[Senate Hearing 107-]
[From the U.S. Government Publishing Office]
S. Hrg. 107 - 929
ARGENTINA'S ECONOMIC CRISIS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
INTERNATIONAL TRADE AND FINANCE
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ON
THE CAUSES OF ARGENTINA'S POLITICAL AND ECONOMIC UPHEAVAL, AND THE
POLICY CHANGES NECESSARY TO CORRECT THOSE PROBLEMS; WHETHER THE
ADMINISTRATION AND THE INTERNATIONAL MONETARY FUND HAVE RESPONDED
CORRECTLY; AND A REVIEW OF ARGENTINA'S FINANCIAL CRISIS ON UNITED
STATES BUSINESSES
__________
FEBRUARY 28, 2002
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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WASHINGTON : 2003
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Martin J. Gruenberg, Senior Counsel
Thomas Loo, Republican Senior Economist
Amy F. Dunathan, Republican Senior Professional Staff Member
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
______
Subcommittee on International Trade and Finance
EVAN BAYH, Indiana, Chairman
CHUCK HAGEL, Nebraska, Ranking Member
ZELL MILLER, Georgia MICHAEL B. ENZI, Wyoming
TIM JOHNSON, South Dakota MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii
Catherine Cruz Wojtasik, Staff Director
Daniel M. Archer, Republican Staff Director
(ii)
?
C O N T E N T S
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THURSDAY, FEBRUARY 28, 2002
Page
Opening statement of Senator Bayh................................ 1
Opening statements, comments, or prepared statements of:
Senator Hagel................................................ 3
Prepared statement....................................... 31
Senator Miller............................................... 4
WITNESSES
John B. Taylor, Under Secretary for International Affairs, U.S.
Department of the Treasury..................................... 4
Prepared statement........................................... 31
Michael Mussa, Senior Fellow, Institute for International
Economics...................................................... 14
Prepared statement........................................... 34
Response to written question of Senator Johnson.............. 39
Peter Hakim, President, Inter-American Dialogue.................. 16
Prepared statement........................................... 35
William J. Haener, President and Chief Executive Officer, CMS Gas
Transmission Company........................................... 18
Prepared statement........................................... 36
Additional Material Supplied for the Record
Crying With Argentina by Paul Krugman, dated January 1, 2002..... 40
Chronology of Events by J.F. Hornbeck............................ 41
(iii)
ARGENTINA'S ECONOMIC CRISIS
----------
THURSDAY, FEBRUARY 28, 2002
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on International Trade and Finance,
Washington, DC.
The Subcommittee met at 2:30 p.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Evan Bayh (Chairman of
the Subcommittee) presiding.
OPENING STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Thank you all for coming. I am pleased to
call this meeting of the Subcommittee on International Trade
and Finance to order.
I would like to say that Senator Hagel is on his way, my
Ranking Member. I want to thank him for his interest in this
issue. We have a good bipartisan relationship and a good
working relationship here in the Subcommittee, so I am grateful
to him. We will afford him the opportunity to make his opening
comments when he arrives. The same thing for any other Members
of the Subcommittee who may appear.
I want to thank our witnesses for being with us today. I
know that you are very busy and there are many other things you
could be doing. So, I appreciate your taking the time to be
with us today.
Also to members of the public, and members of the press who
are here with us to inform the public, this is an important
topic affecting not only Argentina, but also the rest of Latin
America and significant United States interests, as well.
Today's hearing will explore the causes of Argentina's
economic and financial disintegration, the consequences for
United States businesses in our economy, as well as the
consequences, economic and otherwise, for other South American
nations. We will also explore what can be done to stabilize the
situation on a sustainable basis. And the role of the Breton
Woods Institutions and the U.S. Government, if any, in
addressing the current crisis.
We have here with us today four distinguished witnesses. We
are going to begin with John Taylor.
John, thank you for being with us, once again I should say.
John is the Under Secretary of the Treasury for International
Affairs. He will be our first witness and will explain the Bush
Administration's policy towards Argentina.
I am going to just introduce the other three witnesses
briefly and make some opening comments, and then turn to you.
With us is Dr. Michael Mussa. I hope that I have pronounced
that correctly. He is a Former Chief Economist at the
International Monetary Fund, and currently a Senior Fellow at
the Institute for International Economics. He will comment on
the IMF's handling of Argentina, and the Fund's effectiveness
in dealing with economic crises like the one confronting that
country.
In additon, we have Peter Hakim, who is President of the
Inter-American Dialogue. Peter will provide testimony on the
causes of Argentina's crisis, the potential for political
contagion, and the implications of the Argentine situation for
the rest of the emerging market world.
Last--but by no means, least--we have William Haener,
President and CEO of CMS Gas Transmission Company. This company
is one of the most significant American investors in Argentina.
Mr. Haener will give us the American business sector
perspective on Argentina's economic crisis.
I want to thank you all for being with us today.
A few brief comments of my own, and then Mr. Taylor, we
will turn to you.
Argentina is the third most populous nation in South
America. It historically has among the highest standards of
living in that Continent. Over the last decade, Argentina has
received substantial foreign financial assistance. Total
external debt now stands at $128.5 billion. This includes $23
billion in loans from U.S. financial institutions, and $14.5
billion in direct foreign investment from U.S.-owned companies.
The International Monetary Fund has provided $22 billion in
assistance during the last several years. And the World Bank
has provided $8.6 billion of assistance in the last several
years. So the external financial support has been significant
in recent years.
Yet, today Argentina is in a precarious state. Its economy
is at a virtual standstill. It has defaulted on its external
debt. Its currency value has been cut virtually in half, and
political turmoil and social unrest are pervasive.
Many have suggested that this crisis was precipitated by
several factors. Among other things, chronic prolifigate
government spending at both the state and local levels; a
fiscal relationship between the central government and the
states which encourages unsustainable fiscal policies by the
latter, with consequences disastrous for the former; an
inefficient tax collections system--it is my understanding that
roughly one-half of taxes owed are actually paid in Argentina--
a formerly overvalued currency, and unsustainable borrowing to
cover deficits which created crushing interest payments with
consequences that are now obvious.
If possible, some of the recent attempts to address the
situation have given cause for even greater pessimism.
Decisions undermining the sanctity of Argentine contracts, the
rule of law, and the fairness of the bankruptcy provisions make
new foreign direct investment or private sector loans highly
problematic.
A recent surge in the money supply suggests attempts to
monetize the debt, and a possible return to hyperinflation. The
past pledges of reform have been announced, but not implemented
and therefore have been of little consequence, except to
undermine the credibility of future pronouncements. For
example, the Fiscal Responsibility Act of September 1999, and
the Zero Deficit Law of July 2001, are examples of such past
pronouncements of promised restructuring of the relationship
between the central government and the states addressing the
fiscal situation of both that were announced and yet not
implemented to any significant degree.
I want to emphasize that no one likes this situation. No
one benefits from the misery and impoverishment of a great
nation.
It has been suggested by some, that unless we find a way to
usher in and implement--and I want to underline ``implement''--
true sustainable reform, that virulent anti-Americanism,
protectionism, and threats to Argentina's democracy, may be in
store. Obviously, we do not want that. It is not in America's
interest, Latin America's interest, or anyone's interest. But
it raises the question, and in some ways the conundrum of
``what can be done?''
I am personally inclined toward engagement. I have always
favored something that Larry Sommers once said about the
forward defense of America's economic interests through
proactive policies. And indeed, America and the multilateral
institutions that we support, have played a constructive role
in the past and stand ready to do so again.
But given the past record of Argentina's failure to reform,
substantial skepticism is warranted. Reforms must be
sustainable, and implemented, not just announced. Otherwise,
further assistance will merely perpetuate the disastrous
policies which have lead us to this crisis and, in so doing,
postpone the day of genuine recovery for the Argentine people
and others with an interest in that great country.
I look forward to hearing from my colleague, Senator Hagel,
and from our witnesses, as we explore what the ramifications of
this situation are and what can be done to improve the current
state of affairs.
Having said that, Senator Hagel, I would like to welcome
you. I said before you arrived, I have appreciated our close
personal friendship and good working relationship on this
Subcommittee, and I want to thank you again today for your
interest in this subject and helping us put the hearing
together and would welcome an opening statement.
COMMENTS OF SENATOR CHUCK HAGEL
Senator Hagel. Mr. Chairman, thank you. I am appreciative,
I think as we all are, that you would focus on this. This is an
appropriate area not just of jurisdiction but of interest and
responsibility of this Committee, the Congress, and our
country.
So, thank you.
I have a brief statement that I would ask to be inserted
into the record, Mr. Chairman.
Senator Bayh. By all means.
Senator Hagel. And I look forward to hearing from our
distinguished witnesses.
Mr. Secretary, welcome.
Secretary Taylor. Thank you.
Senator Hagel. Thank you.
Mr. Chairman, thank you.
Senator Bayh. That was commendably brief, Senator.
[Laughter.]
You set a standard to which all of us can aspire. But thank
you, Chuck.
John, before I introduce you, our friend and colleague,
Senator Miller has just arrived. Zell, thank you for your
interest in this subject. I would give you at this time the
opportunity to make an opening statement if you are interested
in doing that.
COMMENT OF SENATOR ZELL MILLER
Senator Miller. I think we would get more out of listening
to Mr. Taylor, but thank you.
Senator Bayh. You even did better than Chuck.
[Laughter.]
We have a healthy bidding going on here. This is going to
help us all.
Thank you, Senator Miller.
Senator Hagel. Well, if we have one more come in, it will
be two seconds.
[Laughter.]
Senator Bayh. I was going to say, he may just say ``ditto''
and turn it over.
John B. Taylor, as I mentioned, is the Under Secretary of
the Treasury for International Affairs. As Under Secretary, Mr.
Taylor serves as the principal advisor to the Secretary of the
Treasury on international economic and financial issues. He
heads the development and implementation of policies in the
areas of international finance, trade, investment, economic
development, international debt, and the U.S. participation in
the International Monetary Fund, the World Bank, the Inter-
American Development Bank, and several other institutions.
Mr. Taylor has extensive previous Government experience, as
well as an extensive background in academia.
John, we welcome you again and we look forward to
benefiting from your testimony. Thank you for joining us.
STATEMENT OF JOHN B. TAYLOR
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
U.S. DEPARTMENT OF THE TREASURY
Secretary Taylor. Thank you very much, Mr. Chairman,
Senator Hagel, and Senator Miller for putting this hearing
together and for inviting me to testify. It is a very important
subject, as you indicated in your opening remarks.
I want to begin by saying that I agree with you, the people
of Argentina are facing very difficult times right now.
President Bush has made it clear on a number of occasions that
Argentina is a close friend and an ally, and that we want the
Argentine economy to grow. We want it to become an engine of
growth for its people and for the whole hemisphere.
My written testimony covers events in Argentina during the
1990's leading up to the current time, as well as the recent
IMF program and recent United States policy.
I would like to submit that written testimony for the
record and highlight a few issues, if I might.
Senator Bayh. Without objection.
Secretary Taylor. To begin to understand the current
situation, I think it is actually helpful to go back to the
early 1990's when the government of Argentina undertook a
series of very impressive economic reforms. These reforms had
to do with monetary policy, fiscal policy, international trade,
and regulation. Perhaps the most dramatic one was the monetary
policy change which enabled the inflation rate in Argentina to
come down from over 3,000 percent a year, to nearly zero.
Fiscal policy was also brought under better control. A
significant privatization program was started which drew many
foreign investors into Argentina. Moreover, a number of
international trade barriers were reduced.
Not only did these reforms bring about a much lower and
more benign inflation rate, they increased economic growth.
Economic growth in the 1980's in Argentina was near zero, and
it rose to over 4 percent in the early 1990's. I would also
note, looking at the components of GDP, that investment and
exports grew particularly rapidly during this period. So those
economic reforms did some real good. They were intended to be
market oriented, and as I indicated the results were
impressive.
However, in the late 1990's a number of policy setbacks and
external shocks sharply reduced the economic growth rate in
Argentina, and ultimately lead to the financial crisis that we
are talking about today.
If you look closely at the spending numbers and the debt
numbers, and the deficit numbers, it is clear that the debt
began to grow more rapidly, raising concerns about
sustainability. Risk premia started to increase; and of course
that caused interest rates to rise, slowing economic growth
even further.
This was compounded by a persistent deflation. Prices
actually fell for a number of years in a row. With depreciating
currencies in Europe and Brazil, it raised competitiveness
problems in Argentina as well.
I also think it is important to note that persistent
expectations of depreciation of the peso during this period
tended to raise interest rates in Argentina to levels higher
than they would be elsewhere. In particular, higher on peso
loans than on dollar loans.
As we move toward the end of last year, it became clear
that
efforts to deal with these problems through the budget were not
working. People increasingly viewed the government's debt as
unsustainable, and in November of last year in fact the
government announced that it wanted to restructure the debt.
As that restructuring was underway, uncertainty about its
impact on the banks holding that debt began to lead to large
deposit withdrawals. To stop those withdrawals, the government
imposed restrictions on the ability of people to withdraw their
deposits from banks. That occurred first in December. After
those restrictions were imposed, significant social and
political protests took place. They turned violent, and the
President at that time, President de la Rua, resigned.
