Letter to The Editor: Argentinian Deal Should Prompt IMF to Reform Debt Handling
03/14/2005
Sir, I take issue with some of the conclusions in your article, "Argentina's debt deal leaves it holding a weak hand", (March 9). You state: "Both creditors and debtors now realise that official assistance will not rescue them from the consequences of an insolvency." This was true for Argentina but only because the default in Argentina did not create systemic problems. Indeed, the crisis took so long to materialise there was time for large creditors, at least partially, to write off losses so as not to endanger the solvency of their institutions.
Moreover, given the nature of the rest of the world's trade and financial relations with Argentina, the crisis could not spread to other emerging markets (with the exception of Uruguay, to which the International Monetary Fund and the US provided ample support). International financial institutions and the Group of Seven countries were able to leave Argentina alone because its problems were largely isolated.
None of this means that large IMF/ G7 rescue packages do not pose a moral hazard, nor that the sovereign-debt restructuring mechanism proposed by the IMF is problem-free. However, the Argentine experience does indicate the value of an orderly procedure for sovereign debt restructuring. Looking back over the past four years since the Argentine default, I see a stream of failed negotiations, a huge flight of human capital and broken institutions that will take a long time to rebuild.
The devastating economic and social consequences that followed the default will act as a deterrent to other nations. But this should not detract from the need to clarify the rules of the game in cases of debt repudiation through improved collective action clauses in bond contracts and the establishment of internationally-recognised debt restructuring mechanisms. Most importantly, effective reform depends upon policies being developed that discourage countries from over-borrowing and creditors from over-lending.
The time to reopen discussions on these issues is now, with large foreign capital inflows to emerging markets restored and with no immediate financial crisis in sight. Delaying pre-emptive actions by the IMF/G7 will only leave the international community uncertain about the extent of its support come the next financial turmoil.