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Falling Peso in Argentina

With Argentina declaring bankruptcy and devaluing its peso, how will the U.S. and international lenders respond?

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    With Argentina in economic crisis, new questions: Should the US and international organizations have acted earlier to help, and what should they do now? We begin with some background.

    For the third week in a row, disenchanted Argentines today protested in the streets angry over their country's economic meltdown. Riots have killed 28 people, toppled an unpopular president, and sparked a political crisis in which five men were president in a span of two weeks.

    Yesterday, the government of the newest leader, Eduardo Duhalde, lowered the value of the Argentine peso in an effort to turn things around. The devaluation ends a decade- old policy requiring one peso to be worth exactly one US dollar.

  • JORGE REMES LENICOV, Economic Minister, Argentina (Translated):

    The new exchange rate will be 1.4 pesos for each dollar. Argentina is bankrupt. We have been suffering for almost four years from an increasing depression.


    One goal of devaluation is to help Argentine exporters. Years of an overvalued peso made it tough for export industries to sell overseas, but there's an opposite effect at home. Let's say this imported computer sells for the equivalent of 1,000 US dollars.

    Under the old currency peg, it cost 1,000 pesos. With devaluation, the price tag is now 1,400 pesos.

    Consumers who remember the hyperinflation in the 1980s are already seeing price markups everywhere, which sets off more buying in anticipation of the cheaper peso, which sends prices even higher. Many pharmacies are charging 20 percent more than a few weeks ago, as are most grocery stores.

    Argentines are lining up at banks to withdraw pesos before they lose even more value, and some are trying to get visas to leave the country. This is the line outside the Spanish embassy. Much of the country's population is descended from 20th century immigrants from Europe.

  • WOMAN (Translated):

    I see no future because I have been working for years. I have not seen any progress. I have a profession and I can't use it.


    The devaluation is part of Duhalde's efforts to turn back what he calls "immoral" free-market policies endorsed by former President Fernando de la Rua.

    Before he was driven out last month, de la Rua imposed spending cuts and other belt- tightening policies, often on the orders of the International Monetary Fund. The IMF rules were a condition for large loans to Buenos Aires.

    The US endorsed Argentina's past free-market approach, but the Bush administration frowns on big bailout packages and has a wait-and-see attitude on Argentina.


    And once they come up with a plan that will sustain economic growth, then we're willing to work with them. And we're willing to provide technical assistance to the government through the IMF. And hopefully they'll get their house in order here pretty quickly.


    By contrast, the Clinton administration in 1995 led a $52 billion rescue package for Mexico's peso crisis, and strongly endorsed IMF bailouts of Indonesia and other Asian nations during financial crisis of 1997.


    For more, we turn to Nancy Birdsall, president of the Center for Global Development, a policy-oriented research organization. She was vice president of the Inter-American Development Bank from 1993 to 1998. And Adam Lerrick, professor of economics and director of the Gailliot Center for Public Policy at Carnegie Mellon University.

    Well, earlier last year, earlier in the crisis, the government said it neither wanted to devalue nor default and now it's done both. Could it have gone any other way, Nancy Birdsall?


    Well, in order to have gone some other way it would have had to move much earlier. The seeds of the trouble were planted well, I'd say, in the late 1990s when spending went on, public spending was too high, borrowing was too great, the government was locked in as its people wanted to a monetary policy, which prevented it from printing too much money and inflicting inflation on people; but it had the escape valve of borrowing.

    And it borrowed a lot to spend on some waste and some corruption, particularly from the point of view of Argentine citizens so it got into deeper and deeper trouble.


    It was able, Argentina was able to get money from the IMF as recently as last August, Adam Lerrick.


    That's true. Now the question is, should Argentina have defaulted long ago? It's a very simple question. Argentina had a debt, which was very high and it had an economy.

    The two were totally out of synchronization. The choice was either try to bring the economy into synchronization to pay the debt, which would have required huge adjustments and huge transfer abroad or to bring the debt down to the level the economy can support.

    The IMF…. What you've seen over the last year is a very difficult process, both from the… Both for the Bush administration and the IMF of changing six years of behavior from the previous… from the Clinton administration and from the previous IMF management, which was that there was a policy that at that time if ever a country was in trouble, the IMF would provide whatever funds were needed to pay whatever debts the country had at that time.

    That led to a system of massive bailouts both of investors and of countries. And what this administration and the new management of the IMF have tried to do is change the expectations, change the rules of the international financial system, and that is a very difficult process.

    And the new rules are: If you're a lender and you make a bad lending decision, you're going to have a loss. If you're a borrower who has followed irresponsible policies, you're going to have to make serious adjustments. And the IMF and the taxpayers and the Group of Seven nations are not there to provide all the funds necessary.


    Do you agree with that analysis?


