<HTML><HTML>And we who favor social development, who support local control over countries' antional economic development, or who are just wary of the IMF should be alarmed why? And should we be more concerned about excluding infrastructure than social spending? Should we be in favor of the idea but only for social spending??? DoreneC In a message dated 4/1/2004 4:29:00 PM Pacific Standard Time, dhenwood@panix.com writes: <BLOCKQUOTE TYPE=CITE style="BORDER-LEFT: #0000ff 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px">Subj: [lbo-talk] IMF under siege! Date: 4/1/2004 4:29:00 PM Pacific Standard Time From: <A HREF="mailto:dhenwood@panix.com">dhenwood@panix.com</A> Reply-to: <A HREF="mailto:lbo-talk@lbo-talk.org">lbo-talk@lbo-talk.org</A> To: <A HREF="mailto:lbo-talk@lbo-talk.org">lbo-talk@lbo-talk.org</A> Sent from the Internet <http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_derosa&sid=aOGWO5LS9bWg> Argentina and Brazil Join Forces to Tame the IMF: David DeRosa March 26 (Bloomberg) -- In yet another affront to the authority of the International Monetary Fund, Argentina and Brazil have agreed to stand as one in future negotiations over loan conditions. The Fund is being eviscerated by two of the very countries it has staked its reputation on when it rescued them from financial collapse. In effect, Brazil and Argentina are acting as if they have an entitlement to borrow billions of dollars from the IMF on terms of their choosing. Earlier this month, Argentina successfully negotiated a $3.1 billion loan disbursement by threatening not to make a loan service payment of the same size to the Fund. The Fund gave in; Argentina made the payment and the Fund promptly agreed to return the billions to Argentina. What Argentina learned from that episode is that the IMF is a low-pain-threshold creditor when it comes to its clients threatening it with default. This happens when the lender of last resort, the IMF, is afraid of its own shadow. Now Argentina is trying to gain a tactical advantage over the IMF by combining forces with Brazil. Seeking Exclusion Brazilian President Luiz Inacio Lula da Silva and Argentine President Nestor Kirchner present their agreement as a means to persuade the IMF to free up cash and bolster growth in their countries, South America's two largest economies. They want the IMF to exclude such projects as road building, power plants and other infrastructure from spending limits tied to IMF financing. Last month Lula had the temerity to hit U.S. President George W. Bush with this idea to exclude infrastructure from the primary surplus. Brazil's $14.8 billion IMF package requires it to maintain a primary surplus, or budget surplus equal to 4.25 percent of gross domestic product. Argentina's $13.3 billion IMF accord requires it to run a primary surplus at least equal to 3 percent of its gross domestic product. That calculation excludes government interest payments on debt. Growth Justification What Lula and Kirchner want is some wiggle room. Brazil's Foreign Minister Celso Amorim, speaking after Lula and Kirchner met in Rio de Janeiro on March 16, summed up the case: ``We emphasize the importance that during the negotiations with the IMF, we jointly defend that the primary surplus takes into account the needs for growth.'' Alberto Fernandez, Kirchner's cabinet chief, said the two countries plan to continue to negotiate debt accords with the IMF separately. Be that as it may, what Brazil and Argentina really want is a license to spend billions of dollars in full view of the IMF under the justification that it's good for growth. Maybe it is, though history shows that large government-sponsored infrastructure projects are riddled with fat, the very thing on which corruption feeds. Another rationalization came from Eduardo Suplicy, a senator from Lula's Workers' Party, who claimed the IMF's conditions ``discourage countries to invest in social programs.'' The reality is that there will be no limit to what some politicians will want to classify as acceptable exceptions to the budget surplus rule. Any excuse will do, growth, social programs, you name it. Debtors United It should alarm the IMF that two of its biggest client states think they can join together to fight for a redefinition of the terms of their loan packages. Whether the new partnership gives the combination of Brazil and Argentina actual power over the IMF is uncertain. Yet the symbolism speaks of how little respect either country has for the Fund. What's next? Perhaps a union of Latin American IMF clients? So if Uruguay, for example, needs a loan, the Fund has to sit down with several nations, such as Brazil and Argentina, to work out the terms? Or maybe all the emerging markets nations will band together, and the IMF will have to check with all of them before it can work out a loan package with economic conditions. The very concept of debtor nations combining forces against the Fund is completely antithetical to the IMF having a role in straightening out the financial and economic affairs of bankrupt countries. Before this goes any further, the IMF should put Brazil and Argentina in their respective places. If it doesn't begin to assert authority now, it never may get the chance to do so down the road. -- David DeRosa , president of DeRosa Research &Trading, is an adjunct finance professor at the Yale School of Management and the author of "In Defense of Free Capital Markets." The opinions expressed are his own. To contact the writer of this column: David DeRosa in New Canaan, Connecticut, at  dderosa@bloomberg.net. ___________________________________ http://mailman.lbo-talk.org/mailman/listinfo/lbo-talk </BLOCKQUOTE> </HTML>