As we move to the present, it is clear that those
restrictions, and a number of other things, have caused
economic circumstances in Argentina to deteriorate. With
restrictions on deposits, the payment system does not function
as it normally does, and it creates great shortages of
liquidity compounding the problems as we have seen in the last
few months.
Argentina is beginning to remove these restrictions; and
just
recently, it was made possible for people to withdraw the full
monthly salary of their payments, for example, the full monthly
salary from the banks. But ultimately, it is going to be up to
the government of Argentina, as you have indicated, Mr.
Chairman, to find ways to make economic growth more
sustainable, and to make the policies that do that. Indeed, the
implementation of the policies is very important.
We have been in very close contact in the United States
Government with the economic team in Argentina. In fact, there
have been contacts at all levels. We are following closely what
they are doing. The Economics Minister visited Washington on
February 12, and met with Secretary O'Neill. A good set of
meetings. They also met with the International Monetary Fund at
that time.
We are encouraged with the steps that Argentina is taking
to deal with these problems, and as you indicated in your
opening
remarks, Mr. Chairman, in the last few days they proceeded to
negotiate and establish an agreement with the Providences that
has the goal of making the budget more sustainable and
ultimately economic policy more sustainable.
So let me leave it right there, Mr. Chairman. I would be
happy to answer any questions you or your colleagues may have.
Senator Bayh. Thank you very much, Secretary Taylor.
Let me begin where you ended up by the pronouncement
yesterday of the new agreement with the Providences. As I
understand it, it would call on the provincial governments to
reduce their deficits by around 60 percent, and that the
central government would absorb the outstanding debt of the
local providences.
Having been a governor, I can tell you, cutting a deficit
by 60 percent is a hard thing to do. And so since it is my job
to ask the hard questions, we had a program along these lines
announced in September 1999, the Fiscal Responsibility Law,
which promised restructuring and more fiscal restraint. We had
another zero deficit law enacted in July 2001.
What would give you reason to believe that this
pronouncement would be any more successful in actually being
implemented than its predecessors, given the political
difficulty at the state level of actually carrying this
through?
Secretary Taylor. With respect to the first part of the
question, on the 60 percent reduction, part of the agreement
also has, as you say, the national government dealing with the
debt of the provincial governments, and that reduces the
interest payments and therefore has an impact on expenditures
in that way. So that will be part of the way in which the goals
of deficit reduction are reached. Although, you are quite right
that is a large reduction.
With respect to implementation, I think with all of the
efforts to move policy reforms through, there are steps that
countries must take. This is an agreement which involved
signatures, agreements that are written, ultimately as I
understand it, and of course the information is still very
fresh, there will be legislation needed, and there will be more
documents put into place. But I think the good thing here is
that there is a start on dealing with an issue which the
government of Argentina itself has recognized as important to
deal with, and so the efforts in the last few days are showing
that there is progress.
You are correct though, Mr. Chairman, to emphasize
implementation with respect to all changes in economic policy.
Senator Bayh. So, you are encouraged by the effort, but it
is fair to say that signatures and documents and even
enactments are one thing, however, what really matters is the
implementation of those steps.
Secretary Taylor. Yes, sir.
Senator Bayh. What about the recent reports that the money
supply has been increasing? Is that troubling to you given the
past record of hyperinflation in Argentina? Is there a possible
attempt to monetize the way out of this problem?
Secretary Taylor. I do not see that. I certainly hope that
that is not the case.
The central bank has made it very clear that they want to
limit the amount of money creation. The central bank governor
who was actually just officially confirmed yesterday in his
job, unanimously I understand, is taking efforts to keep the
money growth low and consistent with price stability,
eventually.
So at this point in time, it seems to me that they have
been very clear about the monetary side of the program and
intend to limit the growth of money--certainly to prevent the
kind of hyperinflation that occurred in the past.
As I indicated in my opening remarks, one of the really
great successes in Argentina in the early 1990's was to end
that hyperinflation. I think that has been one of the most
popular things in Argentina during the 1990's, to get rid of
that inflation. It was very popular.
Senator Bayh. If I could put one thing on your radar
screen.
Secretary Taylor. Yes.
Senator Bayh. I was referring to a report, dated February
26. George, I hope I am pronouncing his name correctly,
Tedesco, the Deputy Minister for the Economy, said, to use his
term, ``emissions from the central bank'' were responsible for
what he called, a sharp increase in the money circulation. And
so that caught my attention, given the history of the
situation.
Secretary Taylor. Certainly. If you look at the money
statistics, there are going to be movements up and down. And
remember, I think it is also important to keep in mind that
during the last year and a half, the money statistics in
Argentina have been coming down, down. That is that liquidity
problem we referred to at the beginning. It is one of the
reasons that they have had deflation.
So an increase in liquidity in Argentina is important to
take place. That is how you get some growth again. The
important thing is to have that increase in liquidity
associated with keeping inflation in check, and I see no
evidence that the central bank has not kept that in mind with
respect to any money supply increases that are being reported.
Senator Bayh. Well, that is reassuring. This report went on
to say that the central bank had already injected at least 1.3
billion pesos into the economy this month alone, and that it
had already printed nearly three-quarters of the two-and-a-half
billion pesos that it said would be its limit for the year.
That is what caught my attention, but I am glad to see you are
focusing on this, and if you are reassured, I am reassured.
Secretary Taylor. It is a good fraction of the total amount
for the year, that is for sure. That does not mean that the
amount for the year is going to be exceeded; and it does not
mean that that increase in liquidity at this time is improper.
Senator Bayh. Thank you, Mr. Secretary.
My time has expired.
Senator Hagel.
Senator Hagel. Mr. Chairman, thank you.
You mentioned, Mr. Secretary, in your overview a number of
factors that led to this crisis in Argentina. And you
referenced, of course as always, one of the consequences of
exports' trade, and I would be interested in getting your sense
of what you think this current crisis in Argentina may have on
the Mercusor Free Trade Agreement that we are trying to work
our way along in the general universe of trade agreements and
trade for not just Argentina but Latin America and how it
affects us.
Secretary Taylor. Well, I think it is very important that
we do move ahead on these trade agreements. The events in
Argentina, as I look at them, they indicate the importance of
having policies that keep both strong. And free trade policies
will do that.
Throughout the 1990's, as trade barriers were removed in
Argentina, exports grew very rapidly and that benefited the
economy. It was not until the last few years that things
started to be difficult for economic growth.
If you look at the data carefully, you see there are
benefits to Argentina, and any country for that matter, for
greater opening of markets and reduction of trade barriers. So
that is the objective and the facts.
I think your question also may raise the idea that the
crisis itself, perhaps making people question certain types of
policies, will make them question free trade agreements. There
is no reason for that kind of questioning to occur. As I think
I tried to indicate in my opening remarks, it was the opening
in the market oriented policies that led to strong growth in
Argentina. And it was moving back from some of those, some of
the fiscal discipline, that led to the problems.
The message I see, and I hope the message that is received
by everyone looking carefully, is that this is a reason to try
to have more free trade agreements so that you can establish
the conditions for strong economic growth.
Senator Hagel. Do you know if that is an area the Secretary
touched upon in his meetings earlier this month?
Secretary Taylor. He has always touched on the importance
of open markets and free trade. I cannot report on exactly what
has taken place in any particular meeting, but I would say that
in many discussions that we have had over the months since we
have been here, with Argentina--and again in other countries--
the idea of free trade, promoting trade, open markets, comes up
so much because it is so important, it would be very strange to
have a meeting on economic policy or a discussion without
talking about the importance of this.
Senator Hagel. But I mean specific issues related to
Argentina. I know we all support free trade--fair trade.
Secretary Taylor. Just one example I guess I would give is:
Last August there was a particular effort to have some trade
talks in Argentina, and USTR conducted some trade talks at the
subcabinet level that involved Argentina and the other Mercusor
countries along with the United States, of course, as a
possibility for moving toward these free trade agreements. So
that is an example of what took place. But with respect to very
recent meetings with the Secretary, I cannot really speak to
that.
Senator Hagel. Thank you.
Do you know what we are doing, if we are doing anything, in
regard to stressing the importance of the convertibility of
currency for the free currency convertibility in Argentina?
Secretary Taylor. What we have indicated is that it is
important to have a unified exchange rate in that sense of
convertibility. And Argentina has moved since the start of this
year toward a more unified exchange rate.
The word ``convertibility'' sometimes conveys the idea of
the convertibility law that was in place in Argentina starting
in the early 1990's. That has a somewhat different meaning and
refers to that one-to-one peso peg, and the currency award that
was in place.
They now have decided to have a floating exchange rate, a
flexible exchange rate, and that coupled with the good control
on money that Senator Bayh asked about, will lead to low
inflation just like the Convertibility Law did.
Senator Hagel. And we continue to stress that point with
them?
Secretary Taylor. Stressing the importance of price
stability and low inflation, certainly.
Senator Hagel. Thank you.
Senator Bayh. Thank you, Senator Hagel.
Senator Miller.
Senator Miller. Mr. Secretary, I would like to get your
thoughts on the future of foreign-owned banks in Argentina. We
know that a number of them, like Citibank and Morgan and Chase
have had to shoulder some losses after the peso devaluation. We
know about the protests in Buenos Aires against foreign-owned
banks. What is the situation there? Is there a possibility that
some U.S. banks just simply write off their losses, and
withdraw? What do you see the future to be?
Secretary Taylor. Well, we have been in close contact with
a lot of foreign banks in Argentina, and have had a lot of
discussions, and they have a difficult time in the current
situation with the revaluation of the currency and the other
problems with the economy. The economy is not growing and it is
tough to do business in that situation.
I cannot help but ultimately be optimistic though. This is
a country with so much potential. It opened up its financial
sectors in a way that ultimately will pay off and be very
healthy. But right now there are some restructurings that have
to take place. There is some revaluations. That means that the
banks and others who are creditors, will have to make some
adjustments.
We have always emphasized that that should be fair. Treat
people fair whether they are foreign or domestic regardless of
what country the investment is coming from. But I think once
Argentina is able to get over these payments' problems and
restructuring problems, that the future will be good.
Senator Miller. What about U.S. exports? What do I tell my
Georgia computer and electronics companies that are our State's
leading exporters to Argentina. What should I say to them about
what to expect in the next few months?
Secretary Taylor. The next few months are going to be
difficult, as the last few months have been, but I think we see
some signs for improvement. And there are still a lot of
unresolved questions which people in Argentina are asking us
all the time about how the debt will be restructured. How will
payments be made? But again I do not know exactly what the
business is that you might be discussing something with.
Different businesses are faring in different ways. The
exchange rate change itself has caused these revaluations which
affected different businesses in different ways.
So, I would say in terms of talking to your exporters from
your State to ask them to be patient. Ask them to demand fair
treatment. Remind them that there is an investment treaty in
place, a bilateral investment treaty in place, if it is a
foreign investment issue, and to be in touch with people like
me, and others in the U.S. Government.
Senator Miller. Thank you.
Senator Bayh. Mr. Secretary, we are going to have a second
round. I have three more questions, and then that exhausts my
questions for you today.
Let me say that I am delighted to hear of your optimism.
I am reminded of something that a well-known economist,
Lester Thoreau from MIT, I saw a speech that he gave back in
the early 1980's when there was a lot of pessimism about the
U.S. economic situation, and he was asked his general state of
mind about the U.S. economy. He described himself as an
``intellectual pessimist but an emotional optimist.'' The more
he analyzed the problems, the more it was hard to see how they
would be resolved, but he just knew they would be. And
hopefully that will be the case here with Argentina, as well.
I am glad to hear about your optimism. Can you tell us a
little bit about your meetings with the new Minister of
Economics? There were some suggestions in the press that the
figure of $22 to $23 billion of additional IMF assistance was
just floated. If true, can you give us any idea of how that
figure was derived?
Secretary Taylor. No, I cannot give you any idea of how
that figure was derived. I personally have not been given----
Senator Bayh. It appeared in the press.
Secretary Taylor. --figures like that. Perhaps it appeared
in the press. When Minister Rems Lenicov came to the United
States, it was a very good meeting. He met with Secretary
O'Neill. He met with the IMF. But the particular numbers you
are talking about here are just in the newspaper as far as I
know.
Senator Bayh. So, you do not believe everything you read in
the press?
[Laughter.]
I do not expect you to comment on that, Mr. Secretary.
I have two other questions. First, in the interests of
fairness let me present the other side of the fiscal argument.
I read with interest the other evening a paper by I think the
Harvard economist Jeffrey Sachs--you may be familiar with this
distinguished gentleman. Let me just quote from his paper. He
says: ``Contrary to that widespread view''--which I
incorporated in my opening statement about fiscal problems
being one of the root causes of the current crisis--
``Argentina's public sector is not grotesquely bloated or
wasteful. For a country of Argentina's GDP, the share of
government consumption, Federal Government expenditures, and
total government expenditure is actually at the low end.''
I read this with some surprise. Do you have a reaction to
the professor's statement about Argentina's public sector being
actually fairly modest in size for a country of that GDP? I had
always heard to the contrary.
