The Americas Play 'Deuda Eterna' And Learn All About the IMF
By Mary Anastasia O'Grady. Ms. O'Grady edits the Americas.
Looking for a last-minute gift for that someone special in Russia, Indonesia, Turkey, Mexico or Argentina? How about the new board game "Deuda Eterna" (Eternal Debt)? The Spanish-language Argentine export, which landed on my desk a few weeks ago, carries the provocative subheading: "Who can defeat the IMF?"
More than a game, Deuda Eterna is biting satire designed, no doubt, to comfort a battered Argentine private sector that in recent years has been run into the ground by the International Monetary Fund. On Wednesday Argentine President Fernando de la Rua had to invoke a state of emergency as angry mobs rioted and looted across the country and yesterday he resigned.
Argentine board-game designers are not alone in mocking IMF ineptitude with their gallows humor; it's a global sport. Former U.S. Secretary of State George Schultz a few years back called for shuttering the whole place. Yet the powerful IMF shows no signs of backing down. Quite to the contrary, the fund is now suggesting that it be granted a powerful new role in international finance. In a nutshell, after its own poisonous policy advice leaves an economy in shambles, the fund wants special powers to grant debtor protection from private-sector creditors in a supra-national bankruptcy court. Multilateral institutions like the IMF, of course, would not suffer any interruptions in payments. Markets are rightly horrified.
The Argentine IMF game, a "Monopoly" with a new twist, makes players export entrepreneurs whose "capital is provided by the IMF with all that implies: conditionality, devaluations, etc." Moving around the board players risk a military coup d'etat, IMF conditionality, capital flight and protectionist barriers in northern markets. Players with more than $10,000 in debt must renegotiate, pay interest in advance, and face a currency devaluation.
If nothing else, the game demonstrates a popular Latin American view of the IMF: It lends you money, but with plenty of strings. When you get into trouble, it squeezes you for your last peso and forces a currency devaluation, leaving you poorer.
The fiasco in Argentina follows a string of IMF failures since 1994 -- most notably in Mexico, Indonesia, Russia and Turkey -- where the fund adopted a strategy of bailing out sovereign debtors with huge cash infusions while simultaneously imposing fiscal austerity, or, in local jargon, punitive tax increases. Devaluation was required. Millions of ordinary citizens around the globe have been left destitute from IMF "help" administered over the past seven years.
The devastation that the IMF has left in its wake is so impressive that even the fund itself cannot ignore the results. Fund honchos seem to be concluding that mega-bailouts, once defended as necessary to contain contagion, are helpful mostly to the creditors, who play the game by claiming that the sky will fall if the IMF doesn't pony up. A consensus appears to be emerging that those who lend money to the Third World should accept the risks.
This is progress. Yet judging from the bankruptcy trial balloon, the wrong conclusions are being drawn.
The IMF has yet to even give a nod to the role it played in the Argentine implosion. Argentina's debt-to-gross-domestic-product ratio was not unsustainable in December 1999, when Mr. De la Rua took office. But he promptly increased taxes -- perhaps partly to satisfy his leftist coalition -- and this killed a nascent economic recovery. As government revenues dried up, the combination of Argentine political refusal to downsize the state and hostility toward the free market mixed toxically with IMF insistence on closing the fiscal deficit. Being locked into protectionist Mercosur, the southern cone customs union, made matters even worse. Recession became chronic. If the country's convertibility law had not protected Argentine savings, there is little doubt IMF brain trusts would have forced a painful devaluation by now.
What all this means is that if the IMF is serious about reform it should start by fumigating its 19th Street Washington headquarters to rid the place of devaluationists and third-way economists touting anti-growth remedies. Argentine Economy Minister Domingo Cavallo has tendered his resignation, but who is being held accountable at the IMF?
Instead of reviewing its policy errors, the fund has dreamed up a new ways to distort the markets with its global bankruptcy court idea. Laying out the proposal to the National Economist Club in November, IMF Deputy Managing Director Anne Krueger said, "A formal mechanism for sovereign debt restructuring would allow a country to come to the fund and request a temporary standstill on the repayment of its debt, during which time it would negotiate a rescheduling or restructuring with its creditors, given the fund's consent to that line of attack." In other words, to ensure order and stability, put the IMF in charge. Pardon me, but as another IMF project goes up in flames in Buenos Aires, that's a little hard to swallow.
What Ms. Krueger is after is a way to produce, in the sovereign debt market, the main features of U.S. corporate bankruptcy law: protection from lawsuits and a way to force minority holdouts to cooperate in a restructuring. This is a sensible goal for the private sector. But who needs the fund? There is already a market solution to the problems bankrupt sovereign debtors face and it was used to execute an orderly rescheduling of debt in Ecuador. There, exit consents in the bond contracts allowed a majority that favored a restructuring to alter features of the contracts -- other than payment terms -- such that keeping the old bonds became so unattractive that holdouts gave in.
It is true that the use of exit consents will make lenders more cautious. But markets price for risk. Chapter 11 bankruptcy law has not hurt the high-yield bond market. Instead, the existence of clear non-politicized rules has boosted junk-bond participation.
Sovereign restructuring is often delayed to the point of disaster because admitting a debt crisis has a high political cost. As one debt-restructuring expert puts it "management rarely survives."
But a bigger problem could be the IMF. Says Charles Calomiris, a Columbia Business School professor of finance and economics, "When sovereigns get into trouble the reason we don't have a quick workout is because of IMF discretion and the uncertainty it creates." The IMF's geo-political goals and interventionist ideology often put its policy at odds with the market; investors could hardly be expected to trust it as an arbiter in bankruptcy proceedings.
The objective of Deuda Eterna is for entrepreneurs to "overcome the disadvantages and dispense with the IMF." Argentines lost the last round. Their experience ought to be a lesson to the rest of the world: Dispense with the IMF before it dispenses with you.