April, 2005
Argentina successfully closed its debt swap and Brazil did not renew the agreement with the International Monetary Fund and is starting to walk alone. Both governments highlight the virtues of their policy strategies. However, not all opinions coincide when it comes to evaluations. Some analysts, social movements and leftist opponents criticize these processes: in Argentina, it is alleged that the only thing done by these means was to legitimise and extend debt maturities; in Brazil, it is believed that the decision of the government did nothing but internalise the agenda of financial institutions.
Argentina
Early in March, the Argentinian government announced the end of the debt swap which had been declared in default in December 2001. The offer gained 76 per cent acceptance, in terms of the face value of bonds included, which supposes a restructure and reduction of the Argentinian debt, in spite of the fact that such debt is still of a considerable volume.
The objectives of the Argentinian government were met in a relatively short period, since the offer was presented on 12 January and creditors had time until 25 February (only six weeks) to join the swap. Since the terms of the offer implied a reduction of over 65 per cent in capital and accumulated interests, they were not the most favourable ones for those creditors that had waited for more than three years for payment.
The extraordinary accumulated unbalance in relative prices during the 1990s made the already swollen public debt to acquire exorbitant dimensions in terms of gross domestic product (GDP) by early 2002, at the time of the formal abandonment of fixed exchange rates, increasing from 53 per cent of GDP in 2001 to almost 150 per cent. From that moment, the Argentinian government started to carry out a debt “pesification” process, which supposed a 37 per cent of the total debt to be converted to pesos.
The swap process comprised the exchange of 152 defaulted bonds for three types of papers issued in euros, yens and pesos, which resulted in the saving of 35 per cent of the amount of the total debt prior to the swap, with the exception of those bonds that did not accept the offer. If measured in terms of Argentinian GDP, from accounting for 113 per cent of GDP, the debt started to account for 82 per cent of it (taking into account the bonds that were not included in the swap).
The operation ended up successfully in spite of the resistance the proposal had arisen among small European savers, and the pressures exerted by their respective governments (represented in the Group of Seven), and by the International Monetary Fund (IMF).
Positive repercussions
Once the results were made known, the Argentinian businesspeople, politicians and bankers showed their support for the government. The press, both local and foreign, was also declared in favour of the process and even the international organizations themselves ended up backing it.
The President of the Inter-American Development Bank (IADB), Enrique Iglesias, not only considered the swap resolution as “positive”, but also pointed out that the delay of the operation due to judicial procedures was “lamentable”, thus referring to the judicial embargo placed by US courts over 7 billion in Argentinian bonds, which has postponed the exchange of old bonds for new bonds.
Even the head of the IMF, Rodrigo Rato, expressed at the meeting of the Institute of International Finance held in Madrid in the last week of March, that Argentina took “a important step”, although he mixed this support by insisting on the need to develop “a realistic strategy” by the Argentinian government, in order to solve the issue of the 24 per cent of bonds that were not included in the swap. On the other hand, the Argentinian government publicly admitted in the IADB Annual Assembly in Tokyo that a negotiation will be carried out with rebel bondholders, which will be dealt with “at due time through other channels”.
Criticism
The broad support awarded to the Argentinian debt-swap, although conditioned upon the above-mentioned negotiation with the bondholders that did not accept the swap, strongly differs from the opinion of some analysts and leftist opponents.
Claudio Katz (economist, professor at the University of Buenos Aires and member of Leftist Economists), states in an article written for “Pronunciamiento Latinoamericano” (dated on 23 February 2005), that “the swap legitimises once again a fraudulent debt, which has already been paid several times”. Likewise, Katz maintains that “the Argentinian liabilities meet the three legal requirements of any ‘odious debt’ since they were arranged without the debtor’s consent, they did not benefit the recipient country and creditors introduced clear irregularities”. These opinions are also shared by leftist politicians and non-governmental organizations that promote the cancellation of debt in poor countries. For Katz, in the first place, it is necessary to define which sector of society is going to bear the burden, and he adds that to accept the lies of the government is as harmful as to declare that there are no other options.
The analyst also states that the institutional decision to suspend the fulfilment of external obligations only affected private interests, which did not prevent Argentina from fulfilling its obligations, punctually and without discounts, with international financial institutions (IFIs – International Monetary Fund, World Bank and Inter-American Development Bank) during the whole period. On the other hand, upon default, the level of indebtedness not only did not fall, but was increased. In December 2001, the debt amounted to 145 billion dollars. To this amount it is necessary to add that which was generated by way of interests (20 billion dollars) and a similar amount with which President Kirchner and Economy Minister Roberto Lavagna compensated the banking system for the “pesification”. As a result of this evolution, the total amount of the debt is 180 billion dollars (mostly contracted with IFIs).
