Monday, November 19, 2007

Argentina and the Paris Club


Argentina and the Paris Club
November 19, 2007; Page A18

Argentina, the reigning world champion of debt default, wants to get back into the international credit markets. Given the antimarket agenda that President Néstor Kirchner and his Peronist Party have imposed on the economy since 2003, that's a scary thought. Here's a scarier one: The International Monetary Fund seems desperate to play a role in Argentina's debut as a rehabilitated deadbeat.

Anyone who watched the collapse of Argentina under IMF guidance seven years ago understands that these two parties -- like an addict and an enabler -- deserve each other. But someone should stop the fund before it "helps" again. Writing itself into the next chapter of adventures in Peronist populism is neither necessary nor desirable.

Better to let the gauchos design and execute their own economic policy. Lenders will then assess Argentine risk -- without the distortions caused by an IMF imprimatur -- and charge an appropriate premium. And politicians won't be tempted to rely on IMF credit lines to close spending shortfalls. If the whole thing comes a cropper, Argentines can burn effigies of their own this time.

Back in 2001, Argentina gave the impression that it didn't care about its credit-market standing. When interim President Adolfo Rodriguez Saa announced a moratorium on servicing more than $100 billion in foreign debt at the end of that year, the Congress cheered. Shortly thereafter the government trashed another contract by devaluing the peso. Then it abrogated the agreements it had signed with Spanish and French utility companies, which had made big bets that the country had finally become a reliable place to do business.

Mr. Rodriguez Saa gave no indication about when or how creditors would get their money back. Seventeen months later, in May 2003 when Mr. Kirchner took office, the situation was no better. Many Argentines who held government debt had suffered from the default. But their plight was ignored while Mr. Kirchner poured vitriol on the foreigners. As the economy moved from crisis to recovery, denouncing the barbarians in faraway lands became a Peronist Party sport. The blame for the collapse was laid at the feet of foreign creditors, foreign governments, foreign investors and the IMF. It wasn't until February 2005 that Mr. Kirchner offered 30 cents on the dollar to creditors holding $82 billion of bonds.

This was good for the coffers and for politics. In playing the nationalism card while scalping creditors, the kirchneristas created the illusion that Argentina was transformed from poor to rich by tossing out the foreigners.

But now the punch bowl at the party is running dry. Having demolished property rights, the government is finding that investment rates are too low to sustain modest growth. A more immediate problem is the lack of funding for the energy sector, which has not been able to meet demand in recent years. This is why President-elect Cristina Fernández Kirchner is expected to try to restructure the almost $6.5 billion of debt and interest owed to Paris Club governments that has accumulated since 2001.

The reason to make up with the Paris Club is that members' export agencies (such as the Export-Import Bank in the U.S.) can't provide subsidized financing for companies doing business in Argentina as long as the bilateral debt is in default. Mrs. Kirchner wants the evil foreigners to come back to Argentina to build electricity plants and railroads. Investors, too, want to return and roll the dice again -- if, that is, they get subsidized financing. They're complaining that Brazil, Russia, India and China are gobbling up the opportunities while entrepreneurs from Paris Club countries can't get government help.

Argentina's overture toward clearing its Paris Club debt is a positive development. Government defaults are nothing new, and if Buenos Aires is ready to make amends on its bilateral debt, it should be given the chance.

Whether members of the Paris Club should guarantee new financing in a country that doesn't respect property rights is a separate question. But what ought to be ruled out is a new IMF program as part of the Paris Club negotiation. Argentina does not want a new IMF program, but some have suggested that it is a requirement of the Club. It is not. It may be a precedent, but only because debtor nations renegotiating bilateral debt are normally bankrupt. In this case, Argentina not only is not bankrupt, it is flush with cash. It could pay back in full what it owes immediately, though, in true Peronist fashion, it feels no compunction to do so.

For the IMF, a program for Argentina is attractive because it would come at a time when the institution's "client" base, and hence its relevance, is shrinking. But if IMF sponsors seek to improve the welfare of the Argentine people and the health of the international credit markets, they will see that the fund stays out. The economy is an accident waiting to happen, and no outsider can prevent it from hitting the shoals as long as price controls, manipulated inflation data, high taxes, subsidies for energy and transportation, and fiscal profligacy are the policy tools of choice in Buenos Aires. As we saw in 2001, the fund has no power to influence a political class obsessed with its own power.

High-risk premiums, and not a new line of credit from the IMF, are far more likely to guide Mrs. Kirchner toward more rational behavior. The government needs to raise $7 billion in the capital markets next year and an estimated $10 billion in 2009. Meanwhile, the flight to quality since the subprime debacle has pushed up Argentine borrowing costs. In a 10-year dollar-denominated domestic bond offering issued last week, it had to pay 10.5%. By comparison, Brazilian 10-year bonds yield 5.6%. In other words, Argentina's creditors are demanding almost five percentage points over Brazil to cover the risks of the unsustainable economic agenda of a government that thumbs its nose at property rights, contract security and free prices. The $22 billion of bonds held by the private-sector and still in default don't help either.

Peronists still insist that market economics are part of a right-wing "neo-liberal" plot. In other words, they have a lot to learn. The international community can help by letting them learn it on their own.

Write to O'Grady@wsj.com1

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