And the Money Kept Rolling in (and out): Wall Street, the IMF, and the Bankrupting of Argentina
On January 3 of this year, the long sorry saga of Argentina and the International Monetary Fund (IMF) took an astonishing turn. The Government of Argentina wrote a $9.8 billion check, paying off its debt to the IMF, the deep-pockets global financial institution controlled by rich people in rich countries to lend to rich people in poor ones. The payout comes only four years after a meltdown of Argentina’s economy, when the government defaulted on $141 billion of debt, and roughly 30 percent of the population abruptly plunged into poverty. That year, as capital fled, production in the country virtually ceased and millions lived out the worst imaginable middle class nightmare: First you lose your job, then your savings, then your house … before it’s over you’re bartering your wedding ring on the street. This really happened.
When a disaster of the proportions of the Argentine collapse occurs, economists, politicians and bankers are, whether they like it or not, obliged to play what post-Enron, post-Katrina Republicans refer to derisively as “The Blame Game.” This game is an amusing pastime through which a few unlucky individuals take the fall for the massive corruption of the structure itself and then we revert to doing whatever it was we were doing before this unhappy event occurred.
This game can get complicated, though. For example, you must first stash a few blameworthy candidates behind doors #1, #2, or #3. In the case of the Argentine financial disaster, good candidates for these roles were the IMF, former President Carlos Menem and his cronies (who stole a huge pantload of money), certain gringos, and banks.
Then you have the contestants: columnists, academics, politicians. Sometimes the candidates are also contestants, cleverly attempting to escape blame themselves by blaming each other.
In his aptly titled book And the Money Kept Rolling in (and out): Wall Street, the IMF, and the Bankrupting of Argentina, Paul Blustein proves himself an able Blame Game producer and contestant. His candidates for Argentina blame are limited to three: Behind door #1 is the IMF. These guys are arrogant and hateful; frequently they write impenetrable papers about how to impose “demand restraint” on poor people. They’re good candidates and it’s great fun to tell them off publicly by exposing how they were ‘mistaken’ in the things they did.
Behind door #2 are the Argentine government crooks and hacks of the 1990s: Menem and his wisecracking gang of ministers, many of whom became suddenly wealthy, or went to jail, or both. Also a good choice.
And finally—always a favorite—the Wall Streeters lurk behind door #3. They’re excessively rich and cynical, usually they are gringos, and they believe themselves entitled to absolutely everything.
Gee it’s hard to pick. Through much of Blustein’s book, we go back and forth.
Sometimes it’s the IMF: “Argentina was badly served by the global institutions on which it had come to depend. Nations experiencing reversals of the sort Argentina was experiencing in 2000-2001 should be able to count on the international community for well-designed support to break their falls…”
But then again, the government must have been at fault: “Like a person prone to heart attacks who must maintain a much healthier lifestyle than the average individual to reduce the risk of a fatal seizure, Argentina needed to be ultradisciplined about fiscal matters.” Which it was not.
And don’t forget, “the global financial markets were even more grievously at fault.”
In this version of The Blame Game, Blustein employs a skillful strategy. If you look carefully at the IMF staff and managers, and the government politicians and bureaucrats, and the Wall Street investors and analysts, you will notice that our three possible choices are, in fact, the same people. How about that? Of course, they’re not exactly the same individual people. They’re the same kind of people, and that’s what matters.
The IMF works most closely with the Central Banks and governments in the respective countries, and Central Banks work closely with financial markets. Central Banks also hold public dollars as reserves to back government policies, and Central Bankers are their country’s representatives at the IMF. The staff and management at the IMF are often former Central Bankers. The Executive Directors at the IMF, who approve loans, are Central Bankers. Sometimes managers and Executive Directors at the IMF return to their national Central Banks. Many of these people go to U.S. universities for at least one degree—the University of Chicago, Harvard, and MIT—where they meet each other and learn the same dogma.
This is a fact. For example, the IMF staff member with responsibility for overseeing Argentina and Brazil in 2001 was Teresa Ter-Minassian: Harvard graduate, staff member Central Bank of Italy. On her staff, Jorge Campodónico, former Finance Minister of Peru indicted in absentia for corruption and wanted in Lima.
Then there’s the Deputy Managing Director of the IMF, Agustín Carstens. Ph.D. and M.A. from the University of Chicago, former Deputy Secretary of Finance in Mexico, IMF Executive Director, former official at the Central Bank of Mexico.
During the Argentine collapse, the presiding Finance Minister in Buenos Aires was Domingo Cavallo, a Harvard graduate. Cavallo, after being released from a three-month jail stint in 2002 for presumed complicity in the illegal sale of weapons to Croatia and Ecuador, returned to Harvard to teach in 2003. There, presumably, he is now cranking out the next generation of financial geniuses.
Presenting the IMF, the Argentine government and Wall Street as three different participants in the collapse, as Blustein does, gives the false impression that there were fundamentally differing views involved—that choices were to be made and that those who made them made the wrong ones. Structural reform in this system is therefore unnecessary. Those involved should simply be more thoughtful.
