O'Neill's Folly: the IMF's recent Argentina bailout is good news for European bankers, bad news for U.S. policy, and a disaster for the Argentinean private sector.

AuthorZoakos, Criton M.
PositionPaul O'Neill

The IMF's new $8 billion bailout makes Argentina's economic problems worse, not better. Nor does the bailout "buy time" for Argentina, as some optimists claim. It buys time only for some of Argentina's major foreign creditors.

The major beneficiaries to emerge from the bailout are the European megabanks that hold about 75 percent of the country's foreign debt. The minor beneficiary is the Argentinean political class, whose policies are ruining the economy. The losers are investors, both domestic and foreign, and the average working Argentine. The net effect of the IMF's bailout is twofold: increased moral hazard and increased austerity. The country has been stripped of any conceivable means for restoring economic growth. Increased moral hazard will be keeping foreign investors away more than ever. Increased austerity is crushing the domestic private sector.

However, there are two badly mistaken arguments that are used to blur this clear picture. The first is the conceit that the austerity will break up the pork barrels of the political class, thereby freeing resources. The second is the pious hope that this will result in an "improved profile of the foreign debt," lower interest rates, and thus open the way to economic growth. None of this will happen. Here's why:

The increased austerity is being used by the present coalition government to wreck the rival pork barrels of the opposition Peronist party, not necessarily to reduce the role of the state for the benefit of the private sector. In fact, the major part of the austerity program is to intensify tax collection from the reeling private sector. As for the hope that lower interest rates will automatically kick-start economic growth: Yes, a restructuring of the debt (even if disguised as "debt profile improvement") could lower interest rates. But if Japan and the entire Asia-Pacific region have taught us anything in the last two years, it is that low interest rates--even zero interest rates--cannot launch a recovery if the problems are structural.

Argentina's structural problem remains intact after the IMF bailout. It is a statist economy mired in protectionism, waste, and inefficiency. Protectionism is promoted by the right wing of the political class, waste by the left wing, and inefficiency by both. At the present moment, the right wing (Cavallo) is struggling to restore the state's solvency, and the left wing (Alfonsin) is fighting equally hard to preserve the state's patronage base...

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