Secretary Taylor. Yes. The measures of spending as a share
of GDP are exactly what is indicated there. What is needed in
terms of the budget is making the expenditures come in line
with the revenues. There are all sorts of decisions a country
can make about expenditures, of course, but the important thing
here is to get things in line.
Senator Bayh. So if the government is modest in size but
the revenues are even more modest, that is the problem?
Secretary Taylor. Yes.
Senator Bayh. Very good. I intend to contact the professor
at some point, and I will ask him how he arrived at this.
Let me just offer my own opinion. If so, then possibly we
face as much of a political difficulty as an economic or fiscal
one. The decisions to redress the fiscal imbalance are very
difficult, and that requires real political fortitude. Perhaps
that is one of the major problems that we face in this
circumstance. Would you care to comment on that observation?
Secretary Taylor. I agree. In a way, the economic goals, or
the economic policies are straightforward. They have worked in
other countries that have adopted them. That is, a monetary
policy to have a low inflation; a fiscal policy that keeps the
revenues in line with expenditures and keeps the debt from
becoming unsustainable; a trade policy which is oriented to its
open markets; a regulatory policy with low regulation and
privatization activities.
So those are all easy things to say. But, Senator, as you
indicate, getting those through a political system is sometimes
very difficult. I think you are seeing that in Argentina right
now.
And maybe just a comment on your reference to my optimism,
I see in a way the gains that can be achieved by getting the
right policies. I am just an optimist because I see eventually
people will realize that and will find a way to get these
things through the political system.
But I recognize, and as my realism comes into play for just
the reasons you indicate, that it is difficult politically to
do. But as I indicated, we had a good visit from Minister Rems
Lenicov, and he had a good meeting with Secretary O'Neill. He
knows the things that need to be done, and that is the reason
we can be optimistic.
Senator Bayh. I am glad to hear it. Thank you, Mr.
Secretary.
Senator Hagel, other questions?
Senator Hagel. Yes, Mr. Chairman, thank you.
Mr. Secretary, are we doing anything to encourage the
Argentine government to amend its recent law which allows for
nonpayment to creditors of up to 6 months? Even though it is my
understanding that those companies may have that capital, but
they have that 6 month period. We, as you know, have American
corporations who have provided services and goods and who are
affected by this. I would be interested in your thoughts on
what we are doing or not doing about that.
Secretary Taylor. We are making every effort to find out
about issues like that. Then when we find out about them, to
convey our concerns to Argentina, to the relevant authorities.
There are a number of things that have occurred like the
one you are mentioning as part of this effort to reconcile the
gaps that have occurred because of the revaluation of the
currency.
It is very difficult. Someone, in general, has to make some
adjustments to that. It should be fair in a sense that not one
party, creditors or debtors, should take the large bulk of
that. It should be done in a way that is fair and that will get
things back on course again. So, we have expressed the views
very strongly. It is a very high priority for us that this
adjustment be done fairly and even-handedly.
Senator Hagel. You, I note from your written testimony,
started to get into the current IMF negotiations, and the
Chairman asked you a question about it. Would you care to just
give us a quick
status on those IMF negotiations and how we feel they are
going, and if they are going in the right direction?
Secretary Taylor. I think they are going in the right
direction. The economic team came up and met with the IMF on
February 12. They exchanged information about the situation.
Once the economic team went back to Argentina, they have
been in touch with the IMF and the IMF has been very clear
about the nature of the things that would be required for
sustainability. Sustainability is essential for an IMF program.
As Chairman Bayh indicated, you cannot lend into unsustainable
situations. You have to lend into sustainable situations.
I think the IMF is in good discussions with Argentina and
we, as shareholders in the IMF, keep in close contact and try
to track what is happening, and I think it is going well. I am
not sure when the next formal interaction such as a mission
will take place, but I hope it is very soon.
Senator Hagel. So generally you were of the opinion that
what is happening in those negotiations and the IMF's
participation is helpful and productive and they are doing the
right thing?
Secretary Taylor. Yes. I think the exchange of information,
the perspective that people giving advice can contribute to
people at the IMF is helpful. I think there are people in
Argentina from the central bank to the economics ministry who
recognize that.
Senator Hagel. Thank you.
I thank you very much, Mr. Chairman.
Senator Bayh. Thank you, Senator Hagel.
Senator Miller.
Senator Miller. Mr. Secretary, one of the factors that has
been cited as a cause of Argentina's persistent budget problems
has been the relationship between the Federal Government and
the provinces. It is almost as if they have an incentive to run
deficits. Do you think that President Duhalde's reforms
adequately address that issue? And I guess also, the hard
question, do you think that President Duhalde has the political
capital to bring about these
reforms? They are pretty painful reforms, as Senator Bayh
mentioned in his earlier statement.
Secretary Taylor. I think that the economic reforms have to
deal with a relationship between the national government and
the provinces. They have started along a route to do that. The
details are coming out. But again as I indicated before, there
is progress being shown on this very difficult problem. And,
yes, it has to be addressed. We know in our Federal system the
relationships between the Federal Government and the States are
essential to get right, or you can create fiscal problems.
Brazil, just in the last few years in the 1990's, went
through some major adjustments by the national government that
relates to the local governments and the provincial
governments, state governments. So it is very important to get
in place.
I see the discussions that are taking place, and there are
agreements that are being negotiated, and it seems to me that
the progress is there. But we need to look at it carefully as
everyone else does, as the people in Argentina do.
So, I think I should probably leave my answer to your
question there. You did ask about the political ability to
carry things through, and all I can say is it seems to me that
it should be clear, and it is becoming clear about what should
take place. And if the interests in the Argentine people are
clear on how beneficial a growing economy will be, then I think
that will help the political parties come together. But I
cannot really attest to the particular capital, the political
capital that you were asking about. Sorry.
Senator Miller. Thank you.
Senator Bayh. Mr. Secretary, thank you very much. We
appreciate your presence so much and look forward to working
with you.
Secretary Taylor. Thank you.
Senator Bayh. Thank you to our next panel of witnesses. We
have three very distinguished guests that we are looking
forward to hearing from.
Michael Mussa--I hope I am pronouncing that correctly--is a
Senior Fellow at the Institute for International Economics. Mr.
Mussa has previously served as Economic Counsellor and Director
of the Department of Research at the International Monetary
Fund for a decade from 1991 to 2001, where he was responsible
for advising the management of the Fund and the Fund's
executive board on broad issues of economic policy and
providing analysis on ongoing developments in the world
community.
Michael, thank you for joining us.
Next, we will hear from Peter Hakim. Peter, I hope I
pronounced that correctly.
Mr. Hakim. Perfectly.
Senator Bayh. As someone whose last name is often
mispronounced, I always do my best.
Peter is President of the Inter-American Dialogue, a
Washington-based center for policy analysis and exchange on
Western Hemisphere relations. He writes regularly for The
Christian Science Monitor. He was the Vice President of the
Inter-American Foundation, a U.S. Government foundation that
supports grassroots development projects in Latin America.
Previously, he managed the International Resource and
Environmental Program at the Ford Foundation, and worked for
the Foundation in South America.
Last, but not least, we will hear from William Haener.
Mr. Haener. That is correct, Senator.
Senator Bayh. Mr. Haener is the President and Chief
Executive Officer of CMS Gas Transmission Company, one of the
largest United States investors in Argentina. Mr. Haener, I
should say that one of your home State Senators, Senator
Stabinow, has looked forward to coming to the Committee today
to hear your testimony. Unfortunately, she is the Presiding
Officer of the Senate as we speak. There is very little you can
do to get out of being Presiding Officer, but she did want me
to give you her best regards. She looks forward to reading your
testimony and she apologizes for not being able to be in
attendance. You can turn on C-Span and see that she is not
making this up. She is in the Chair presiding.
Mr. Haener. I do appreciate that, and there certainly are
higher priorities.
Senator Bayh. Well, I would not say higher priorities, but
it was unavoidable. When you get called, you have to sit.
Mr. Haener. I understand.
Senator Bayh. Mr. Mussa, we will begin with you. Thank you
for being here today.
STATEMENT OF MICHAEL MUSSA
SENIOR FELLOW
INSTITUTE FOR INTERNATIONAL ECONOMICS
Mr. Mussa. Thank you, Mr. Chairman.
It is a pleasure to be able to testify on the economic
tragedy now gripping Argentina, on how it got into this mess,
and on how, with the help of the international community, it
might get out of it.
The economic performance of Argentina during the past
decade has encompassed a remarkable transition from
hyperinflation and deep recession at the end of the 1980's
through a spectacularly successful period of stabilization and
economic growth from 1991 through 1998. Then into a deepening
recession and deflation. And finally, late last year, into a
catastrophic collapse economically and financially.
What was responsible for the tragic collapse of Argentina's
initially successful efforts of stabilization and reform? Well,
a variety of factors could be mentioned and weighed, but I
think it is most important to emphasize that the tragedy was
due primarily to
Argentina's economic policies, either directly or in their
failure to respond adequately to other adverse developments.
Argentina's key policy failure was the inability and
unwillingness of the government at all levels to run a
sustainable fiscal policy. Even when the Argentine economy was
turning in by far its best performance in many decades, as it
was between 1991 and 1998, the ratio of total public debt to
GDP was rising.
You may recall in the United States when we had good growth
the debt came down and the deficit came down and went away and
turned into a surplus. That did not happen in Argentina in even
better circumstances.
Senator Bayh. We remember those days with great fondness.
Mr. Mussa. In fact, after the Brady bond deal that helped
cut the debt ratio in 1993 to 29 percent of GDP, total public
debt rose to 41 percent of GDP by 1998. And then when the
economy slowed down and deflation began, the debt moved up to
50 percent of GDP. Moreover, not only was the Argentine
government running up large debts, it was also enjoying very
large privatization revenues, all of which were being spent
during this period.
When financial markets became persuaded that this game was
not going to have a good end in the middle of last year, then
sovereign default became inevitable.
Argentina's Convertibility Plan, which rigidly linked the
peso to the dollar and tightly constrained monetary policy,
also played a critical role in the transformation from success
to tragedy. Early in the last decade, the Convertibility Plan
helped enormously to bring financial stability and economic
recovery after decades of chaos. It was a rigid framework that
made it more difficult for the Argentine economy to adjust
successfully to adverse shocks of the late 1990's; and this did
not make the problems for fiscal policy any easier. However, in
the end I would say that fiscal imprudence killed the
Convertibility Plan, rather than the other way around; and then
both together killed the Argentine economy.
What was the role of the International Monetary Fund in all
of this? The Fund was deeply involved with Argentina throughout
the past decade, as Argentina operated under the close scrutiny
of a
series of IMF-supported programs. The Fund generally praised
most of Argentina's policies and pointed to them as a model for
other emerging market economies. Thus, the Fund must take some
responsibility for Argentina's tragedy. To be fair, it is
important to emphasize that the policies that led to
Argentina's tragedy were well and truly owned by the Argentine
authorities; Argentina was not pushed into bad policies by the
Fund. Rather, the failures of the Fund were sins of omission.
I would emphasize two such failures. First, when the
Argentine economy was performing well, the Fund did not press
the Argentine authorities as hard as it could have and should
have to run a more responsible fiscal policy. This was a
serious failure of the Fund to do the job that it is expected
to do for a program country like Argentina that had a long
history of fiscal imprudence. Second, I believe that the Fund
was right to organize a large international support package in
December 2000 to help give Argentina one last chance to avoid
disaster. However, by the middle of last year, it was clear
that the Argentine authorities could not implement the policies
required to take advantage of this one last chance. At that
time, the Fund made another serious error in significantly
augmenting its financial support for Argentina. Money that
might be far more useful in aiding Argentina now was wasted in
a futile effort to sustain the unsustainable. And the Argentine
authorities were not given a forceful message of the need to
change fundamentally their policies at a time when the
inevitable turmoil arising from such a fundamental change might
have been better controlled than it has subsequently proved to
be.
Looking at the future, no one should underestimate the
immense difficulties faced by the Argentine authorities. The
Duhalde administration has taken several important steps,
painful but necessary steps, in the right direction. However,
my understanding is that they are still somewhat short of the
consistent, credible, and comprehensive set of implementable
policies that the Fund and others rightly insist are needed to
provide assurance of a successful stabilization effort.
In the extremely difficult economic and political
environment of today's Argentina, I think that one must
recognize that the Duhalde administration may not be able to
put together and implement a credible program. The effort may
fail, and stabilization and recovery may only come after
Argentina has gone through a more prolonged period of economic
and financial chaos and political and social upheaval.
However, I believe it would be unwise to surrender to this
prospect because the policy program that might avoid it is
somewhat less than fully credible. At some point--perhaps
sooner rather than later--it makes sense to take some risk by
extending international support to the best policy program the
Argentine authorities are capable of proposing, even if it has
some significant weaknesses. For the Fund and the international
community, the risk inherent in supporting such a program can
be contained within reasonable limits: By insisting on a
reasonable, if not perfect, set of policies that have some
chance of successful implementation; by keeping the amount of
net new financial support within reasonable limits; and by
tranching the disbursement of this support in relatively small
monthly packages so that if the program goes seriously off
track, remedies may be expeditiously sought.
