Economists probe past, current crises for insights Panelists discuss Argentina, sovereign debt crises

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In early January, thousands of economists traditionally descend on a U.S. city for the annual American Economic Association (AEA) conference. This year, the venue was Washington, D.C., which no doubt prompted the unusually large number of policy-oriented panels on top of the customary wide array of research-oriented panels.Maureen Burke, Asimina Caminis, Jeremy Clift, Elisa Diehl, Sheila Meehan, and Patricia Reynolds highlight several sessions on financial crises and on the outlook for the U.S. economy. Coverage of additional panels will appear in the IMF Survey's next issue.

What has Argentina taught us?Why has Argentina been so hard hit? Was this crisis avoidable? Could the international community have done anything different? And how important is an IMF program to Argentina's recovery? The depth and length of the crisis-and the need to look to the future- provided the impetus for Guillermo Calvo (Inter-American Development Bank),Michael Dooley (Deutschebank), Kristin Forbes (previously with the U.S. Treasury and now at the Massachusetts Institute of Technology), Nouriel Roubini (IMF and New York University), and Randall Kroszner (U.S. Council of Economic Advisers) to examine what went wrong and what it would take to sustain a recovery.

Calvo, Roubini, and Dooley essentially agreed that the severity of Argentina's crisis was due to a combination of fiscal woes, a weak banking system, and political problems. Calvo emphasized that the drying up of financial flows to emerging markets that resulted fromPage 4 East Asia's crisis of 1997-98 caused a sharp depreciation of the equilibrium real exchange rate. The warranted depreciation was larger in relatively closed economies like Argentina that are less able to respond by increasing their exports. Argentina was also more vulnerable because of the level of its debt denominated in U.S. dollars.

In Roubini's view, the severity of Argentina's fiscal problems distinguished it from other emerging markets.

The country was basically insolvent, and this, together with currency, banking, and corporate crises, capital controls, a bank run, a freeze on deposits, and a default on domestic and external debt,made Argentina more vulnerable to financial turmoil and political strife.

Dooley blamed the severity of Argentina's crisis on the government's unwillingness to take any corrective steps. Its choices were to default or devalue, and it did neither, he said, until it was too late. Instead, it raided the banks, introduced capital controls, and redistributed wealth arbitrarily, which led to a complete breakdown of financial intermediation and uncertainty about how the problems would be resolved.

Dooley's prognosis was that recovery in Argentina would be delayed as much as 10 years because of the difficulty of restructuring private sector debt. "Until all losses are allocated," he said, "there will be no economic recovery."

Was the crisis avoidable? Could the international community have done something else? As Forbes noted, none of the panelists suggested that a large bailout could have prevented the crisis. Roubini agreed in part with Dooley that a government could not be forced to default, but he argued that if official financing had been cut off in November or December 2000, even as late as the summer of 2001, Argentina, lacking another source of finance, would have experienced a rollover crisis. It would then have been forced to default and accept the consequences.

By mid- or late 2001, Roubini said, Argentina had reached the point of no return. It was too late for fiscal adjustment, and dollarization, which had been suggested, was a bad idea. Early on, he maintained, if Argentina had resolved its own problems through the private sector, debt restructuring would have been more orderly. But the country did not go that route, and, as a result, the debt restructuring occurred much later and was far more disorderly.

But, Forbes and Kroszner noted, Argentina's situation has begun to stabilize and a recovery-albeit slow-is under way. According to Forbes, output growth in 2003 should be positive; the peso has more or less stabilized following a 70 percent depreciation last year; unemployment has declined by 4 percent since May 2002; bank deposits have stabilized and are starting to increase; and although inflation is high, there is no hyperinflation. Still, Kroszner pointed out, growth needs to be reignited. For that to happen, there must be political stability and less uncertainty about future economic policies.

Forbes and Kroszner agreed that if Argentina wanted a vigorous recovery, IMF support for the economic program would be important. It would improve the chances of a stable environment and signal to foreign direct investors that recovery was starting.

In Forbes's view, if the IMF made more money available to Argentina than the country needed to repay debt, the government would have the incentive to undertake difficult reforms. But Roubini had reservations about Argentina's receiving net new financing.

He noted that the IMF already had a large exposure to the country, the...