Jewish World Review March 11, 2004 / 18 Adar, 5764

Stratfor Intelligence Brief by
George Friedman

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Argentina's plight highlights International Monetary Fund's ineptitude


http://www.jewishworldreview.com | As Iraq is being slowly put to bed, other crises that might normally be ignored amid the chaos come to the fore. In bygone days, news that a fairly important country is toying with an international financial default would rivet the world. These days, the world is too punchy to focus. Indeed, the financial crisis might well not happen. Still, it is hanging out there - and it is coming to a head.

Argentina, which has not been well these past years, owes the International Monetary Fund $3.1 billion - due on Tuesday.

The Argentinians say they will not pay unless they are guaranteed that the IMF will release the next installment of a loan to them on schedule in the next few weeks. They have indications from the IMF that the next tranche will not be released, because the IMF thinks that Argentina has not fulfilled guarantees it made when the loan was created in September 2003.

The issue is not about loans owed to the IMF, but about money owed to private foreign creditors. Argentina defaulted on these loans at the end of 2001 and, under agreements with the IMF, was supposed to have negotiated a payment plan in order to qualify for the IMF funding agreed to in September 2003.

As in many such agreements, the Argentinians agreed to negotiate in "good faith," a slippery concept under the best of circumstances. They say they have been negotiating in good faith; their creditors say they have not received a dime.

According to the Argentine government, it has proposed a deal that would repay foreign creditors 75 cents on the dollar. According to the investors' arithmetic, however, the repayment plan actually amounts to only 10 cents on the dollar, which is really bad, even as these things go. The issue, of course, is what bond you are talking about and what deal is on the table at any given moment. The truth does not lie somewhere between the high number and the low number; it is all over the place.

People and institutions invest in things - including countries - and they take risks in return for rewards. Sometimes they lose their shirts. The normal punishment for defaulting on a loan is that your credit rating is ruined, which means that no one will lend you any money for a long time.

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Not being able to borrow money is frequently a blessing, because it forces you to live on your own resources and get your house in order, which is sometimes painful. For a country, the pain is rarely distributed equally: Pain for the upper classes can translate into devastation for the middle classes and malnutrition for the poor. Not everyone is hurt equally for the financial irresponsibility of the state; neither did everyone benefit equally from the irresponsibility.

The IMF's job is . well, it has some job, but no one is really sure any longer what it is. In the case of Argentina, it seems to be operating as a multinational bill collector for foreign financial interests. In other cases, it seems to operate as a particularly inept social worker, sending in home economists to teach impoverished housewives how to make more nutritious meals for less.

The IMF has been pilloried for being a tool of globalist financial interests, for being inept at managing financial crises and for being ineffective at disciplining profligate nations. The odd thing is that the IMF is guilty of all charges.

If we look at the Argentine situation carefully, we see: On the one hand, it is a classic case of a nation that mismanaged its finances - not for the first time - and is now acting as if the people who lent it money were victimizing it by making the loans.

There is a market solution to the problem. Argentina defaults, investors who bet on Argentina lose their money and no one lends to Argentina again. The social outcome is painful, of course, particularly to the poor and middle classes.

Argentina is in default anyway, and the IMF is keeping it from the logical conclusion of its situation to the benefit of no one, including - contrary to what the leftists say - the market, whose job it is to punish people who invest in the wrong thing. The problem with the IMF is that it does not have the size to really solve a problem, but shows up just in time to make sure that nothing is solved.

In the meantime, an entire class of IMF investor-scavengers - who follow the IMF around, buying up defaulted bonds for pennies on the dollar in hopes that it will give those bonds value - distorts the national and international markets. It is fascinating to watch how much the IMF can work to subvert reality.



George Friedman is president of Strategic Forecasting, Inc., one of the world's leading global intelligence firms, providing clients with geopolitical analysis and industry and country forecasts to mitigate risk and identify opportunities. Stratfor's clients include Fortune 500 companies and major government. Comment by clicking here.

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