Senator Bayh. Thank you very much, Mr. Mussa.
Mr. Hakim.
STATEMENT OF PETER HAKIM
PRESIDENT, INTER-AMERICAN DIALOGUE
Mr. Hakim. Thank you, Senators Bayh and Miller. I am glad
you are holding this hearing. I have actually found not a whole
lot of interest in what is going on in Argentina in Congress so
far.
You may remember we did try to organize a small group, the
Inter-American Dialogue, to take a few Congressmen and Senators
to Buenos Aires. We came close, but we could not quite get
people. They had other things on their schedule, as you well
know.
Let me say that in your letter to me you asked me to
address a large number of questions in a very short time, and I
decided in fact to focus on one question that I think has been
given too little attention even in this hearing today. That is:
What is it that the United States should and can be doing?
As you will see, I think the United States should and can
be doing a lot more than it is now doing.
Before getting to that, I do want to say that I fully agree
that Argentina is in a mess. It is a terrible tragedy. I agree
that most of the blame, if not all of the blame, falls on the
Argentine policymakers and politicians and officials; that it
is not a problem of the international organizations. The
Argentines were the ones that were making decisions about their
own country. I also agree that they need a real, sustainable,
coherent program for their economy to recover. That is
absolutely essential.
What I do not agree with, I certainly do not share John
Taylor's optimism. I probably share more of Michael's pessimism
here. I think it is a disaster. I think it is going to get
worse in Argentina, and I think it is going to last for a long
time.
What I think is clear, and Michael Mussa made mention of
it, is that Argentina does need some external support to
resolve the crisis. I do not think there is any question of
that.
I think at the same time the U.S. Treasury and the IMF have
made clear that there will be no aid without a sustainable
program of the kind that I already said was absolutely
necessary.
President Duhalde has made some progress toward coming up
with a program, but he still has a long way to go to really
produce the kind of sustainable program that might be
convincing to the U.S. Treasury or to the Fund. And indeed, I
think the consensus is increasing that he probably will not be
able to come up with such a program, at least any time soon.
That he--Senator Miller, you asked this question directly--does
not have the political capital to pull it off.
Either the United States and the international community
steps in much more vigorously than they have to date, or
Argentina will fall into a deeper and more dangerous crisis.
Michael Mussa has already mentioned the possibility of a
devastating hyperinflation. Let me add that nobody knows where
the country's politics may wind up. But certainly the country,
25 years a democracy, is I think in some substantial danger.
This is a disaster not only for Argentina, but it could be
a very serious blow for a number of other Latin American
countries, and a lot of them are facing their own very
difficult problems at this point. I think it will, if things
continue to deteriorate, play havoc with U.S. objectives in
this hemisphere. We can talk about each of those more.
So far the economic contagion has been contained. Only
small neighboring--Uruguay has really been affected--but there
are indications that there may be a decline in investment
capital to Latin America, which could seriously undercut the
region's prospects.
And like I said, the danger to United States relations with
the region, which are already, Argentina is already seen as an
example of a United States that is somewhat indifferent to the
region. I think this is compounded by the obvious distraction
that occurred after September 11.
Again, this is something I would be delighted to talk
about. What can the United States do, and what should the
United States do?
Certainly more involved than Mr. Taylor suggested than a
shareholder in the IMF. Let me be very clear. I do not think
the IMF is going to take any action or a decision without the
United States taking the leadership on this. The United States
is the one that is really going to be calling the shots. I
think the Administration in tandem with the IMF should provide
the Argentine government with a clear and precise statement of
the essential elements of a program that the United States
could support.
What does the U.S. Treasury want?
And then make plain what level of resources the United
States would help to try and mobilize. I do not say
``provided.'' I say ``try to help mobilize'' to support the
program.
If the Argentine government is prepared to accept these
principles, these basic elements as a basis for moving forward,
the United States should join with the IMF and begin
intensively working with the Argentine government to develop a
full-fledged policy blueprint. And then work to get the
necessary international contributions from the financial
institutions, the IMF, private investors in the G-7 countries.
This is a high level of intervention. I rarely recommend
this. But I do not think the Argentines are going to be able to
put this together without it. And when you have a house burning
down in a neighborhood, you try to help put it out. You do not
wait for it to continue burning.
Let me say, with appropriate prior consultations. I think
the set of initiatives I have outlined would gain strong
political backing from most Latin American countries. Most of
them have already been urging the United States to provide this
assistance.
I think--and this is just a supposition--there is a good
chance that an intensely engaged United States with broad
regional support could end some of the political impasse in
Argentina, could give the Argentine government the political
capital it needed to begin to effectively resolve the crisis.
Let me say, all this may not work. But without the
leadership and intense engagement of the United States, the
Argentine government will likely remain immobilized. The
country's economy and politics will continue to deteriorate.
The end will be a terrible and lasting damage to Argentina,
possibly spreading harm to other Latin American countries and
potentially undercutting our policy objectives in the
Hemisphere.
Thank you.
Senator Bayh. Thank you very much, Mr. Hakim.
Mr. Haener.
STATEMENT OF WILLIAM J. HAENER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CMS GAS TRANSMISSION COMPANY
Mr. Haener. Thank you very much, Mr. Chairman.
First, I have already submitted some formal testimony. I
would ask that that be adopted into the record.
Senator Bayh. Yes.
Mr. Haener. Thank you.
I will try and keep my remarks brief, but frankly this is
very important to United States business and to the citizens of
Argentina. I am going to talk about it from an energy
perspective. The Argentine government's new economic regime is
far more than a simple devaluation. It is really much worse
than that.
The government has abrogated the contracts of existing
investors, and is issuing arbitrary decrees to limit the
revenues of energy projects, actions that have no relationship
to market forces, and that are without regard to the external
debt obligations of those projects. As a result, the government
is forcing the energy sector into a crisis. Since 1993, the
Argentine economy was fueled by free market principles and
privatization policies really that I think benefited the
government and the people.
United States and other foreign investors invested over $6
billion in the energy industry alone, and brought that
equivalent credit. The investments were based on specific
commitments and guarantees from the government. For example,
dollar-denominated, or peso equivalent, not necessary linked,
but peso equivalent rates were allowed to be charged.
Now the impact of this international investment in energy,
what is it? Let me tell you what it is. Energy prices have
fallen, and reliability and availability have increased. Low
energy prices, lots of it, are good for the economy. I think we
all know how GNP growth is linked to energy.
Despite the current government rhetoric and somewhat
finger-pointing at United States and foreign investors were the
cause of the current economic and social turbulence, it has
really been the sovereign debt incurred by the central
government and provinces due to their inability to limit
spending. Period.
We have not taken huge projects out of the country, or
profits off the backs of the Argentine citizens. Just the
opposite. Let me give you an example. We are a major owner in
the TGN Pipeline System. When that System was privatized, the
owners--and there are five of us--spent $392 million to buy
that from the government. Since that time, we have reinvested
$1 billion to upgrade that System so it met international
safety reliability standards and have expanded deliveries to
other parts of Argentina that did not have natural gas service
before. I think that is a benefit to the economy.
Now the government has arbitrarily changed policies and
laws in results that are punitive and discriminatory to the
United States and foreign investors.
Let me be clear. It is not the peso devaluation we are
concerned about, but the abrogation of our contracts and the
illegal delinking of the peso to the dollar. As an example,
under the TGN privatization rules--again, that is their
pipeline--the government rules provided that our tariff rates
be calculated in dollars or the equivalent in pesos. As a
result, companies like TGN received loans and entered into
services and supply contracts in dollars. Since revenues would
match up in dollars or the peso equivalent, everything was in
balance.
Now as a result of a recent change in law, it is now
illegal to make that link. You can go to jail for trying to do
that.
Obviously, what has happened now with the peso devaluation
and delinking the ability to collect what the fair tariff is,
our foreign debts effectively doubled compared to our revenues.
And if the projections are right that the peso devaluation will
be even further, that debt situation is going to go further.
So, we won't be able to even think about a profit. You won't be
able to pay your debts. We have a problem.
I think in the real world of energy companies, our projects
could be expropriated. We will not be able to purchase spare
parts, keep up the maintenance. Service will be disrupted.
Power outages. Natural gas deliveries will be stopped. All of
which I think will disrupt the economic recovery.
There will be a substantial effect on the U.S. economy as
well. Shareholders will lose their equity. Banks will lose
money on the debt that comprises $6 billion in energy
investments. Insurers that back those banks and investors will
lose money. U.S. exporters will lose money. The contracts for
the provision of spare parts of the execution of maintenance
services agreements are unfilled.
U.S. taxpayers will lose money as OPEC and Ex-Im loans go
into default, and as their guarantees are called in. A form of
investment or a contagion will begin to spread as prospective
investors and other emerging economies shy away, having seen
this model program fall and fail.
The United States and international financial institutions
have a vital role to play in ensuring that this situation gets
reversed and that there is protection against further economic
and social turmoil. The international community must work with
Argentina to provide a credible yet sustainable plan that
enables the Energy Project to return to solvency and to restore
the terms and basic economic equation of their contracts.
In order to hold the Argentine government accountable,
there must be strict, enforceable conditions and performance
requirements to this effect in whatever lending and support the
IMF, the World Bank, the Inter-American Development, and other
institutions provide. Without these, any financial support
would be meaningless, since the recovery will be only
sustainable to the extent it attracts private investment.
I think I can summarize this very clearly. I think energy
is one of the keys to any economic recovery. The current
government's policies are detrimental to the United States and
foreign investors, and over the long haul will be harmful to
Argentine people.
We do not need a simple bailout. Prior to international
aid, we do need strict conditions and performance requirements
and international loans to ensure investors that they will be
treated fairly. These conditions must support long-term,
sustainable economic growth, and you must ensure the
reinstatement of prior contracts and rules that allowed us the
ability to collect our revenues in dollar equivalence.
We are not the bad guy. I think we are just the opposite.
Thank you.
Senator Bayh. Thank you very much, Mr. Haener.
I have some questions, and I will continue because the
clock says 6 minutes, Zell, and then I will turn it over to
you. Then if I have a couple more, I will go back for a second
round.
Mr. Mussa, starting with you. Over the last 2 or 3 years
the International Monetary Fund has advanced $22 billion to
Argentina. Do we have any idea where that went? What it was
used for? How about the proceeds from the privatization sales?
Mr. Haener mentioned one, what was it, three hundred and----
Mr. Haener. Three hundred forty-two million.
Senator Bayh. --Three hundred forty-two million. What
happened to this money? What did they spend it on? First the
IMF, and then the proceeds from the privatization. If we are
being asked to advance further sums, there should be some
accountability for past expenditures.
Mr. Mussa. Well, they certainly spent it. I mean since
money is fungible, it is impossible to know whether the
privatization money was spent to make in the end transfers to
the provinces, or was spent on Federal Government level wages
and so forth. But it was spent. That is clear.
The IMF money is a somewhat different issue. For one thing,
most of the IMF money came just in the last couple of years.
For a long time, aside from the Tequila crisis where they had a
foreign exchange crisis and so forth and we supported their
reserves with IMF lending, the program was largely
precautionary until 1999-2000, and then the big disbursements
came recently.
Much of the money that was disbursed recently was
effectively used to pay off the debt that was maturing over
that period of time, or to pay the interest on it. Because
Argentina lost access to international capital markets after
the first few days of January of this year. They had in 2001
about $22 billion of interest and principal payments on the
debt that they needed to make.
Senator Bayh. Interest and principal payments owed by the
Federal Government, the States, or both?
Mr. Mussa. This was at the Federal level. I think it is a
somewhat larger amount if you add in the States.
Senator Bayh. And this is owed to multinational
organizations, multilateral organizations, and private lenders
as well?
Mr. Mussa. No, I think this is primarily the private sector
debt of the Argentine Sovereign: $21-$22 billion. Now part of
that was refinanced domestically by selling it to the domestic
pension funds, domestic banks, and so forth. But they needed
$10 or $12 billion of financing externally, which was not
available privately. And the international money helped to fill
in that gap.
The Argentine government also ran--and this is at all
levels--a very substantial budget deficit, and some of the Fund
money that was advanced by the Fund, by the World Bank, and so
forth, no doubt since money is fungible, wound up financing
that.
Senator Bayh. Money you do not use to repay interest and
principal is thereby freed up to spend on other things, money
being fungible as you were saying.
Mr. Mussa. Yes. That principal is probably more important
going forward than it has been--than it was last year, because
last year the interest and principal was being paid. But now
they are in actual default on at least the external component
of their Sovereign debt. So no interest or principal payments
are being made.
Now that helps the budget in the sense that they are not
needing to make provision for that, and I think that is one of
the reasons why any international support that is provided at
this stage should be provided in much more modest amounts than
one was thinking about earlier, because they are in fact
getting extraordinary financing by simply not paying their
debts, and I think that it is not a realistic prospect either
this year or next year that there is going to be any
significant amount of either interest or principal payments to
the external creditors of the Argentine government. But I do
not think the Fund should be stepping in at this stage to
provide money to make those interest and principal payments.
