Crisis Prevention and Resolution: Lessons from Argentina, Address by Anne Krueger, First Deputy Managing Director, IMF

IMF News, July 17, 2002

Source details

Canonical URL

Crisis Prevention and Resolution: Lessons from Argentina, Address by Anne Krueger, First Deputy Managing Director, IMF

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Published: July 17, 2002

Introduction

• Context: National Bureau Of Economic Research (NBER) Conference on "The Argentina Crisis", Cambridge, July 17, 2002.
• Purpose: Identify lessons from Argentina's experience for IMF crisis prevention and resolution and discuss immediate challenges and the Fund's role.

What went wrong?

• Macroeconomic performance and reversal:
  • Between 1990 and 1997 its economy grew by more than 6 percent a year.
  • Real GDP is expected to decline by between 15 and 20 percent this year alone.
  • Argentina entered a protracted recession now in its fourth year (as of the speech).
• Convertibility Plan and exchange-rate rigidity:
  • Convertibility Plan (1991) reduced inflation "from four figures to single digits within three years".
  • Fixed exchange-rate regime (currency board) reduced degrees of freedom for adjustment; insufficient domestic flexibility (e.g., labor market) contributed to mounting overvaluation.
  • Real exchange rate appreciated significantly during the 1990s; weak export growth relative to other Latin American countries.
• Fiscal and public-sector imbalances:
  • Consolidated budget deficit was around 2½ percent of GDP even as the boom peaked in 1997 and 1998 (after off-balance sheet borrowing taken into account).
  • Much provincial fiscal indiscipline and off-budget borrowing exacerbated consolidated public finances.
  • Federal wage differential: in 1994 the average federal employee was paid 25 percent more than the average private sector employee; by 1998 the differential had risen to 45 percent.
  • Public sector employment accounted for 12.5 percent of the labor force in Argentina (mid-to-late 1990s), compared with barely 7 percent in Brazil and Chile, and 8-10 percent in Russia, Turkey and South Africa.
• Debt dynamics and external vulnerability:
  • Consolidated public debt rose from less than 33 percent of GDP in the early 1990s to more than 41 percent in 1998.
  • Argentina's total foreign currency debt was around five times the size of its foreign currency receipts from exports of goods and services.
  • External debt climbed to 50 percent of GDP in 2000.
  • Markets feared collapse of the currency board; by the end of 2001 the debt-to-GDP ratio stood at 130 percent.
  • Financing requirement in excess of $20bn a year at the time market appetite for Argentine paper was exhausted.
• Policy responses and sequence of events:
  • Large international support package: $14bn from the IMF and a total package of $40bn.
  • Market confidence undermined by policy moves: dollar/euro peg, removal of Central Bank Governor, a costly debt swap.
  • Spreads reached 500-600 basis points at one stage.
• Four summarized proximate causes (as stated in the speech):

1. Fiscal policy too weak during the upswing. 2. Unfavorable external environment and shocks. 3. Convertibility plan locked in overvaluation given domestic inflexibilities. 4. Unsustainable debt dynamics left unaddressed.

Lessons for Crisis Prevention and Resolution

• Debt dynamics and debt sustainability:
  • Need to focus more closely on debt dynamics; IMF stepping up work on the analysis and assessment of debt sustainability (remains a matter of judgment).
• Currency boards and exchange-rate surveillance:
  • Currency boards are not necessarily durable without supportive fiscal and structural policies.
  • IMF priority: more candid and comprehensive analysis of exchange rates and exchange rate regimes.
• Public external debt conservatism:
  • Emerging markets may need to be more conservative with public external debt; public sector reliance on international private finance is risky.
  • Changes in international capital markets have already forced reassessment of rules of thumb (e.g., adequacy of official reserves).
• Sovereign debt restructuring mechanism:
  • Restructuring has become more difficult with shift from syndicated bank loans to bond issues and more numerous, diverse creditors (example: "88 bond issues outstanding in five legal jurisdictions" for Argentina).
  • Proposal: a sovereign debt restructuring mechanism to empower the debtor and a super-majority of creditors to take timely, efficient decisions.
• Persuasive policy advice and ownership:
  • IMF must make policy advice more persuasive during booms through closer dialogue and outreach.
  • Ownership by authorities (and society) is essential for program implementation, but ownership alone is not sufficient—policies must also make economic sense.
• The Fund's central dilemma (probabilistic judgments):
  • How far should the IMF support a policy strategy the authorities are committed to but which has uncertain chances of success?
  • Need to balance risk-taking in lending with responsibility to restore growth and viability.

Immediate Challenges and Policy Priorities for Argentina

• Current economic conditions (as described in the speech):
  • Real GDP was down more than 15 percent on a year earlier in the first quarter.
  • Inflation rising: consumer prices increased by 30 percent and wholesale prices by almost 100 percent in the first six months of the year.
  • Liquidity assistance expanded monetary base: year-on-year change in currency issue moved from minus 27 percent in December to plus 26 percent by the end of June.
  • Fiscal position: consolidated primary budget deficit standing at around 1 percent of GDP in the first half.
  • Despite current account surplus, intervention to reduce pressure on the peso and inflation is depleting official reserves.
• Progress noted:
  • Satisfactory amendments to the insolvency law and repeal of the economic subversion law.
  • Bilateral agreements with provinces to ensure orderly adjustment of their finances.
  • IMF Executive Board agreed on July 15 to extend by one year the expected repayment of $985m due from Argentina under the Supplemental Reserve Facility.
• Two priority areas for Fund–authorities discussions:

1. Developing a sustainable monetary anchor:

• Essential to halt rising inflation.
• Independent advisory group appointed to assist.
• Issues include outcome of voluntary securitization of bank deposits and restoring central bank independence.

2. Strengthening the banking sector:

• Key elements: framework for bank intervention and resolution; consistent and sustainable liquidity support policy; proposals to reform, restructure and downsize public banks.
• Authorities expected to detail plans shortly.

• Urgency:
  • Rapid progress in these areas is essential to create a strong, comprehensive program capable of restoring confidence, underpinning a sustained recovery, and winning international support.
  • "Time is not on Argentina's side." The IMF will remain fully engaged.

Source: Crisis Prevention and Resolution: Lessons from Argentina, Address by Anne Krueger, First Deputy Managing Director, IMF (July 17, 2002).

References

• Argentina and the IMF
• Brazil and the IMF
• Mexico and the IMF
• Russian Federation and the IMF
• South Africa and the IMF
• Speeches
• PRESS CENTER
• https://www.imf.org/en/home