    Fundamentally yes. I think we could say that the IMF was too indulgent for too long. On the other hand, I think we have to recognize that in the end game in the last year the choices were much tougher. And if the IMF wanted to support a society, prevent a very chaotic situation that a combination of default and devaluation we're now seeing it's bringing, it was on the horns of a dilemma.

    It's very tough to know what was the best thing to do. But in the end, yes, probably went on for too long. I think another part of the problem is that the international community, the IMF and the United States was supporting a healthy process in some respects in Argentina of democratic change, democratic deepening and some sensible opening of markets, privatization, some quite reasonable efforts to make that economy work better but it was too little, not enough.

    And in the end there was a lot of social injustice, a lot of tax evasion on the part of the rich, not a lot of attention to the revenue side: Who's paying taxes? Who's benefiting from government expenditures? And the citizens of Argentina were blaming the political class for that. And they wanted to see a change in the way the government was using its money.

    The outside community, in supporting the overall general reforms, wasn't insistent enough on the need for that government to deal with its social programs, meet the needs of the increasing numbers of poor, work on the growth process if only because of the social costs of low growth, and at the same time ensure that a kind of fairness in the over-all system of taxes and expenditures.


    Just a moment ago we saw President Bush talking about how now the Argentines have to get back on their feet and then perhaps ask for US help.

    Is there a risk in cutting Argentina loose and just letting them go their own way? There are a lot of heavily indebted countries in Latin America probably watching.


    Well, I think you have to differentiate the types of risk. The great risk that was portrayed for the last seven years from 1995 to 2001 was the risk of financial contagion that if you let one major country default that would lead to a cascading financial crisis throughout the world, which would eventually spread to the developed countries through the capital markets of the United States and Europe.

    We've seen over the last year that that was a straw man, that, in essence Argentina because of reasons we could talk about in another context, a small country, 37 million people, very small foreign trade sector as a part of their economy, was able to issue so much debt that it was almost one quarter of the total emerging market capital market.

    We've seen though that that country has been able to default without creating any financial contagion. Brazil is doing very well. Mexico, Chile are all doing extremely well. There's been no contagion of those effects throughout the financial system.

    If Argentina were… Did not receive any assistance, which I don't think is the optimal policy under the right circumstances, would that have a major impact throughout Latin America? I do not believe so.


    Well, I disagree with Adam a little bit on this score. I think it's true that we don't see any signs of financial contagion but there's a risk of an intellectual contagion or ideological contagion and also a risk that the US looks like a kind of on-again/off-again friend.

    Argentina has been a close ally. I think – you know, from the point of view of the citizens of Argentina, they would probably like to see a little bit more assertive help to what should be the right set of policies, that will bring investor confidence back and that will enable Argentina to go back to the IMF, to go to the world bank and borrow sufficiently to get over its short-term problems. It won't be able to command loans from those institutions without sensible policies.


    Because it's already defaulted.


    It's already defaulted and because those institutions won't lend into chaos.

    Now, the problem is that the risk for the US is that people throughout the region in Latin America and indeed in all other emerging markets in developing countries see this as a condemnation of an open market system and a healthy democratic and capitalist model. And that would be unfortunate.

    And if the Argentines come up with proposals that involve protectionism, that involve subsidies that are inefficient to certain privileged industries, that create a lack of investor confidence, that don't attack their fundamental social and political problems, then they won't be able to get the support from the international community.

    And the question is, should the US with a close ally, caring about generating open markets having a free trade agreement across the Americas, shouldn't the US And the Bush administration in the interests of preventing that kind of negative view of our model and ensuring that we're not seen as an on- again/off-again fair weather friend perhaps be a little bit more insistent on and aggressive in shaping with the Argentines what should be their next steps.


    Well, let me turn that right to the professor. Should the US?


    I don't believe so. I believe that first and foremost the Argentines must come up with their plan. It has to be an Argentine plan and should not be an IMF plan, a US Treasury's, a G-7 plan, because the Argentines are the people who have to live with the consequences.

    Now, I think this is a very different atmosphere and framework than the Clinton administration. In the Clinton administration, the rules were very clear. You had a crisis, the minister of the economy came to Washington says, what do I have to promise you for you to give me money? Washington gave the list. The minister promised. The money flowed. The minister didn't necessarily fulfill the promises but he promised and he received the money.

    The new approach is, you're a country in crisis. You should come up with your own plan. It should be a consistent plan. It should be a coherent plan. The numbers have to add up. Then come to Washington and say, "This is the plan we are going to enact. We will discuss the details but this is basically the plan we'll do. We would like your assistance in these specific areas."

    If you do provide the assistance, that will help us, that will make the plan less painful for our people but we're going to do the plan in any case.


    Adam Lerrick, Nancy Birdsall, thank you both for joining us.