Senator Bayh. Let me ask you about the tax system. Mr.
Hakim, you might have an observation on this as well. I
commented that the statistics that have been shown to me
indicate that about 50 percent of the taxes that are owed in
Argentina are actually paid. To be a devil's advocate here for
a moment, why should foreign lending substitute for domestic
tax collection?
In other words, should not one of the emphases of the
Argentine government be on not raising taxes but actually
collecting what they are already owed domestically? Would that
not go a fair part of the way toward solving their problem?
Mr. Mussa. This has been a continuing issue of discussion
with the Argentine authorities, because the tax rates are not
low in Argentina. Tax revenue is relatively low. But that is
because of this problem that there are a lot of people that do
not pay their taxes. And on top of that, the Argentine
government has a number of tax rebate schemes and so forth
which lose a significant amount of revenue. There are also
large-scale transfers of revenue from the central government to
the provinces. Well over half of the budget of the provinces is
financed by revenue that is transferred from the central level.
Now that is not entirely inappropriate, but I would say----
Senator Bayh. It has been a fixed amount, and apparently
the agreement that was announced yesterday is going to make it
a
percentage?
Mr. Mussa. There was a fixed amount, a minimum amount, and
then there were additional amounts on top of that in most
years. And now they are going to get a percentage of the
revenue.
What is not clear to me from the press reports was whether
the deal said that that is going to be for this year, or that
is going to be for all time looking forward. Because what the
Federal Government agreed to do, on the other hand, was to take
over the debts of the provinces.
That is something that has happened several times in the
past 50 years in Argentina. The provinces have never paid their
debts. When they get to be too big, they pass them off onto the
central government. And when that happens again and again and
again, it subsidizes imprudent fiscal policy at the provincial
level.
Unlike the United States, I mean Orange County has a
problem and they default on their debt, that is Orange County's
problem. The Federal Government does not necessarily step in to
bail them or the creditors out. But in Argentina, there has
been this long history of a central government stepping in. And
Argentina is by no means the only country. In Brazil, and many
developing countries if not most of them, this has been a
problem.
Senator Bayh. My time has expired, so I am going to turn it
over to Senator Miller.
I would just say your comment reminds me of something they
say in the private sector, Mr. Mussa, that if someone owes you
a modest amount of money they are a debtor. If they owe you a
large amount of money, they are your partner.
[Laughter.]
It sounds as if that is the arrangement between the
provinces and the central government in the past from time to
time when the debts have gotten to be so large.
Senator Miller.
Senator Miller. First of all, I want to thank all three of
you for bringing some reality to this hearing. I had begun to
wonder if we were going to really get down to the dire
situation that we face right now.
I particularly appreciate what you had to say, Mr. Hakim. I
wish I had heard you earlier. I might have gone on that trip
with you.
Mr. Hakim. It is still open.
[Laughter.]
Senator Miller. I want to ask you this first. You talked
about the economic and political contagion. You know, of
course, that Colombia and Brazil are going to be holding
presidential elections later this year. Do you see the
potential for more radical anticapitalist parties to increase
in power as a result of what has happened in Argentina?
Mr. Hakim. No, this is really one of the most encouraging
developments in Latin America. I mean I have been hearing this
for the past 15 years every time there was a downturn. There
have been a lot of downturns and crises, that this was going to
be the forerunner of a new populist regime in Latin America,
and that just has not happened.
There is no indication at all that there is a turn away
from free markets, really. What I think the problem is is less
a problem of kind of an ideological change than a broad
demoralization that is occurring in Latin America.
There is a lost confidence in institutions and leaders
generally. That is particularly clear in the case of Argentina
where there is no institution that any ordinary citizen--this
gentleman, I forget your name--suggests they abrogated
contracts with the energy companies. They abrogated contracts
with depositors, pensioners, they guaranteed there would be one
dollar for one peso. That in itself is terribly demoralizing to
Argentina. And then other countries look at Argentina and say
this was a middle-class, wealthy country. This is a problem for
U.S. policy. It makes U.S. policy harder.
Senator Miller. Let me follow up with this. You probably
saw that editorial some time ago in The New York Times that was
written by Paul Kreugman called ``Crying With Argentina.''
Mr. Hakim. Right. I did.
Senator Miller. He made the statement that Argentina, more
than any other developing country, bought into the promises of
U.S.-promoted neoliberalism were slashed.
Mr. Hakim. I think that is a bit exaggerated.
Senator Miller. You know what I am talking about?
Mr. Hakim. Yes, I know precisely. I read that article.
Senator Miller. You do not think there is a backlash
against market-oriented reforms?
Mr. Hakim. It is hard to find any evidence of it. In other
words, if you look at recent elections in Latin America, there
have been two elections in Central America, for example, this
year. In both elections, the more conservative--both of them
were businessmen--won the election.
A classic populist Daniel Ortega, you may remember, lost
the election quite handily. In Brazil, there is a populist
candidate who is running for his fourth try at the presidency.
He is declining in the polls over the past couple of months
since the Argentine--there is just no concrete evidence of
that.
The problem I think, like I said, is a broad demoralization
and discouragement. The results in Latin America of free
markets, of even democratic change, have not lived up to
expectations. There is not any good ideas of how you begin to
make them work better.
Senator Miller. Mr. Haener, do you have investments or
business in Chile?
Mr. Haener. Yes, I do.
Senator Miller. Would you mind talking to us a little bit
about the difference of doing business in Chile and in
Argentina?
Mr. Haener. It is significant right now. Certainly Chile
has had a history of living up to their commitments. They have
solid economic policy. And I will say that they have always
stood up to the agreements and, frankly, I would continue to
invest in there.
Senator Miller. You would.
Mr. Haener. If you asked me if I would invest in Argentina,
I would tell you that if I went to our chairman of the board,
it would take them only one nanosecond to tell me to seek
employment
elsewhere.
[Laughter.]
Senator Miller. I should have asked you the question that I
asked Secretary Taylor awhile ago about what do I tell my
Georgia computer and electronics companies back in Georgia.
Thank you.
I have another question, but you go ahead, Mr. Chairman.
Senator Bayh. No, go ahead.
Senator Miller. This is a question that I asked Secretary
Taylor awhile ago, and you have talked about it a little more.
What is the relationship that the national government has with
those provinces? It is almost as if they have an incentive--you
more or less confirmed that--to go ahead and just spend all you
want and go into debt, because sooner or later mama's gonna
come along and pay for you. Do these Duhalde reforms, in your
opinion, really address that?
Mr. Mussa. I think that is far from clear. Indeed, the fact
that they are going to go in and take over the debts one more
time as part of the present deal is yet another instance of
that system working.
So it is cross my heart and hope to die I won't do it
again. Well, Argentina has a long history of it. Indeed, when
Duhalde was the Governor of Buenos Aires Province, the largest
province, and one of the most fiscally profligate provinces in
the country, there was another mechanism of this kind.
Sometimes they would borrow from their local/state provincial
bank, and then either the government or the central bank had to
step in and bail the bank out.
This is yet another instance of what we have seen. The
details are not the same each time around, but it is more or
less the same business. Well, I think that is a source of
concern.
I would say if they are going to do a deal like that, then
there should be some type of agreement on a constitutional
change which is going to limit in some way the liability. Of
course, you can always change the constitution. So that is not
an absolute guarantee.
Senator Bayh. Or the supreme court.
Mr. Mussa. Yes, the supreme court in Argentina is not the
Supreme Court of the United States, and they have also been
part of the problem as well. In past occasions when the central
government has tried to impose some discipline on either state
spending and borrowing, or excessive pension payments, or
whatever it is, the supreme court has often overruled those
decisions. And indeed, a not negligible amount of the borrowing
has been the borrowing to finance the fiscal consequences of
those adverse decisions.
Senator Miller. Did you want to add to that, Mr. Hakim?
Mr. Hakim. International markets also play a role in this.
If a country has a province that is not paying its debts
internationally at least, or to international companies located
in the province, that country will often find its credit
ratings deteriorating. We have seen this in Brazil where one
governor----
Mr. Mussa. Governor Franco, yes.
Mr. Hakim. In other words, it is not simply a
constitutional measure. These countries have to perform very,
very well fiscally and they have to take control over the
provincial finances basically when they break down. In other
words, it is not a question you can build into law. You have to
have some capacity of the central government to really almost
intervene.
Mr. Mussa. And it is a political problem, as well. Can the
central government really face down the provinces and say, this
time you are going to take the consequences of your fiscal
excesses. And that has proved to be very difficult to do in
Argentina, and Brazil, and a number of other countries.
Senator Miller. I have found it such with my children.
[Laughter.]
Thank you, Mr. Chairman.
Senator Bayh. Mr. Hakim, I have a question for you
following up on Senator Miller's last question. You recommended
in your testimony outlining specific steps that need to be
taken to, in the International Monetary Fund's opinion and the
opinion of the U.S. Treasury, constitutes sustainable economic
and financial policies.
My question to you would be: If we were to do that, would
that not appear that the difficult consequences of those steps
were being imposed from abroad, thereby generating a political
backlash within Argentina which would make these steps that we
were proposing politically unsustainable? In other words, it is
a Catch 22. Is there really any substitute for a domestic
political consensus about what to do, not appearing to be
imposed from without?
Mr. Hakim. There is no good path here. In other words----
Senator Bayh. You can understand----
Mr. Hakim. I know exactly where you are ----
Senator Bayh. Can I just say one final thing? You can
understand how the politician or some political figures in
Argentina might play it as it is the bad old United States
coming in and telling us what we have--all these adverse
consequences you do not like, that is being imposed on us from
without.
Mr. Hakim. But at the same time, the fact is the Argentine
political politicians cannot come together on a plan. There is
simply not enough political capital in the system. The Duhalde
government does not have the authority or the capacity or the
will, whatever, to make this work.
He needs external support. I think the United States is the
only country that has the leadership, the international
authority that can put its weight behind it. Because if the
United States does put its weight behind it, the Europeans are
likely to be able to be willing to support this.
It is also important the fact--and this is what I think
very strongly--that the other Latin American countries,
Argentina's neighbors, Brazil, and Chile, would support this
kind of initiative from the United States.
Senator Bayh. I am sure ----
Mr. Hakim. I have talked to many representatives of these
countries precisely about this idea. They cannot say publicly
they want the United States to essentially give Argentina a
plan, but I think if this were put together right and presented
to them right, we could get public international backing
support for this from Brazil, from Mexico, from Chile, and the
other countries in Latin America who realize how dangerous----
Senator Bayh. I am sure they would support it, but they do
not bear any of the adverse domestic consequences.
I hear what you say. Just from my own perspective, I am
very skeptical that all the good advice from abroad can do much
good if there is not that domestic political----
Mr. Hakim. Well, in the end----
Senator Bayh. --and I can see this being demogogued to
death by some political figures.
Mr. Hakim. What I am saying is how you create the domestic
support for something like this. In other words, I think at
times it takes somebody from outside to say this is the right
way to proceed. If you proceed this way, there will be
resources available, and the other friends in the region are
saying this is the right way to proceed, you might get a good
result. The risk is there. You send the firemen into a burning
building. There is a risk. There is no question.
Senator Bayh. So, Mr. Mussa, this gets back to my point I
think previously, which was in some ways this seems to be as
much of a political challenge as an economic or financial one.
Clearly, some formal guidance needs to be offered, but overt
public, basically laying down of conditions, it seems to me,
would run the risk of political demagoguery domestically----
Mr. Hakim. I have been as much opposed to that
intervention. I think this is a particular case that these
problems all have to be solved. As we have seen in the 1980's
and 1990's, on a case by case basis, and in this case it is the
first case I have ever done this,
advocated a very heavy-handed intervention.
Senator Bayh. Mr. Mussa, you wanted to comment?
Mr. Mussa. I think one needs to recognize, first, how
clearly terrible this situation is. Probably over the past 3
months, real GDP in Argentina has fallen something like 25
percent. That is what happened in the United States between
1929 and 1933. I mean, this is really an economic collapse that
is virtually unprecedented, far worse than we have seen in the
other emerging market crises of the 1990's. And it is still
going on. One of the things that means is that if you can step
in and bring some sense of stabilization, even if the program
is not perfect, that there is a long way to go back up.
So the risks that one takes when the economy is really
enormously depressed in going in and trying to assist with a
stabilization, the risk that it will be a failure, is reduced
because you have already had the big failure.
Everybody recognizes in Argentina that it is the big
failure, and the chance is to turn things around.
You do not want to step in at the top. If we had stepped in
in December with this type of program, then the international
community, the United States and the Fund, would have been
blamed.
Senator Bayh. Would you agree with my observation--I think
you spoke to it a little bit when you said the funds could be
released in the tranches over a period of time--that the
assistance provided should be for demonstrated performance as
opposed to just pronouncements?
Mr. Mussa. That is the idea, that they are committed to
perform. And if they do not live up to that performance, and
there is not a good reason why they fail--I mean sometimes
things, you know, the economy continues to sink and the tax
revenues sink along with it--but if it is failing because they
are failing to deliver on their policy promises, then you have
to pull their chain.
