Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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Argentina has found an easy way to keep its reserves from rising

by Brad Setser
July 28, 2005

Pay off the IMF.

Argentina is one of the few countries whose reserves have been growing about as fast as China's.  It just started 2003 with about $10 b in reserves (and a ton of debt), while China started 2003 with about $300 b in reserves and very little debt.

By the end of 2003 Argentina had about $14 b in the bank.
By the end of 2004 it had about $19-20 b in the ban.
Now it has about $25 billion

And yes, Argentina, like China, has an undervalued real exchange rate.  Its central bank is intervening heavily to keep the exchange rate from appreciating, hence the rising reserves.

Argentina's holdout bondholders won't be happy if the IMF gets paid in full and they, well … get nothing.  

Moreover, if Argentina doesn't need the IMF, the IMF won't be able to pressure the Argentines to reopen the deal and offer the holdouts — mostly Italian retail investors — something.   Nor will the IMF be able to push Argentina to reach agreement on a sensible framework for regulating its privatized – and often foreign owned – utilities.

Kirchner (Argentina's President) may be bluffing.  Elections and all.

That's what Rafael de la Fuenta of Paribas thinks:


“We don't want to owe the IMF anymore,'' Kirchner said at a rally in the Buenos Aires province. “Because of our debt, the IMF wants to impose on us the internal and external policies Argentina should follow.''

The pledge by the leader of a country that just restructured more than $100 billion of defaulted debt is rhetoric designed to please voters, said Rafael de la Fuente, senior Latin America economist at BNP Paribas Securities Corp. in New York. The amount owed represents about 10 percent of the nation's gross domestic product, he said.

`It's not realistic,'' de la Fuente said. “They can't come up with that kind of money.''

But with Argentina you never know.

It would be kind of strange if Argentina, which defaulted, ends up paying the IMF back before Turkey, which did not.   Not necessarily good.  Just strange.

This will only increase the IMF's angst about its role in an (over) reserved world.

Afterall, by the end of the year, the world's emerging economies may hold almost $3 trillion in reserves.  The IMF, by comparison, has about $200 billion to lend out.



  • Posted by MTC

    One of the zeitgeists (possible a side-effect of the explosive spread of the democratic ideal from 1985 to 2000) is an increase in the political value of the appearance of autonomy. Politicians from George Bush to Vladimir Putin to Kirshner (and too many others to name) bolster their fortunes by displaying contempt for international norms and regulations. “We don’t need the approval of others; we will do as we see fit,” is the attitude of the great powers once again, and the governments of the less powerful states mimic it.

    Such is the short-sighted but entirely understandable view of a generation of leaders with no memory of the Great Depression (though Argentina has certainly run a fine simulation of the Great Depression) and World War II. For them, the postwar international institutions are sources of trouble rather than bulwarks against even worse troubles.

  • Posted by MatiasGC


    Probably the Administration desires to pay off the IMF and not hear from them again. Not sure about the political repercussions, thou. The idea of transferring that amount of money to an international financing institution with a generalized perception (inside the country) of being the most important culprit of the crisis in 2001…. And this perception, of course, was greatly induced by this same Gov. Right now they are having trouble “selling” the idea of paying off very slowly the debt and are forced to use euphemisms just as “De-borrowing” (desendeudamiento). Because borrowing from the IMF is bad, but paying off, to the economically confused mind of the average Argentinean, is evil.

  • Posted by MC3

    With the due respect, i believe that the average mind is not so economically confused as you think, Matias.
    Just take a look at the millions of people living below the poverty line (less than us$ 250 monthly) and try to put yourself in their pants; this president arrived telling them that the IMF (among other people) was the main responsible of the debacle. Also, the govt has a fiscal surplus record in the history of the country and every day you see great economic numbers in every media, so the guy that is trying to survive with these 250 dollars also has to see every day how the economic growth is going to few pockets, but not to his pocket.
    The people that was confiscated in December 2001 neither is confused; their deposits and savings of a life dissapeared in a night.
    The people knows that borrowing means that the corrupt govt is spending (or directly stealing) too much in things that never go to the people, or the companies does not pay their taxes, so yes, they think that borrowing is bad, because the IMF will put conditions because they know very well with which kind of govt they are dealing.
    But the people is not confused.