, the use of international reserves is another highly controversial aspect of this measure. The IMF had “suggested” the Argentine economic team to resort to these resources in order to cancel the country’s debt in June of the closing year. This proposal was rejected by Kirchner and Lavagna, stating that it questioned the independence of the Central Bank in terms of monetary policy. At that time, the back-up represented by international reserves in terms of monetary supply was not the main argument.
At the present time, the government has left all its arguments behind and decided to issue an emergency decree, amending the Central Bank statutory law, and to introduce the concept of reserves of free availability. Notwithstanding the increase of reserves from 23 to 26.8 billion dollars, this is undoubtedly a political decision.
What could have changed between June and December to prompt the Argentine President to make this decision? Probably, it was necessary to do without Lavagna, who always believed that the best thing was to aim at refinancing the debt to the IMF, kicking it forward, taking into account that Argentina should refinance an increasing part of its debt to private creditors as of 2006 and it is really difficult to forecast what will happen in the next years within the international financial scenario (Página 12, 16/12/2005).
Likewise, it was necessary to wait for the adequate economic and political timing. With regards to the latter, the decision in the same direction made by Brazilian President Luis Inacio Lula da Silva, its international impact and the numerous conversations held with Hugo Chávez, Venezuela’s President, certainly played a very important role.
Brazil: The example of big brother
The situation of Brazil with the IMF is outstandingly different from that of its Mercosur partner. President Lula came to power in 2003 with a debt bequeathed by Fernando Henrique Cardoso, after resorting three times to the funds of the institution. The electoral banner of the Workers’ Party (PT), Lula’s political party, was always entirely against the IMF. However, during his first year in office Lula renewed the agreement with the institution.
Contrary to what happens in Argentina, Brazil’s relationship with the IMF has been historically good. President Lula’s discourse has always been of a moderate tone. Beyond his sayings, that which prompts receptivity and praises from IMF officials is the policy the Brazilian government has been carrying out: fiscal accounts have performed according to IMF recipes.
Brazil’s decision not to renew the stand-by agreement with the IMF in March 2005, its early payment of 5 billion dollars in July 2005 and the subsequent development of its economy account for the fact that it was not necessary for the government to be formally constrained in order to comply with IMF guidelines.
Lula’s decision to cancel the 15.5 billion dollar debt owed to the IMF is framed within this context. According to Economy Minister Antonio Palocci, “the decision to cancel the debt implies the saving of 900 million dollars and will not bring about any changes in the good relationship between the Brazilian government and the IMF. Brazil will continue to have a relationship with the IMF in its capacity as partner and will continue to develop joint projects” (Rede Brasil). Therefore, in this case, the argument of greater independence is not prompting the decision.
Brazil’s debt to the IMF only accounts for 7 per cent of the total Brazilian external debt; while its largest debt is the one owed since 1983 to the Paris Club, institution made up of the 19 most industrialized countries.
By means of this action, the government would surely attempt to counteract criticism to its economic policy, which in the third quarter of 2005 has retracted 1.2 per cent if compared to the second quarter, the worst quarterly result since Lula took office. In this way the government can start 2006, the year in which Lula will try to become re-elected, with a new “electoral banner”: for the first time in eight years Brazil will be free from its obligations to the IMF.
At the same time, this is a further step for Brazil in its quest for an “investment grade” - rating by risk agencies, which is used as a letter of introduction before world investors.
Therefore, Lula’s pre-electoral discourse: get out IMF! was so radical that he succeeded in achieving it after behaving properly and paying off all debts, thus turning according to the organization Rede Brasil into the “IMF’s best student”.
From the IMF, the reaction was of total approval. Rodrigo Rato congratulated Lula’s government and at the press conference in which he presented an evaluation of his last six-month period as IMF managing director he set Brazil’s attitude as an example. On such occasion (Washington, Dec 14, 2005) Rato pointed out that countries such as Argentina could take advantage of the favourable situation of the world economy in order to implement reforms, such as Brazil did, referring to a “prudent monetary and fiscal policy”.
In other circumstances, Brazil’s announcement would have arisen strong international concern, due to the role played by this country in the global economy. However, Brazil is cancelling its debt to the IMF, fulfilling all the goals set by the institution and even its own much stricter goals. While the agreement with the IMF stipulated that the country should obtain a primary fiscal surplus of 4.25 per cent of GDP, Lula’s government saved in the first ten months of this year 5.97 per cent.
Brazil’s economic performance, at the expense of its export momentum and its savings, has managed to increase the country’s international reserves from 15 to 67 billion dollars within the period ranging from 2003 up to date. However, the situation of Brazil continues to be vulnerable.
Growth prospects for 2006 are only of 3 per cent and the volume of public debt stands close to 65 per cent of GDP. So, public savings and increased reserves, which also result from strong cuts in social and environmental programmes, are not enough to reflect an improvement in social conditions, poverty and mainly inequality.
Old and new challenges
The decision announced by the governments of Brazil and Argentina in the last month of 2005 represent the culmination of a process which through different paths headed both countries towards the same fate: paying off the IMF.
The institution is gradually recovering its resources. The Board of Directors should be happy about it, notwithstanding the fact that second line officials are afraid of losing the influence they have exerted on Latin American economies for more than a decade.
However, this decision faces the activity of both governments with important challenges in the coming year.
The strong pressure to comply with IMF guidelines in order to continue receiving external financing, is now replaced by the urgent need to maintain international credibility and meet the internal requirements that may prevent both countries from falling again into the clutches of international financiers on account of not having been able to do without them.
Thus, both governments will be even more forced to maintain a fiscal and monetary discipline that may allow them not to have to resort to loans which in case of being necessary would be taken at much higher interest rates than those charged by the IMF.
The international reserves of both countries shall be reduced. In Brazil, the disbursement of 15.5 billion dollars accounts for 25 per cent of its reserves, while in Argentina the 9.81 billion dollars allocated to debt cancellation imply giving up 36.6 per cent of its net reserves. In the case of Argentina, it is estimated that it will take almost a year for the economy to recover the level of reserves and take them back to estimated levels, which is no simple task.
On the other hand, the independence with regards to IMF conditionalities will not be enough if governments are to introduce the Fund’s recipes to their own programmes. Discourses may continue to be of confrontation, such as in the case of Argentina, or moderate, as in Brazil, but there is no indication as to the existence of differences between one and the other in terms of government behaviour.
Therefore, beyond economic indicators and the strict fiscal discipline to be maintained by Argentina and Brazil, the most impoverished social sectors are the ones that have paid and will be paying - at the expense of being left behind - for all the “spectacular” announcements that governments decide to make.
More information:
After years of fighting the IMF, Lula turns Brazil into the best client of the Fund, by Rede Brasil
Lavagna’s resignation and Argentina’s relationship with the IMF
Who owes who?: External financing in Lula’s administration, by Rede Brasil
Most part of Latin American budgets are conditioned upon debt payment
It all depends on the colour of the glass you are looking through: Argentina and Brazil in the face of debt
|
