On what Greece can learn from the Argentinean debt crisis and the way the IMF (and the troika) are working
On October 1st 2012 ‘pirates’ snatched the beautiful Libertad, the Argentinean training frigate, when it arrived in Ghana. This is only one asset Argentina’s creditors are trying to get hold on after its debt default of 2001.
But wasn’t Argentina constantly presented as a model for Greece to follow? Did many economists not say that debt-ridden Greece should also default and in this way get rid of all its debts?
The Argentinean story is a sad one. In 2001 Argentina ceased payment on 81 billion Dollars of bonds. It offered its creditors a bond swap for 35 % of the value. Most holders of the debt accepted but some did not. One of them is the hedge fund that now seized the ship. It was awarded a 1.6 billion $ claim against Argentina by a New York judge. Buenos Aires refuses to pay, because if it met the fund’s demands, others would also be entitled to sue for better terms.
It is easy to condemn the greed of hedge funds, vulture funds and other speculators with government bonds. But the event also shows that Argentina’s problems are far from over. True, the country got an easy economic recovery, with some vigorous measures of President Kirchner and soaring prices for agricultural commodities Argentina is exporting. But the problems did not go away. Argentina is still paying 12 % of its GDP and 43,6 % of its budget to debt servicing, against 2 % of GDP and 7,4 % of the budget for education and 1 % of GDP and 3,6 % of the budget for health care[1].
One of the reasons Argentina still has so many problems is the ‘asymetric pesification’ Argentina decided to implement in 2002: after the delinking from the Dollar and the devaluation of the Peso with 60 %, banks had to recover one Peso for every Peso they had lent, but had to pay 1,40 Peso for every Peso they had in deposit. This was presented as a measure against the banks, but banks simply did not have that money, so the government had to borrow again and is still paying for these expensive debts.
Two opposing world views
Many intelligent analyses have been published after the Argentinean crisis, and most of them focus on the unforgivable errors the IMF has made. The IMF did indeed support different governments during the run-up to the crisis when it was clear for most analysts the country was driving into the wall.
So maybe, if Greece can learn something from Argentina, it is not how to default, but how to avoid that the same errors are made over and over again.
In 2005, a fascinating little book was published with a conversation between a leftwing Argentinean journalist and the former civil servant at the IMF responsible for Latin America and Argentina. It is an honest dialogue between two totally opposing views, between people who try and fail to understand each other’s positions and who both have to end the e-mail correspondence with a certain frustration. Both participants start their conversation with a lot of good will and some common understanding, but this did not help to arrive at any common conclusion. The journalist blames the civil servant for having a ‘split personality’, the civil servant blames the journalist for being ‘ideological’.[2]
But the book gives an amazing insight into the world and the thinking of the IMF and in this way explains why they do what they do. And it is here that we can learn something for Greece, because the ‘troika’ – of which the IMF is part – is making exactly the same ‘mistakes’.
On the importance of leadership
An interesting direct point of comparison between Argentina and Greece concerns the leadership of the IMF and the current leadership of Germany within the European Union.
How many times has it been said that Germany has it all wrong with its strong demands on austerity and its harshness against Greece, including at the level of common people who believe the Greeks are lazy, they live ‘beyond their means’ and any solidarity with them is as putting money into a bottomless pit? Merkel, it is said, is inspired by religious feelings of ‘good’ and ‘bad’, and those who behave bad have to be punished, whatever the consequences, and even knowing that at any rate the debt is unsustainable.
At the IMF, according to the senior analyst, things began to change seriously with the arrival of Horst Köhler as director gener al. Köhler was extremely hard on Argentina. ‘I think he had a kind of quasi-religious conviction that countries had to expiate their sins in order to get rid of their problems’ (p. 146). Köhler had more than enough of it all, he was very inflexible; where Camdessus would have made an extra effort, Köhler thought they had to pay first and then maybe could get some help. ‘His world vision was very German’, ‘he was a man of religion’ (p. 203).
On dogmas and technicalities
One question the journalist puts over and over again is how the IMF could obstinately impose austerity policies on a country already in recession. He never gets a satisfactory answer, except that for the IMF the crisis was not a consequence of the adjustment programmes which were meant to restore growth. The objective is to free the economy of the burden of the State (p. 52).
IMF civil servants are ‘technicians’, so it is said, they sometimes disagree on the negotiation strategy, but never on the way which was to be followed. They know ‘theoretically’ what has to be done, but sometimes politics interfere and countries do not do what has been recommended. They may see some of the problems that a country is faced with, but in the case of Argentina it was politically ‘not done’ to criticize President Menem. In Washington and elsewhere, Argentina was seen as doing the things which had to be done.