As it is explained by Julio C. Gambina (professor of Political Economy at the School of Law of the National University of Rosario) in an article written for the Latin American Information Agency, the public debt is divided into three parts. The first part is that which is owed to international agencies, which is rigorously paid. The second one is that which was undertaken after the 2001 crisis and which allowed to: a) eliminate provincial currencies; b) centralize and nationalize provincial debts in exchange for fiscal agreements; and c) solve the “corralito” and the “corralón” (freeze on bank accounts) by indebting the whole society to the benefit of banks and savers (investors). This part of the debt is maintained in a regular situation and is paid with budgetary funds thus restricting other necessary social and economic spending or investment. The third part comprises the swapped debt, which is spread out over time until 2046. Although there is a grace period on principal payments of 20 years, the real fact is that interests that will be subtracted from the budget start to become due as of April.
For Gambina, the debt figures clearly evidence the short-term seriousness of the issue. The upcoming maturities of both capital and interests indicate that within this year the figure amounts to 13.5 billion dollars; in 2006, it will amount to 14.9 billion dollars; in 2007, to 13.5 billion, adding some 41.9 billion dollars for the year of the presidential re-election. The total amount over the five-year period reaches 62.5 billion dollars, without taking into account the new loans that could be eventually taken within this period.
In the opinion of some analysts, who criticize the way out chosen by the government, another mechanism could have been selected. According to Gambina, a common way out with other debtor countries and a solidarity campaign could have been promoted, especially against the unpopular IMF. It is true that there was a reduction of the debt, extension of maturities and decrease in interest, but all this was for the sole purpose of making payment possible. Besides, a significant part of the debt mostly issued in dollars and other currencies was converted to pesos (one-third). However, and curiously enough, since the dollar is held steady and/or is falling and the peso is being appraised, the payment of interests is thus increasing its value.
Katz points out that people pay for debt restructuring by bearing the effects of fiscal surplus. Never before had the budget austerity reached neither the 2004 dimensions nor the prospects for 2005. As the tax system regression is held invariable, the surplus is obtained by cutting down spending. In order to fulfil obligations to creditors, the country is forced to perpetuate inequality and socially segmented growth. To celebrate the debt swap as an achievement “in terms of dignity and consensus” while at the same time regretting the social debt in poverty and unemployment the country has been dragging along implies a contradiction of pro-government economists. For most part of the population, to say goodbye to default implies the consolidation of Belindia (a mix of Belgium with India; a term that is used to refer to a country with a prosperous sector surrounded by a sector of huge misery).
Brazil
The announcement made on 28 March by the Economy Minister Antonio Palocci that Brazil will not renew its agreement with the International Monetary Fund, drew praise, criticism and expectation.
The economic fluctuations in Brazil, which are many times the result of external factors, have made space for a close relationship with IFIs. Since 1998, amid the effects of the economic crises in Asia and Russia, Brazil had been turned into a country heavily dependent on aid from multilateral credit institutions. That year, when Fernando Henrique Cardoso was running for re-election against Lula, the IMF – together with the World Bank, the Inter-American Development Bank and the Bank for International Settlements (BIS) – lent Brazil 41 billion dollars, and once the loan arrived, the Brazilian real was devaluated in January 1999.
In 2001, the IMF aided Brazil once again with a 15 billion dollar loan, and in September 2002, when Lula’s victory was drawing near and the international market still feared for the access of the Workers Party (PT) to power, Cardoso’s government negotiated a new loan (42.1 billion dollars). This time, the amount granted was the largest single loan ever extended by the Fund (Brazil only withdrew 26.4 billion dollars). This last credit had been negotiated together with Lula, who thus made a public gesture by accepting foreign aid one month before his victory and by committing himself to fulfil the agreements.
The announcement not to renew the agreement with the Fund does not imply a change in the country’s orthodox economic policy. As it was explained by Palocci, the government will continue to fulfil the IMF’s main demand: to maintain fiscal surplus and save funds to pay off debt interests. The step taken then is justified on account of the evolution of the Brazilian economy within the last two years. In 2004, the GDP growth accounted for 5.2 per cent, the highest growth rate in the last ten years, and analysts maintain that the national economy is less vulnerable to international turbulences, since exports accounted for more than 100 billion dollars in the last twelve months and an unusual surplus was registered in external current accounts. These economic indicators led to the creation of 2 million jobs, a fact that has been highlighted by the government. Last year, Brazil registered a positive trade balance of 33.6 billion dollars and reduced its external debt in 13.6 billion dollars, which in December fell to 201.4 billion dollars, according to official data. In specific terms, this year Brazil has to pay 51.1 billion dollars in interests and short, medium and long term debt amortizations, in which debts of both the public and private sector are included.
Opinions in favour
In this context, the repercussions of the announcement were immediate. In the market, the decision not to renew the agreement caused no concern, but on the contrary it was considered as “a symbol of having reached certain maturity”. According to Zeina Latif, chief analyst of HSBC Investment, “the possibility not to renew was already being discussed since last year, as a way to show that the fulfilment of fiscal goals is something already incorporated into the Brazilian economic administration, and not a mere imposition of the IMF”. Along the same lines were the comments made from the Brazilian Social Democratic Party (PSDB) of former President Cardoso, who confirmed that “in the economic area his party has no major differences with the government; however, when no agreement is reached it is necessary to maintain that which matters, the awareness of the need for a fiscal policy and the fundamental commitments of the country”.
