CAMBRIDGE – In case you blinked, the Argentine government built up a pile of debt out of almost nothing with surprising speed, and then proceeded to default on it almost as quickly. Compared to the country’s slow-motion 2002 default, the latest crisis feels like 60-second Shakespeare. But in both cases, default was inevitable, because the country’s mix of debt, deficits, and monetary policy was unsustainable, and the political class was unable to make the necessary adjustments in time.
And in both cases, loans from the International Monetary Fund seemed only to postpone the inevitable, and, worse, to exacerbate the ultimate collapse. So, after the second debacle in Argentina in less than a generation, it’s high time to ask how to refocus the IMF’s mandate for dealing with emerging-market debt crises. How can the IMF be effective in helping countries regain access to private credit markets when any attempt to close unsustainable budget deficits is labeled austerity? The only answer is to increase substantially the resources of international aid agencies (the IMF is a lender). Unfortunately, there seems little appetite for that.
Why was the IMF willing to pour resources into a situation that – at least with the benefit of hindsight – could be resolved only through stronger fiscal adjustment (more austerity), a debt default, more foreign aid, or a mixture of all three?
The IMF’s difficulty in saying no to Argentina partly reflects an acrimonious history stemming from the failed loans from the late 1990s through 2001. It was also hard for the Fund to resist funding a big program in a world where countries can borrow at ultra-low interest rates from private markets. (China, too, has become a major source of funding in emerging markets, which might sound good in the abstract, but the lack of transparency makes Chinese loans fertile ground for corruption.)
But IMF staff know very well that countries with a history of serial default, such as Argentina and Venezuela, ride a slippery slope in debt markets. When Miguel Savastano, Carmen Reinhart, and I studied this phenomenon many years ago, we called it “debt intolerance.”
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