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IMF Loan Agreement Good for Argentina

A Letter to the Editor
By Thomas C. Dawson
Director, External Relations Department
International Monetary Fund

Los Angeles Times
September 15, 2001

We differ strongly with Mr. Weisbrot's characterization of Argentina's latest loan agreement with the IMF as "helping Argentina dig itself into a deeper hole"("Community `Helpers' Such as IMF Make a Junkie of Argentina," Sept. 5). It is his prescription of default and devaluation that would see Argentina digging itself deeper.

Yes, there are risks in the new program, but Argentina's recipe for reform is the right one, well deserving of strong international support. And the new agreement has already begun to restore confidence domestically. In recent days, Argentine depositors have not only stopped withdrawing money from the banks but begun to return money to the financial system.

Mr. Weisbrot is wrong for a number of reasons. First, Argentina's currency board enjoys widespread support in the country. And given Argentina's highly dollarized economy—most debts of firms and households are denominated in dollars—a devaluation would have a devastating impact on companies' balance sheets, with a likelihood of large-scale bankruptcies and unemployment.

Second, Argentina has no option to a zero-deficit policy because of its loss of access to financial markets. This reality would hold even if there were a devaluation or an involuntary debt restructuring: in fact, experience shows that the latter would result in loss of access for several years. With no inflows, there can be no deficit.

Third, the government is taking steps to protect the poor from the worst of the adjustment, by safeguarding key social programs, strengthening the social safety net, and limiting cuts in wages and pensions.

Argentina's program—as crafted by Argentina and not the IMF—will build on the country's very good record of economic transformation over the last decade. As Finance Minister Domingo Cavallo recently said, under a zero-deficit rule, Argentina "will be able to adjust more easily to external shocks without continuously having to shift the burden on to the productive and efficient private sector."




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