The decision of the Brazilian government was also supported by the workers’ movement, since the Workers Union Confederation (CUT) declared to be against the renewal of the agreement with the IMF, stating that Brazil should preserve the adjustment of public accounts and set the control of inflation as goal.
In an article published in the Uruguayan newspaper “La República”, the journalist Niko Schvarz states that the decision of the Brazilian government represents an expression of political coherence. The same tendency towards sovereignty and independence practised by Brazil with regards to the IMF impregnates its whole foreign policy. From its leading role in the creation of the Group of 20 (G-20) at the heart of the World Trade Organization (WTO), to the reform of the United Nations (UN) and its Security Council; from the creation of the G-3 together with India and South Africa to the meeting with Arab countries to be held in Brazil, in May 2005, until the strengthening of its economic and commercial presence. All of this implies a strategy aimed at creating “a new economic and commercial geography” and a reconfiguration of the correlation of forces at international level.
Criticism
Notwithstanding the above, at the same moment that the resolution was being communicated to the IMF, opinions were also expressed stating that “nothing has happened”.
The opinion of social movements and leftist opponents is contrary to the essence of the announcement, that is to say, to maintaining the economic policy that supposes the fulfilment of commitments undertaken with the Fund. The economic policy is considered to be at the service of the IMF, even without the agreement. According to Marcus Faro, of the Executive Secretariat of Rede Brazil (Brazilian non-governmental organization) “the non-renewal of the agreement in the present situation implies that the government has internalised the agenda of multilateral financial institutions”. Rede Brazil condemns the agreements with the IMF because “they have a huge impact on everyday life in society, since they restrict the state’s investment capability, having negative repercussions on social programmes and national strategic interests”.
According to some analysts, the orthodox economic policy carried out by Lula’s government, shows indicators that in spite of being more than favourable do not manage to be positively reflected in social terms. An example of this is that almost the total number of job posts created earn the minimum wage, barely over one hundred dollars a month.
Joao Sicsú, professor at the Federal University of Rio de Janeiro, in an interview granted to “Correio da Cidadania” expresses that Brazil has an economic team that thinks in the same way as the IMF, thinks about the same ideas, but executes them in a much more intense way. The “Brazilian IMF” is more radical than the “American IMF”. The Fund suggests a primary fiscal surplus of 3.75 per cent to be reached by Brazil and we take it to 4.6 per cent. At the same time, Sicsú mentions Korea’s case, which in 1999 did not renew the agreement with the IMF in order to change the direction of its economic policy and in fact managed to change it. As he states, Brazil is being left free of the IMF in order to be able to implement its policies in a more intense way.
Finally…
From the perspective of the government, it could be said that Argentina, in spite of the challenges ahead (renegotiation with the IMF to refinance the payment of capital and interests maturities in the short and medium term), is staging a return to the international financial system by means of its way out of default. And this was carried out through a strategy developed with a strong margin of national autonomy, since it imposed its own payment terms to external creditors (in terms of maturities, interest rates and the amount of reduction).
Some analysts interpret it as an important political message that should be taken by the international community in the sense that in spite of the fact that the government is willing to fulfil the undertaken commitments, it aims to do so without necessarily accepting any type of payment terms intended to be imposed on the country at the cost of its national growth.
Others, however, do not analyse it in this way and state in turn that the debt swap finally sealed the acknowledgement of a fraudulent debt which should never have been acknowledged. To the fact that it was not possible to arrange better swap terms (the amount of the debt was not reduced, and besides one-third of it was converted to pesos at a time in which the dollar is weakened against the peso, and this within an inflationary context), it should be added that the scene ahead is not one of greater autonomy to face the demands of international financial institutions. The IMF’s demands for a higher fiscal surplus and for a solution to rebel bondholders will have to be considered at the negotiation table at the time of renegotiating next maturities.
This disagreement in analyses, although in another context, is similar to the Brazilian case. From the perspective of the government, the reluctance to sign a new agreement with the IMF is a symptom of institutional strength. This would give Brazil the capacity not to be tied to the conditions that come along with agreements and letters of intent that are signed by borrowing countries with international financial institutions. At the same time, the country could continue to develop its foreign policy, which clearly focuses efforts in becoming not only a regional leader (with regards to its role in MERCOSUR), but also a partner of significant importance in North-South relationships.
From a completely different point of view, voices are heard from those who say that instead of the declared search of autonomy, that which the Brazilian government has done is nothing but internalise the IMF’s agenda. And what is even more serious, that the receipts of the Brazilian government are even more draconian than the conditions imposed by the international financial institutions, which reminds us of the proverb that says that “servants make the worst masters”.
To sum up, the analyses and choices of policies are distributed along a line that ranges from those that propose a strategy based on remaining within the system of international financial institutions and acknowledging the commitments undertaken, although not at any cost but trying to preserve margins of autonomy in internal development policies and in the relationship with the international community, and those strategies that propose to become disengaged from international financial institutions and to set up a parallel agenda, through the creation of alternative financial mechanisms and spaces for negotiation where those countries adversely affected by the current international economic order are to be properly represented.
