## 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](https://www.imf.org/en/news/articles/2015/09/28/04/53/sp071702) ## Other formats - [Markdown version](/en/news/articles/2015/09/28/04/53/sp071702/index.md) - [Structured JSON version](/en/news/articles/2015/09/28/04/53/sp071702/index.json) - [Bundle manifest](/en/news/articles/2015/09/28/04/53/sp071702/bundle-manifest.json) ## 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](http://www.imf.org/external/country/ARG/index.htm) - [Brazil and the IMF](http://www.imf.org/external/country/BRA/index.htm) - [Mexico and the IMF](http://www.imf.org/external/country/MEX/index.htm) - [Russian Federation and the IMF](http://www.imf.org/external/country/RUS/index.htm) - [South Africa and the IMF](http://www.imf.org/external/country/ZAF/index.htm) - [Speeches](https://www.imf.org/en/news/searchnews) - [PRESS CENTER](http://presscenter.imf.org/) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp071702_