If this is so, what exactly were the choices available to “decision-makers” as the financial house of cards that was the Argentine economy drew closer to collapse? Choice #1 apparently, was to “pull the plug.” The IMF could have refused to lend the government any more money and let the chips fall where they may. And choice #2 was to keep bailing until the collapse happened anyway. Not much of a selection.
Blustein describes a number of other possible strategies, such as a transaction tax on international financial transfers to stem capital flight, or jurisdiction of local courts over the funds of international investors to cool the enthusiasm of speculators eager to cash in on the Argentine bubble. But these kinds of solutions were never seriously considered by any of the possibly blameworthy candidates, despite the fact that they might, at least, have cushioned the blow.
These choices were not adopted because, in the end, there weren’t different views, and the private advisers, as well as the Argentine politicians and businessmen counseling the Executive Directors at the Fund were making enormous amounts of money by deepening the crisis before they addressed it.
A case in point: David Mulford. Mulford had been U.S. Treasury Undersecretary for International Affairs during the administration of the first President Bush, a position that deals closely with IMF policies. Later he joined Credit Suisse First Boston (CSFB), the firm that cashed in on the privatization of Argentina’s oil company in 1993 (a long and interesting story in itself) and became a major underwriter of Argentina’s bonds. While working at Treasury, Mulford had become great pals with Domingo Cavallo. He and Cavallo worked out one last deal as Argentina sank under the weight of its loans in 2001: the megaswap. Under this arrangement, bondholders who were due for a short-term payout on their holdings agreed to wait longer to cash in their bonds, if paid higher interest rates. The deal was a bonanza for CSFB and the other firms that arranged it—they earned $90 million in fees—but it was a bust for Argentina. The swap saved the government about $12 billion in payments due between 2001 and 2005, but cost the country about $66 billion in payments due between 2006 and 2030.
What did the IMF experts have to say about this deal? They had “kind words for it in public,” reports Blustein.
In international finance, the bigger the operation, the more likely it is that the laws the rest of us must obey, can’t reach or restrain it. Domingo Cavallo had this figured out. No only was he the Finance Minister who presided over the collapse, he also held this post under the Argentina military junta, responsible for the murder, torture, and disappearance of more than 30,000 people from 1976 to 1983. In 1982, he was the author of another swap; under his authority the Central Bank assumed responsibility for billions of dollars in private sector debt. Under such a ferocious government, no one could protest even such an obvious theft, and so, in one blow, the foreign debt of Argentina exploded.
Most analyses of Argentina’s fiscal problems begin with the state of the economy in 1984, the year the junta left power. Blustein’s book also begins with this date. But in many ways, 1984 is the beginning of the end of the story. In seven years, while the IMF maintained a cozy relationship with the dictators, while Cavallo enriched his friends and associates, and while the public suffered unprecedented repression, the country’s debt increased tenfold—from $4 billion to $45—with nothing to show for it. When the junta returned to the barracks, the Treasury was empty, the debt already unmanageable, and the economy of Argentina was mortally wounded. It would bleed for 17 more years before it died. And when it died, the only responsible party who lost his job was the unfortunately named IMF staffer, Claudio Loser. The people and the system responsible, the managers of the IMF, the David Mulfords, Domingo Cavallos, Teresa Ter-Minassian and her ilk, were not the ones left out on the street bartering their personal effects in exchange for food and clothing. Quite the contrary. Cavallo went to teach at Harvard, and Mulford was appointed U.S. Ambassador to India in 2004 by President Bush.
Because the origins of unsustainable Argentine debt go back to the dictatorship, many claim that this is odious debt and should not be repaid. The IMF et al contracted with a de facto government that lacked constitutional authority to make national financial commitments on behalf of the public it terrorized. If institutions and individuals who lent to that government can’t be repaid, that’s too bad. Oddly, no one—not a single “expert” at the IMF, on Wall Street, or in the Argentine government—suggested the non-payment option as the Argentine debt grew out of control.
Which brings us to the last Argentine payout to the IMF last month. President Néstor Kirchner presented the payout as a decision to “break the chains” that have held the economy hostage to hostile foreign manipulation by the international financial elite at the IMF. Oh, please. A trail of memos dated last July shows that, in reality, the chains simply tightened a notch through this maneuver. The memos reveal that the early payout using the country’s dollar reserves instead of waiting and paying with incoming government revenues was actually the IMF’s idea. So the President transferred nearly $10 billion in public funds out of the Central Bank of Argentina to the IMF.
The potential consequences of doing this are alarming; chief among them is a possible halt to foreign investment, as the stability of the currency erodes. Later, The Blame Game will begin: Who was responsible for this latest “mistake”? Someone will write a book to determine whether it was the Argentine government or the IMF staff that made the wrong decision and emptied the Central Bank. But something more consequential should really be done.
But once again, just as the country’s economy began to recover, public dollars went rolling out. Something really ought to be done.
Gabriela Bocagrande, who lives in Washington D.C., reports on multilateral malfeasance for the Observer.