That is the way in which the system works. As I say,
because they are not paying any debt service at present, I do
not think that the amount of money that is needed, aside from
postponing the payback of the money to the Fund and others that
is due this year and next year, the net new amount of money
that would be needed to support them is not in my judgment that
large. It is not $22, $23 billion of net new money. That is
relevant in this circumstance.
It is primarily a political problem, not I think an
economic problem. What needs to be done is I think reasonably
clear. It is getting it done that is the problem.
Mr. Hakim. Could I just add one thing? When the United
States went to Mexico and helped with their economic crisis in
1995, I understand we placed in the treasury--and Michael can
talk to this perhaps better than I can--something like 17 or 18
staff people working with the Mexicans to help them oversee. A
plan was already in place, to oversee the implementation of
their economic program. In other words, that was also a very
heavy engagement.
I think we have to be more involved, and what Taylor
suggested then as merely a shareholder of the IMF, I mean that
is just totally inadequate for a country like the United
States.
Senator Bayh. It should be at the invitation of the
Argentines, shouldn't it?
Mr. Hakim. That would be helpful.
Senator Bayh. As opposed to being imposed from without. I
am just worried about the political ramifications. In order for
this to work, you have to have--there is no substitute for the
Argentines running their own country. So, you have to have a
political consensus develop there eventually.
Mr. Hakim. And believe me, I have actually talked to a lot
of the Argentines that are asking for somebody from outside
that can impose--impose is a strong word--but at least present
a rational way to proceed, and to strengthen those people that
want to proceed in Argentina in a rational, intelligent,
technically sound way.
Senator Bayh. I have one more brief comment.
Zell, do you have anything else? I have two questions for
Mr. Haener. I have not forgotten you. As a matter of fact, I
have great empathy for the situation you are in here today. You
are on the front line of all this.
Senator Miller. No, go ahead with Mr. Haener.
Senator Bayh. My one observation, Mr. Hakim, for you, and
then two questions for Mr. Haener. I have heard this from other
individuals, too, about the perception in some quarters in
South America about American indifference to the plight of the
Continent, and so forth and so on.
I can understand that in part, but I just recount the
statistics. Our banks are on the line here for $23 billion. We
have direct foreign investment of $14.5 billion. A great chunk
of that is worthless now. The IMF, which you know we fund in
great part, has $22 billion on the line here. There is a good
question about whether that will ever be repaid.
This does not sound like indifference to me. We have been
major contributors to the country, to our great loss at this
point.
Mr. Hakim. Let me say that all of those companies went to
Argentina. They may be doing great for the Argentine economy,
and I support them very, very much. They also went there for a
profit. They went there because Argentina represented a place
where they could earn money. In other words, this was not
benevolent----
Senator Bayh. Regardless of their intentions, however, they
have suffered great losses, and that does not strike me as
indifference.
Mr. Hakim. I mean the Argentine people have suffered
losses, as well. All that I am saying is that there is a crisis
now in a country that we considered a close ally, a country
that we want to make a partner in free trade, that we want to
be part of a hemispheric free trade area, that we meet
regularly in summit meetings. The question is how the United
States should respond now to that.
Senator Bayh. I do not disagree with any of that. All I am
saying is it seems as if there ought to be some recognition in
some quarters of the constructive role that both----
Mr. Hakim. Oh, I think the fact that so many people are
asking for the United States to become more involved suggests
they know that the U.S. involvement is a good thing. The
President of Brazil is not asking for the United States to
become more involved in Argentina because he thinks U.S.
involvement is bad. On the contrary, they believe the U.S.
involvement is good and want more of it now.
Senator Bayh. I am saying that the perception of
indifference is not only inaccurate but also unfair.
Mr. Hakim. That is a conversation we could have. I think
that promises have been made and have not been fully kept.
Senator Bayh. By whom?
Mr. Hakim. By the U.S. Government.
Senator Bayh. Well, what about the promises of the
Argentine government?
Mr. Hakim. That, too. They have not been kept. I agree with
that. That is the first thing I said today.
Senator Bayh. Perhaps we will have that conversation later.
Mr. Hakim. Okay.
Senator Bayh. I would look forward to it.
Mr. Haener, I think that you answered this in response to
Senator Miller's question. It sounds to me as if your opinion
is that the confiscatory policies that have recently been
implemented by the Argentine government, in your opinion would
essentially mean no further direct foreign investment certainly
from where you sit?
Mr. Haener. Certainly from the private sector I think it
would be very difficult for anyone to justify putting money in
there now.
Senator Bayh. I had a major banker tell me that yesterday.
Their company has been in Argentina for 60, 70 years and they
are considering pulling out entirely because of the complete
lack of credibility they now feel exists with regard to the
rule of law, sanctity of contracts, bankruptcy procedures, the
list goes on and on.
Mr. Haener. It is incredible, to my way of thinking.
Frankly, I am surprised that the people have put up with it.
I think that there is a recognition in Argentina within the
populace of the benefits of stable economic policy. I will give
you an
example. The first time I went to Argentina was after the
market reforms and after the days of the hyperinflation. I was
riding in a cab, talking to the cab driver, and I said: Well,
what do you think about the new economic policies of the free
market? He said, I am from the days of hyperinflation. I am
working harder now than I ever have before. But I never want to
go back. I said, why is that? He said, now I own my own cab. I
never could before.
So something was working. And I think there is a will
within the country, if we give them some leadership.
Senator Bayh. My last question is for you, Mr. Haener. It
seems that some of the policies have disproportionately singled
out the energy industry that you represent and some of the
financial institutions to help address the crisis. Is that your
perception, or no?
Mr. Haener. Absolutely.
Senator Bayh. Well, why do you think that is? Do you have
an opinion?
Mr. Haener. I think it is politically easy to point the
finger outside the country. I think it is that simple.
Senator Bayh. Um-hmm.
Mr. Haener. Let somebody else shoulder the burden.
Senator Bayh. Very good. Well, thank you, Mr. Haener.
Again, I have empathy for your situation.
Mr. Hakim, I appreciate your input today. Mr. Mussa, thank
you. It has been very enlightening. Again, just to make my own
viewpoint clear, I hope we can play a constructive role here.
It is in the best interests of everyone that we try and resolve
this in a positive way. It does require a certain suspension of
disbelief, I guess, or a greater degree of optimism, but that
is also a strain in the American character that has stood us in
good stead, and I do hope it turns out well.
The last thing I would say, Mr. Mussa and Mr. Hakim, to
both of you, if we can get policies that seem to make sense and
get some demonstrable performance on those policies, then by
all means I think we should try and lend a hand here.
Thank you all, very much.
Mr. Mussa. Thank you.
Mr. Hakim. Thank you.
Mr. Haener. Thank you.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
[Prepared statements, response to written question, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR CHUCK HAGEL
Thank you, Chairman Bayh, for holding this hearing.
I also want to thank our witnesses for talking to us about our
concerns regarding Argentina. It is a very important economic partner.
One concern is that, during this insecure financial time, Argentina
may take some actions that will not help in the long run and will, at
the same time, cause harm to United States businesses.
I am sure that the appropriate United States agencies are working
with their counterparts in Argentina and providing all the advice
necessary. I hope that some of the issues covered include urging
Argentina to preserve its freely convertible currency and avoiding the
expropriation or confiscation of private sector assets. I am also
interested in hearing the panel's views on President Duhalde's current
theory that he can bring Argentina out of this crisis by blocking
imports.
The implications on trade, the IMF, the U.S. business and regional
contagion are significant. This timely and important hearing will help
guide us in policymaking decisions that will hopefully aid our friend
and ally, Argentina.
----------
PREPARED STATEMENT OF JOHN B. TAYLOR\1\
Under Secretary for International Affairs
U.S. Department of the Treasury
February 28, 2002
Thank you very much, Chairman Bayh, Ranking Member Hagel, and
Members of the Subcommittee for inviting me to participate in this
hearing on the current economic situation in Argentina.
---------------------------------------------------------------------------
\1\ This is an update to the testimony submitted on February 6,
2002, before the Subcommittee on International Monetary Policy and
Trade of the House Financial Services Committee.
---------------------------------------------------------------------------
The people of Argentina are facing extremely trying times.
Throughout this difficult period, President Bush has made it clear that
Argentina is an important friend and ally of the United States of
America. We want our allies to be strong leaders of free democracies
and free markets. Argentina should be an engine of economic growth in
our hemisphere. It is important that Argentina succeeds.
In order to understand the current situation in Argentina, I think
it is helpful to begin by reviewing some of the key economic
developments in Argentina during the last decade.
The Economy of Argentina in the 1990's
In the early 1990's, the government of Argentina undertook a series
of important reforms in economic policy, including monetary policy,
fiscal policy, structural policy, and international trade policy.
Perhaps most dramatic and immediately noticeable was the change in
monetary policy. A highly inflationary monetary policy was replaced by
a new ``convertibility law,'' which pegged the peso one-to-one with the
dollar and largely prevented the central bank from financing the
government's budget deficit by printing money. Fiscal policy was also
brought into better control and there was a decline in deficits. On the
structural side, a comprehensive privatization program was implemented
through which a number of inefficient state-owned enterprises were
privatized. Moreover, barriers to international trade and investment
were reduced and Argentina's financial sector was opened to foreign
investors.
These market-oriented reforms produced very impressive results.
Hyperinflation--which had risen to over 3,000 percent--was brought to a
quick end by the convertibility law. Economic growth turned around
sharply: After falling during the 1980's, real GDP began growing at
over 4 percent per year. Investment and exports grew particularly
rapidly. The sharp increase in economic growth was even more remarkable
given the very rapid disinflation that was occurring at the same time.
However, starting in the late 1990's there were a number of policy
setbacks and external shocks which sharply reduced economic growth in
Argentina and ultimately led to the financial crises in 2000 -2001 and
the current halt to economic activity.
First, government budget deficits began to increase and fiscal
discipline began to wane. Government spending at the Federal and
provincial level increased faster than tax revenues. These deficits
could not be financed by money creation because of the convertibility
law. Instead, they were financed by borrowing in both the
domestic and the international capital markets; however, as the
government's debt began to rise and raise questions about
sustainability of the debt, risk premia rose and increased interest
rates. Eventually the higher interest rates put additional pressure on
the budget deficit and held back economic growth.
Second, the low inflation of the early-to-mid 1990's turned into
persistent deflation, which also had negative effects on economic
growth. In addition, the currencies of Argentina's major trading
partners in Europe and Brazil depreciated relative to the dollar, and
therefore relative to the Argentine peso. This effective appreciation
of the peso led to deterioration in Argentina's competitiveness, which,
along with the higher interest rates, further held back economic
growth.
Third, persistent expectations of depreciation of the peso caused
interest rates on peso loans to be higher than dollar interest rates.
Whenever policy actions were taken that raised questions about central
bank independence or about the convertibility law, market expectations
of depreciation increased causing domestic interest rates to rise
further.
As low economic growth persisted into 2000, concerns began to grow
that a vicious cycle of low tax revenues and continued government
spending increases would lead to rising interest rates, which would
further slow the economy. Following the political turmoil in October
2000 when Vice President Alvarez resigned, Argentina's
borrowing costs soared and rolling over government debt became more and
more
difficult. Renewed plans to reduce the budget deficit brought interest
rates down
temporarily, but by February 2001 it was clear that further actions
needed to take place. The Argentine government introduced a number of
policy changes and finally decided to create a rule--the zero deficit
law--in the summer of 2001 to try to provide confidence about the
government's seriousness in getting its fiscal house in order.
Eventually, however, it became clear that these changes to the
budget were not working. Many market participants considered the
government's economic plan to be unsustainable, and interest rates on
government debt began to increase sharply. By November, it was apparent
that the government's debt would have to be restructured and, indeed,
President de la Rua took the step of announcing that such a
restructuring would take place.
As the restructuring effort was underway, the uncertainty about its
impact on the banking system led to increasingly large deposit
withdrawals from banks and international reserves began to fall. In
order to stop the withdrawals and the decline in reserves, the
government imposed severe restrictions on such withdrawals in December.
Soon after the restrictions were imposed, social and political protests
turned violent, leading to the resignation of President de la Rua and
his Ministers.
Economic circumstances in Argentina deteriorated after the
imposition of the restrictions on deposit withdrawals. The lack of a
functioning payments system led to a virtual halt of much economic
activity. The shortage of liquidity is hindering economic growth and
underlies much of the social frustration. The Duhalde government, which
took over in January, is in the process of gradually removing these
restrictions and at the same time moving to a flexible exchange rate
system.
It is of course up to the government of Argentina to work out the
details of a set of economic policies that will increase economic
growth in a sustainable way. Secretary O'Neill met with Argentina's
Minister of Economy on February 12. I met with the Minister the
following day. Argentine officials understand that the decisions they
must make will be difficult, but I was impressed with the Minister's
sincerity and commitment. We have maintained our dialogue and will seek
to build upon the initial progress we have made.
