Self-help key in new era of financial rescue

As Argentina twists in the economic wind, US and IMF test tough-love policy.

The world's mechanism for patching up financially struggling nations is getting a modest overhaul of its own.

Led by the United States, the West pumped financial aid into Mexico, Asia, and Russia during economic crises of the 1990s. The results were mixed, and in the process, critics say a costly message was sent: If you get yourself into trouble, we're here to bail you out.

That, currently, is not the signal to Argentina, the latest country in crisis.

Argentina last week missed a payment on $141 billion in public debt, signalling the biggest sovereign default in history.

Instead of rushing in to help, America and the International Monetary Fund (IMF) are sitting on their hands.

In one sense, the aloof approach is purely pragmatic. The situation had deteriorated so far that many economists didn't think further loans to Argentina would do any good.

But on another level, it reflects a new policy climate the Bush administration hopes to create for at-risk nations. The goal is a more market-oriented approach that does not automatically bail out bondholders but adds more tough love to the policy toolkit.

"We are getting a smaller, tougher, more effective IMF out of this," says Allan Meltzer, an economist at Carnegie Mellon University in Pittsburgh.

How big a shift?

This doesn't mean the end of financial rescues by the IMF, the multilateral institution tasked with aiding near-insolvent nations. And, given the distinctive circumstances of each case, it is hard to know how bold President Bush's IMF course will be.

But Mr. Meltzer does see a shift that goes beyond rhetoric. Rather than devising detailed economic-reform plans, the IMF is starting to require troubled governments to come up with their own plans - and get these endorsed by their legislatures.

Argentina has been under pressure since mid-December, when the IMF held back a $1.3 billion loan. Some economists argue the IMF should have been tougher far sooner. Several rescue packages failed, and its economic performance was increasingly unable to prop up its currency, the peso.

"Bad policies and bad politics brought Argentina down," says one economist close to the scene. "The IMF was exceedingly understanding."

On Saturday, Argentina's lower house gave preliminary approval to a plan that allows for a major devaluation of the peso. The Senate was expected to pass the measure yesterday. The action comes after 10 years of a one-to-one peg with the US dollar.

Argentina's new government hopes the devaluation, coupled with a debt-reduction scheme to be negotiated, will boost the economy sufficiently to restore prosperity and reduce 20 percent unemployment.

But the devaluation imposes severe hardship on ordinary citizens. To ease the burden, the legislation would allow dollar debts of less than $100,000 to be converted into pesos. In effect, banks would bear the burden of devaluation.

The US, while on the sidelines in Argentina, hasn't made a 180-degree policy turn on the IMF.

The Bush administration allowed massive IMF aid to Turkey earlier this year. In part, this may reflect geopolitics. Turkey is a key Muslim ally, since it permits the US to use air bases on its territory to patrol Iraqi skies.

During the cold war, such geopolitical factors often decided whether the West would come to the financial rescue of failed developing nations, sometimes even those with rapacious regimes.

"He's a crook, but he's our crook," the US said in effect of such past leaders as Mobuto Sese Seko of Zaire and Ferdinand Marcos of the Philippines.

The end of the cold war hasn't ruled out the geopolitical calculus in financial aid. Because of its location and its influence in Afghanistan, an economically weak Pakistan is getting financial aid from the US, despite testing of a nuclear bomb, for example. But other financially desperate nations, such as Ecuador, Romania, and Ukraine, have been left to

seek out their own solutions.

In other cases, aid may be forthcoming if larger impacts on the world economy are at stake.

So far, the Bush response to the various financial crises has been basically pragmatic, tailored to the details of the problems.

Fallout controlled

Economists expect no serious domino effect on other Latin American nations. But with Argentina accounting for one-quarter of external loans to emerging nations, interest rates on such lending have gone up.

With a credible economic plan, Argentina could be welcomed back to the international money markets "before the end of the year," one economist guesses.

But Washington economist Mark Weisbrot sees Argentina as accentuating a grim long-term trend. Latin America and the Caribbean saw per-capita economic output grow only 7 percent during the entire period from 1980 to 2000. He puts much blame for this "remarkable failure" on a powerful "creditors cartel" of the IMF and its industrial nation members.

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