Never ever, according to Claudio Loser of the IMF, can it be the objective to have the costs of adjustment been paid by common people, let alone the poor. In is inside some countries, that governments are reluctant to shift the burden to their middle and wealthy classes, because they are the ones who vote and can easily mobilize. The IMF never talks about social protection when it imposes an adjustment plan.
Privatizations, according to Loser, is not within the remit of the IMF, though it strongly supported these measures because of their positive results on productivity. Unemployment is not a problem for the IMF, since it can easily be solved with growth. Lowering wages and getting rid of the ‘rigidities of the labour market’ can be very positive, since it is better than a devaluation and allows the markets to function smoothly. Privatization of pensions is not a bad idea, but it has to be done correctly …
But: ‘Reality sometimes resists the theory’, ‘if the conditions are in place, adjustment works’ (p.86).
Yes, we have been too optimistic, admits Loser. We should have asked more questions. We were happy with the privatizations, but public companies had been replaced by private monopolies. Hundreds of thousands of people were unemployed … We tried to respect our rules, but did not reflect on the way to proceed. That is because there was an international consensus on the economic model, but the implementation was left to the responsibility of national governments. And in the end, no one knew what to do, not the government, not the IMF, not the G7.
National responsibilities
If the rigid theoretical/technical reasoning is something that can easily be recognized in the case of the ‘troika’ countries in Europe, an even more strikingly similar problem is the one concerning the division of responsibilities.
The IMF may be right to say that it never touches on social protection, and even recommends to help the poor, but if it says that public expenditures have to be cut, governments do not have so many choices. And indeed, they will try not to hurt those who are most important for their re-election.
And yes, in the case of Argentina and of Europe, national governments do have a responsibility and can be said to have made many errors in the past. But these ‘errors’ were known and were accepted.
Yes, Loser admits, the IMF has worked with dictators and corrupt or undemocratic regimes, but we did not elect these people and they were accepted by the international community.
Are we being dogmatic, so Loser asks himself, when we think that there can be no equitable redistribution when there is no economic efficiency? Argentina did not use the privatization money in an acceptable way, the liberalization of capital markets was not matched with control on the financial sectors.
When politics come in
‘It has 4 legs, it barks, it wags its tail, but for you, it looks like a giraffe’ the journalist replies.
There is no conspiracy at all, Loser says. People working at the IMF are highly competent and show a high degree of integrity. But sometimes political decisions are taken, and sometimes, even the IMF cannot do what it wants to do.
Loser himself was dismissed when politics came in after the Argentinean crisis. He was ‘too close’ so it was said. And Köhler had to give another loan, because that was what the G7 had decided. But no, never ever had the interests of Wall Street influenced IMF decision-making …
Politics and economics
Most probably, this is the way most senior civil servants at the European Commission are also thinking. They see themselves as ‘technicians’ working according to an economic theory they believe is correct and is shared by the world community. They see many problems but attribute them to the inference of ‘politics’ and/or ‘national governments’. Those who do not share their opinions are said to be ‘ideological’.
They all work for an institution whose rules they accept – ‘neither a charity nor a de-humanised entity – but easily forget there is a world outside with real people and real problems.
While these personal attitudes of civil servants can easily be interpreted as a kind of ‘self-protection’, a way to avoid to question yourself, the underlying philosophy is of course deeply flawed. Because obviously, ‘the conditions’ never are in place, there is always a ‘reality’ that the textbooks do not know.
Most of all, economics never can be separated from politics, there is always a ‘reality’ which is not in conformity with theory, and there are always interests to be promoted or to be ignored. Believing it can ever be different is probably the most serious ‘error’ of neoliberal philosophy.
But what this book also teaches us is the seriousness and indeed integrity of many civil servants, their conviction that what they are doing is the thing that should be done. No one ever goes to any country, whether it is Argentina, Greece of Portugal, with the intention to hurt people. On the contrary, they truly believe that when growth will be restored, all short term social problems will melt away. And if they do not, or if growth is not restored, it is the responsibility of the governments…
One conclusion one can make from this story – and from recent ‘troika’ experience’ – concerns the procedures with which global politics are being organized. By putting into place an international technocracy – even working with a democratically given mandate – far-reaching economic policies can be imposed with severe social and political consequences. ‘Politics’ is said to have no interference, but of course it has, while shifting the responsibility on international institutions. It should be clear that yes the IMF and the European Commission are responsible for what has happened in Argentina and what is now happening in Greece or Portugal, but the political responsibility is with member states who either let the technocrats do, or interfere for the worst. And always have the last word. Can one speak about ‘errors’ in such a case? Or are these ‘errors’ well planned?
As Susan Schadler, former deputy director of the IMF’s Europe department says in a blog on the Bretton Woods Project[3], the IMF still did not learn its lesson. It changed its rules after Argentina, in order to be able to immediately restructure unsustainable debts. But faced with the Greek crisis, it changed its rules again, in order to not restructure. A purely technical measure? An ‘error’?