In addition to meeting with Argentine officials, we have also held
meetings in recent weeks with U.S. corporate officials operating in
Argentina. We apprised these officials of developments taking place on
our end, and have listened to their concerns about difficulties that
they are facing. In conversations other U.S. Government officials and I
have had with Argentine officials, we have repeatedly emphasized the
importance of all investors being treated fairly. Foreign investors can
play a critical role in Argentina's future.
Summary of IMF Programs
During the period of time discussed above, the government of
Argentina had several programs with the International Monetary Fund
(IMF). In March 2000, Argentina obtained a $7.4 billion IMF program.
The Argentine government treated the program as ``precautionary,''
meaning that the government did not intend to draw upon it. However,
starting in the summer of 2000, the growing concern in financial
markets was that the persistent Argentine recession was setting up the
potential for a financial crisis.
In December 2000, Argentina drew on $2 billion from its IMF
program, and the next month the IMF approved an additional $6.3 billion
for Argentina's program, bringing the total program size to $13.7
billion. As a condition for the January package, the Argentine
government agreed to a series of structural measures in the area of
fiscal, pension, and health care reforms to help develop a sustainable
fiscal position in the medium term and to build investor confidence.
In August 2001, the IMF provided Argentina with a further
augmentation of $8 billion. Of this amount, $5 billion was to bolster
reserves in the central bank to counter a substantial fall in deposits
during the summer. The remaining $3 billion could be used to support a
voluntary, market-based debt operation and thereby begin to address
Argentina's debt sustainability problem. However, when tax revenues
continued to fall short and the government failed to reach an agreement
on transfers to the provinces, it became increasingly clear that the
government was not going to be able to meet its fiscal targets and had
no other sources of financing. This fueled concerns about the
government's ability to service its debt, particularly to domestic
banks, and eventually prompted an accelerated run on the banking
system.
In December, the IMF's staff determined that Argentina was not
going to make its fiscal targets for the fourth quarter that were
agreed upon in August and that its program was no longer sustainable.
Thus, the IMF could not complete its review and consequently did not
disburse a loan tranche in December 2001.
Earlier this month, a team from the finance ministry of Argentina
visited the IMF. I understand the meetings with the IMF were
productive. As President Bush has said, once Argentina has designed a
sustainable economic program, the United States is prepared to support
it through the international financial institutions.
U.S. Policy
Our engagement with the International Monetary Fund and the
government of Argentina during the last year should be viewed in the
context of our overall approach to emerging markets. During the last 4
years the flows of capital to the emerging markets have declined
sharply, and it has been the intent of the Bush Administration to
reverse this trend by reducing the frequency of financial crises of the
kind that we have seen in Argentina.
Of course, the ideal would be to prevent crises such as the one in
Argentina from occurring. This requires not only early detection of
policies or of external shocks that could cause crises, but also the
resolve to take actions to reverse such policies or to counter such
shocks. The Bush Administration has encouraged the IMF to strengthen
its capacity to detect potential troubles on the horizon, and to be
willing to warn countries that are heading down a dangerous path to
take appropriate
action. Effective communication with markets is also key. And the IMF
can be more effective and credible in undertaking these tasks if it
focuses on issues that are central to its expertise--notably
strengthening monetary, fiscal, exchange rate, financial sector, and
debt management policies. In the last decade, the IMF became too
involved in matters outside of these core areas.
I hope the emerging market asset class grows much more in the
future as the rates of economic growth in developing and emerging
market countries rise. But we have to recognize that official sector
resources cannot possibly grow at such a high rate that we can continue
with very large official finance packages to deal with emerging market
debt crises as in recent years. There will inevitably be limitations on
the use of official sector resources. Moreover, in order to reduce
bailouts of private investors it is necessary to limit the use of
official resources, especially in cases where debt sustainability is in
question. We must, therefore, gradually move in the direction of less
reliance on large official finance packages.
An important change has been occurring in emerging markets and we
have encouraged this change as part of our approach to emerging
markets. Investors are increasingly differentiating between countries
and markets based on fundamental economic assessments--judgments that
are facilitated by better information. This differentiation is reducing
contagion from one country to another, as exemplified most recently by
the relative stability in other emerging markets over the past few
months despite the crisis in Argentina. Emphasis on the risk of
contagion by the official sector in the past led to the expectation on
the part of investors and emerging market governments that the official
sector would bail them out. That encouraged excessive risk-taking and
gave rise to the very conditions that made financial crises more
likely. Changing this mindset has been an important priority, and, I
think, an area where we have made some progress.
One important challenge that remains is to explore options to
promote more
orderly sovereign debt restructurings. The official sector should not
encourage countries to default on their debts, but we recognize that
restructuring can and will happen in certain cases. At the moment,
there is a great deal of uncertainty about the process involved in such
restructurings. It is important to find a way such that when a
sovereign debt restructuring occurs, it does so in a more orderly
manner that treats debtors and creditors fairly and reduces the scope
for arbitrary, unpredictable official action.
Thank you again for this opportunity to speak with you. I look
forward to hearing your views and answering your questions.
----------
PREPARED STATEMENT OF MICHAEL MUSSA
Senior Fellow, Institute for International Economics
February 28, 2002
Thank you, Mr. Chairman. I am a Senior Fellow at the Institute for
International Economics here in Washington, DC. As you may know, for 10
years before I joined the Institute last October, I worked on the staff
of the International Monetary Fund, serving from September 1991 through
June 2001 as its Economic Counsellor and
Director of its Research Department.
It is a pleasure to be able to testify today on the important and
timely subject of the economic tragedy now gripping Argentina--on how
it got into this mess, and on how, with the assistance of the
international community, it might get out of it.
The economic performance of Argentina during the past decade has
encompassed a remarkable transition: From hyperinflation, financial
chaos, and deep recession at the end of the 1980's, through a
spectacularly successful period of stabilization, reform, and economic
growth extending generally from 1991 through 1998, then into a
deepening recession and deflation from 1999 through most of last year,
and finally into a catastrophic financial and economic collapse that
began with the effective closure of the Argentine banking last December
and the subsequent sovereign default and termination of Argentina's
Convertibility Plan linking the peso rigidly to the United States
dollar.
What was responsible for the tragic collapse of Argentina's
initially successful efforts at economic stabilization and reform.
Clearly, a variety of important factors played significant roles; and I
will not attempt to detail all of them and weigh their relative
significance in these brief remarks. However, it is important to
emphasize that the tragedy was due primarily to Argentina's economic
policies, either directly or in their failure to respond adequately to
other adverse developments.
Argentina's key policy failure was the inability and unwillingness
of government at all levels to run a sustainable fiscal policy. Even
when the Argentine economy was turning in by far its best performance
in many decades, as it was from 1991 to 1998, the ratio of total public
debt to GDP was rising. In fact, after the Brady bond deal that help
cut the debt ratio in early 1993 to 29 percent of GDP, total public
debt rose to 41 percent of GDP by 1998. And, this was in a period when
the
Argentine government was receiving substantial nonrecurring revenues
from privatization. With the onset of recession and deflation in
Argentina after the collapse of Brazil's exchange rate peg in early
1999, Argentina's fiscal difficulties became more pressing, and public
debt rose to 50 percent of GDP by late 2000. When efforts to reign in
the fiscal deficit during 2001 repeatedly proved inadequate, financial
markets completely lost confidence and sovereign default became
inevitable.
Argentina's Convertibility Plan, which rigidly linked the peso to
the dollar and tightly constrained monetary policy, also played a
critical role in the transformation from success to tragedy. Early in
the 1990's, the Convertibility Plan helped enormously to bring
financial stability and economic recovery after decades of financial
chaos. However, it was a rigid framework that made it more difficult
for the Argentine economy to adjust successfully to adverse shocks in
the late 1990's; and this did not make the problems for fiscal policy
any easier. However, in the end, I would say that fiscal imprudence
killed the Convertibility Plan, rather than the other way around; and
both together killed the Argentine economy.
What was the role of the International Monetary Fund in all of
this? The Fund was deeply involved with Argentina throughout the past
decade, as Argentina operated under the close scrutiny of a series of
Fund-supported programs. And the Fund generally praised most of
Argentina's policies and pointed to them as a model for other emerging
market economies. Thus, the Fund must take some responsibility for
Argentina's tragedy. To be fair, however, it is important to emphasize
that the policies that led to the tragedy were well and truly owned by
the Argentine authorities; Argentina was not pushed into bad or
inadequate policies by the Fund. Rather, the failures of the Fund were
sins of omission, not sins of commission.
I would emphasize two such failures. First, when the Argentine
economy was generally performing very well, the Fund did not press the
Argentine authorities as hard as it could have or should have to run a
more responsible fiscal policy. This was a serious failure of the Fund
to do the job that it is expected to do for a program country like
Argentina that had a long history of fiscal imprudence. Second, I
believe that the Fund was right to organize a large international
support package in December 2000 to help give Argentina one last chance
to avoid disaster. However, by the middle of last year, it was clear
that the Argentine authorities could not implement the policies
required to take advantage of this one last chance. At that time, the
Fund made another serious error in significantly augmenting its
financial support for Argentina. Money that might be far more useful in
aiding Argentina now was wasted in a futile effort to sustain the
unsustainable. And the Argentine authorities were not given a forceful
message of the need to change fundamentally their policies at a time
when the inevitable turmoil from such a change might have been better
controlled than it has actually proved to be.
Looking to the future, no one should underestimate the immense
difficulties faced by the present Argentine authorities in their
efforts to stabilize a rapidly deteriorating situation and then to
initiate a sustainable recovery. The Duhalde administration has taken
several important steps--painful but necessary steps--in the right
direction. However, my understanding is that they are still somewhat
short of the consistent and comprehensive set of implementable policies
that the Fund (and others) rightly insist are needed to provide
assurance of a successful stabilization effort.
In the extremely difficult economic and political environment of
today's Argentina, I think that one must recognize that the Duhalde
administration may not be put together and implement as credible a
program as we would all like to see. The effort may fail, and
stabilization and recovery may only come after Argentina has gone
through a more prolonged period of economic and financial chaos and
political and social upheaval.
However, I believe that it would be unwise to surrender to this
prospect because the policy program that might avoid it is somewhat
less than fully credible. At some point, perhaps sooner rather than
later, it makes sense to take some risk by extending international
support to the best policy program the Argentine authorities are
capable of proposing, even if this program has some significant
weaknesses. For the Fund and the international community, the risk
inherent in supporting such a program can be contained within
reasonable limits: By insisting on a reasonable (but not perfect) set
of policies that have some chance of successful implementation; by
keeping the amount of net new financial support within reasonable
limits (such as 100 percent of quota for additional annual support from
the Fund); and by tranching the disbursement of this support in
relatively small (monthly) packages so that if the program goes
seriously off track remedies may be expeditiously sought.
The international community cannot simply abandon Argentina in its
present desperate circumstances. While recognizing that success is not
assured, it must seek a reasonable and a realistic basis for aiding
Argentina's efforts to end the present tragedy.
----------
PREPARED STATEMENT OF PETER HAKIM
President, Inter-American Dialogue
February 28, 2002
There is a broad consensus that any solution to the Argentina's
financial crisis will require substantial external economic support
from the IMF and other sources. This is the view of Argentine and
United States Government officials, staff and officials of the IMF and
other international financial institutions, most corporate and
financial leaders, and economic analysts of every political stripe.
The United States Government and the IMF have made clear that no
external resources will be made available to Argentina, unless the
Argentine government comes up with a realistic and coherent program for
sustainable economic recovery.
After nearly 2 months in office, the government of President
Duhalde is still struggling to develop a program that is convincing to
the U.S. Treasury and the IMF. Now, a new consensus is forming--that
the Duhalde government, operating under severe political constraints,
will not, on its own, ever be able to put together and execute such a
program. The government does not now have, and seems incapable of
galvanizing, sufficient political support to take the extraordinarily
difficult measures that will be required to restore order to the
Argentine economy. Those measures will impose enormous economic losses
on most Argentines.
If this second consensus is correct, then either: (a) the U.S.
government and the IMF have to reconsider their stated position (for
example, that they cannot come to Argentina's aid unless the Argentine
government first produces a suitable program; or (b) Argentina will
face a far deeper, more prolonged, and more dangerous crisis. Under
these circumstances, hyperinflation, which will leave the economy in
total shambles, appears the most likely way that the necessary economic
sacrifices will be forced on the Argentine population. And nobody quite
knows where the country's politics will end up, but the country's
democratic institutions will be at risk.
A deepening crisis would not only be disastrous for Argentina, but
also it could well produce serious reversals in many other Latin
American countries and play havoc with United States objectives in the
hemisphere. So far the consequences of the Argentine collapse seem to
be largely contained, affecting in a serious way only its small
neighbor, Uruguay. Yet there are already disturbing signs of a decline
in investment flows to Latin America. Such a decline, if it occurs,
would undercut the region's prospects for economic stability and
growth.
The more prolonged and deeper the Argentine crisis, the more impact
it will have on United States relations with other Latin American
countries. Already, the United States is seen by many Latin Americans
as having turned its back on the country that was its strongest ally
and supporter in the region (at the same time considerable aid was
provided to Turkey, a country facing similar problems, but
strategically more important). The United States response to Argentina
is also widely seen as further evidence of the low priority that
Washington has assigned to Latin America, particularly since September
11. These are attitudes that will make the negotiation of hemispheric
free trade more difficult and could result in less cooperation on other
key fronts.
