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'Countries can default and the world doesn't end'
Financial Times Deutschland
June 25, 2009

By Jude Webber

When a crisis hits, surviving is just a case of doing what you can

Cut off from international capital markets and still tens of billions of dollars in arrears with public and private creditors, Argentina has been a financial pariah since its 2001-02 crash led the country to take drastic measures to right itself - involving a $95bn debt default.

The country remains out in the cold because of its refusal to return to International Monetary Fund scrutiny of its public accounts, even after paying off its $9.5bn debts to the lender in one fell swoop in 2006.

But now, the global financial crisis has given respectable developed economies fighting with high debt, ballooning spending and lower international confidence a taste of what it feels like to be Argentina. In turn, the Latin American maverick is suddenly being viewed as a test bed for ways to restore stability.

As worldwide recession bites, countries struggling to meet tough deficit limits and spending cuts the Fund has imposed on them as a condition of bailing them out are trying to assess whether Argentina's go-it-alone stance works out any better than the fiscal medicine they are being ordered to swallow.

"I wouldn't be so quick to say that there is no alternative to the IMF," says Aldo Caliari at the Center of Concern, a Washington think-tank. He praises the exchange rate targeting and demand-led model that have been features of Argentine policy under N stor Kirchner in 2003-07 and since then under the presidency of his wife Cristina Fern ndez, which led to six years of growth averaging 8.5 per cent in Argentina's rebound from its crash.

In its transition out of chaos, Buenos Aires adopted a devalued exchange rate, kept real wages low, froze public sector tariffs and introduced a web of energy, transport and food subsidies. Together this was dubbed a "heterodox" approach, as opposed to the orthodoxy preached by the IMF.

New ways to combat the crisis

Argentina's experience, as that of other countries struggling now, reveals that "in times of crisis, you'll do what's necessary to survive", says Mario Blejer, a former IMF official who headed the Argentine central bank for the turbulent first half of 2002. With governments worldwide seeking creative ways to combat the crisis - such as the US Federal Reserve buying government bonds - the eccentric has almost become the conventional, he adds. "I don't know what is heterodox any more."

Indeed, the Argentine crisis showed that "countries can default and the world doesn't end", says a senior official at one multilateral lender. Ecuador, for instance, defaulted on $3.9bn of debt last year.

But Argentina has failed to move on by creating stable conditions for investment. As countries worldwide seek to emerge from recession, they will face the same challenges to improve competitiveness by boosting infrastructure, education, technology and labour productivity - tests that Argentina has so far failed.

Furthermore, it has settled neither with private creditors, which rejected a debt restructuring in 2005 and whose legal action has barred it from tapping international markets, nor with the Paris Club of western creditor nations. Argentina last year promised to pay off its $6.7bn Paris Club arrears using central bank reserves, but that plan was buried by the international crisis.

Since the default the government has, moreover, clung to the excuse of economic emergency to give it leeway to pursue its policies. That essentially allows Argentina to break contracts if necessary - alienating investors, who class it alongside Venezuela, Ecuador and Bolivia as the "bad boys" of South America.

Living beyond means

The problems are hardly easing. They include higher-than-expected capital flight as savers take dollars abroad, and decelerating tax revenues - which according to Lu s Secco, an analyst, mean Argentina is living way beyond its means. For every peso the state earns in taxes, it is now spending 1.8 pesos, he says.

Mr Caliari adds: "The government cannot rest on its laurels. It needs to be more cautious about spending. Heterodox doesn't mean you can ignore economic realities." The high outlays reflect a pre-election spending spree as Ms Fern ndez fights to retain a majority in Congress on June 28. The mid-term polls are being portrayed by the government as a referendum on its economic model: a choice between more of the high growth Argentines have become used to and a return to the chaos of previous years, when poverty and unemployment soared.

"It isn't important at this stage to have a programme or financial arrangement with the Fund," says Mr Blejer. "But it is important to slowly normalise international financial relations to gain access back to capital markets and improve the flow from other multilaterals."

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