There is no getting around it. In order for Argentina to recover
its economic health, a technically sound economic program is essential.
Nothing can be done without that. But that program can only succeed if
two other conditions are met: The Argentine government must have the
political capacity and will to implement it and external support must
be available. The United States can and should help on all three
counts.
The United States, in tandem with the IMF, should now: (a) provide
the Argentine government with a clear and precise statement of the
crucial elements that must be included in a program for the Argentine
economy that the United States could support; and (b) make plain what
level of resources the United States is
willing to help assemble in order to make the program work. If the
Argentine government accepts this as the right basis to move forward,
the United States, again together with the IMF, should quickly start to
cooperate with the Argentine economic team to develop a full-fledged
policy blueprint--and undertake efforts to secure necessary
contributions from the international financial institutions, the G-7
countries, and private investors. This set of initiatives would, I
believe, gain the political backing of Argentina's neighbors and most
other Latin American countries. They, of course, should be consulted
from the outset.
Only the United States can provide the kind of leadership that is
necessary to make this effort succeed. Without the full weight of the
United States behind it, the IMF cannot and will not take the forceful
actions needed. And there is a good chance that an intensely engaged
United States could end the political impasse in Argentina, and give
the government the support and resolve it needs to take the economic
and political decisions that are essential to address the crisis.
All this still may not work, but without the intense involvement of
the United States, the Argentine government will likely remain
immobilized. The country's economy and politics will continue to
deteriorate, doing terrible and lasting damage to Argentina and its
people, possibly spreading the harm to many other countries of Latin
America, and potentially undermining the United States policy
objectives across the hemisphere.
----------
PREPARED STATEMENT OF WILLIAM J. HAENER
President and Chief Executive Officer
CMS Gas Transmission Company
February 28, 2002
Mr. Chairman, Members of the Subcommittee, I am William Haener,
President and CEO of the CMS Gas Transmission Company, a subsidiary of
the CMS Energy Corporation. I want to thank you for the opportunity to
present my company's perspective on the current crisis and to emphasize
the great concerns that we and other investors share.
Argentina had previously--and justifiably--been held up as a model
for an IMF-supported economic recovery based on sensible, transparent
economic policies and free market principles that fostered sound
investments. In recent weeks, however, both policy and principle have
been reversed. The government's new economic regime represents a
summary abrogation of Argentina's legal obligations and treaty
commitments and contravenes the framework of that country's
constitution. It signals an abandonment of Argentina's free market
orientation and successful privatization program--which brought
billions of dollars of foreign investments into the Argentine economy.
Argentina did not come to its present economic condition because of
foreign investors. In truth, neither investment nor credit could keep
pace with the speed at which Argentina was incurring sovereign debt. It
is Argentina's sovereign debt, which it accumulated by ignoring a giant
fiscal imbalance for too long, that is the cause of Argentina's
economic troubles. That is something that cannot be cured by forcing
the adoption of an increasingly devalued currency or by mounting
politically charged attacks on investors. Attacking sources of
investment, whether they are
domestic or international, will only worsen the plight of the Argentine
people and will do nothing to foster a recovery.
Our main concern with the new policy regime is not the devaluation
of the peso. Rather, we are far more troubled by the government's
cancellation of public and private contracts, its imposition of
restrictions on the free transfer of funds and its elimination of
adjustments for inflation and currency fluctuations. While in some
respects it could be understandable that the government needed to
adjust the value of and float its currency, these other measures are
throttling the revenue stream of energy projects. Since there is no
corresponding relief on the external debts and other obligations of
these energy projects, the Argentine government is forcing many of them
into a position of insolvency.
Since the energy sector is fully privatized, from gas production
through gas transportation, power generation, and electricity
distribution, there is a cascading effect throughout the sector. In
this type of policy environment, insolvent projects could go into
bankruptcy, bankrupt projects could be renationalized, and service to
the
Argentine citizens definitely will be less efficient, more expensive
and subject to
disruptions. Over the long term, a sustainable economy can be achieved
only if there is access to reliable and affordable sources of energy to
fuel the growth of the Gross National Product. But in the short term,
Argentina could be exposed to power outages at any time. The energy
sector is heading into a crisis that could have grave economic, social,
and political implications.
As recently as this week, President Duhalde announced that his
government was contemplating a new ``emergency tax'' on utilities in
response to what he termed ``the extraordinary'' profits that foreign
investors have reaped in recent years. I want to be very clear about
this issue. American and international investment in Argentina's
electricity sector has been of extraordinary benefit to the Argentine
government and people in terms of lower prices and increased
reliability of service.
According to the independent and highly regarded Cambridge Energy
Research Associates, spot energy prices in 2001 were the lowest on
average in Argentina since 1995. Monthly average prices did not rise
above $14 per megawatt hour during the second half of the year. Only in
the winter months of May and June did average prices rise above $16.50
per megawatt hour. These compare to average prices in neighboring Chile
of about $30, in Peru of about $30, and in the United States between
$25 and $35 per megawatt hour. I should emphasize that the prices in
Argentina were no accident--they were the outcome of a well designed
and transparent privatization process.
Similarly in the natural gas sector, prices to the typical
residential customer in Buenos Aires rose only 20 percent between
December 1992 and January 2001 while reliability of service rose
significantly. The vast majority of the price increase was due to
government taxes, which rose nearly 69 percent on gas in that period.
Gas transmission and distribution costs were essentially flat, rising
only 1.9 percent.
At the same time, due to the robust level of competition in the
Argentine marketplace, the returns to foreign investors who produced
those low prices were thin--in many cases less than what could be made
in the United States. On top of that, CMS Energy and other companies
reinvested a large percentage of whatever returns were made in order to
strengthen our operations, increase their efficiency, and make them
more competitive in the tight market. For instance, CMS Energy and the
other shareholders in one of our investments, the TGN Pipeline, have
invested more than more than $1 billion since 1992--above and beyond
the $392 million initially paid for the asset--to upgrade and improve
that system. President Duhalde's comments notwithstanding, we have not
repatriated huge dividends and profits but rather reinvested them to
benefit the Argentine people.
Let me be equally clear about something else. We are not
complaining about the fact that we faced low prices or had low returns.
We as investors are fully prepared to live with unexpectedly thin
margins as long as our contracts are being honored and implemented.
When our contracts are summarily abrogated, however, and when a
government changes the rules and reregulates revenues in such a fashion
as to place sound investments into a position of insolvency, it is
fundamentally unfair, will result in further economic turmoil, and
could lead to massive expropriations. Cheap and reliable energy
supplies are critical to economic stability and growth but cannot be
obtained under current circumstances in Argentina. There will be no
recovery, no matter how much financial support is poured into that
economy.
Through its interference with public and private contracts, the
Argentine government has moved well beyond a simple devaluation and is
ensuring that the crisis will be far worse and longer lasting than in
other recent cases such as Mexico and Brazil. Unless Argentina honors
its contractual and treaty commitments, its actions will continue to
undermine its competitiveness, threaten the viability of its energy
infrastructure and virtually guarantee that there will be no additional
foreign investment in the sector.
I would also urge the Subcommittee to consider that events in
Argentina will have an impact on the United States and other economies.
American energy companies brought approximately $6 billion in equity
and commercial and other loans into
Argentina during the privatization process. Argentina as a whole
brought in about $80 billion in capital and another $80 billion in
credit, mostly in the form of debt. Unless the situation is corrected,
there will be losses to those shareholders whose equity was invested.
There will be losses to U.S. suppliers and service companies who
provide spare parts or hold operations, maintenance, and service
contracts. There will be losses to the U.S. banks that hold the debt,
and to U.S. insurance companies that backstop the banks and the energy
investments. There will be losses to the U.S. taxpayer, as the American
government invested in and insured some of these projects through the
Overseas Private Investment Corporation and the Export-Import Bank of
the United States. And there will be a contagion effect on other
emerging economies, as prospective investors and corporate boards look
far more skeptically at future investments elsewhere. It is difficult
to see how private investors will find their way to other markets in
the region, much less to places like
Afghanistan or Pakistan, if Argentina is allowed to fail.
As a matter of utmost priority, a bailout is not the answer. CMS
Energy urges the Congress, the United States Administration, and the
international financial
institutions to work with Argentina to produce a credible, sustainable
economic plan. That plan must enable existing investors to succeed on
the terms that were espoused in their contracts, and in order to
achieve this outcome there must be an element of accountability
introduced in the process. We would encourage the adoption of strict
and enforceable conditions on any future lending to Argentina to ensure
compliance with the original terms that were the basis for the initial
investments. This means enabling payments to energy companies in
dollars or in pesos indexed to the dollar so that prices will cover all
costs, including depreciation and financial costs, in accordance with
the original economic equation of our contracts. We must also have the
ability to transfer funds freely as stipulated in the bilateral
investment treaty. Only under these circumstances will energy projects
remain solvent, will energy prices remain low and service reliable, and
will Argentina's ability to recover stand a better chance.
If you will permit me, Mr. Chairman, I will conclude on a more
personal note. CMS Energy was one of the earliest United States
participants in the privatization process and is now one of the largest
United States investors in Argentina. We have developed deep and
lasting ties to the country, have employed and trained hundreds of
Argentine citizens, and have been pleased to help develop the country's
infrastructure. It disappoints us greatly to see Argentina reverse
course and head down the path to economic chaos. It worries us to see
the instabilities emerging in Argentina's political system. It alarms
us to see the periodic eruptions of social unrest, with perhaps greater
turmoil in store. And it especially troubles us to see our Argentine
employees and friends have their savings and hard-earned money denied
to them and their futures thrown into doubt. As a friend to the
Argentine people, we hope very much to be able to work constructively
with the authorities there to turn the situation around.
Thank you very much. I will be happy to respond to whatever
questions you and the Subcommittee Members may have.
RESPONSE TO WRITTEN QUESTION OF SENATOR JOHNSON FROM MICHAEL
MUSSA
Q.1. Argentina is a significant producer and exporter of beef
cattle. In light of this fact and the current devaluation of
the peso, could there be an adverse impact on international and
U.S. domestic beef commodity prices. If there is an effect, how
significant could this be?
A.1. This is not really my field of expertise. Nevertheless, I
believe that the correct answer is probably that recent
developments in Argentina, including the sharp devaluation of
the peso, will have only a very small adverse impact on
international beef prices and an even smaller adverse effect on
United States domestic beef prices. The reason is the
following.
Developments in Argentina will affect international beef
prices only to the extent that they affect the volume of beef
exported from Argentina. The devaluation of the peso will
almost surely cause a substantial rise in the price of beef
inside Argentina, measured in pesos, while the international
price of beef (measured in dollars) is largely unaffected.
Higher prices for beef producers in Argentina would normally be
expected to induce an increase in production. However, for the
next 2 years or so, beef production is largely determined by
the size of the existing herd. Beyond this time frame, larger
Argentine beef production seems likely if the peso remains
sharply depreciated (after adjusting for inflation inside
Argentina). But to reach this higher level of production on a
sustainable basis, the size of the herd must be increased. This
requires that slaughter rates be reduced for a time, with the
effect of temporarily reducing the supply of beef. Thus, it
would probably take at least 3 years before production of beef
in Argentina would rise significantly and on a sustainable
basis in response to a lower value of the peso.
Experience in many financial crises indicates that the
foreign exchange value of the Argentine peso, adjusted for
inflation in Argentina, will depreciate much more in the short
run than in the longer run. For example, after the Mexican
devaluation in late 1994, the Mexican peso lost more than a
third of its dollar value (adjusted for inflation) by mid-1995.
But, 5 years later, the foreign exchange value of the Mexican
peso (adjusted for inflation) was back near its predevaluation
level. If the foreign exchange value of the Argentine peso
follows a similar course, the long run effect on beef
production in Argentina is likely to be modest.
With respect to the U.S. domestic beef prices, it is
essential to recognize that the market for domestic beef is far
from completely integrated with the international market. (This
very same principle applies with even greater force to domestic
beef prices in more heavily protected markets such as those in
Japan and Europe.) Accordingly, any effects of Argentine
developments on international beef prices are likely to be more
muted for United States domestic beef prices.
January 1, 2002
Crying With Argentina
By Paul Krugman
Although images of the riots in Argentina have flickered across our
television screens, hardly anyone in the United States cares. It is
just another disaster in a small, faraway country of which we know
nothing--a country as remote and unlikely to affect our lives as, say,
Afghanistan.
I do not make that comparison lightly. Most people here may think
that this is just another run-of-the-mill Latin American crisis--hey,
those people have them all the time, don't they?--but in the eyes of
much of the world, Argentina's economic policies had ``made in
Washington'' stamped all over them. The catastrophic failure of those
policies is first and foremost a disaster for Argentines, but it is
also a disaster for United States foreign policy.
Here is how the story looks to Latin Americans: Argentina, more
than any other developing country, bought into the promises of United
States-promoted ``neoliberalism'' (that is liberal as in free markets,
not as in Ted Kennedy). Tariffs were slashed, state enterprises were
privatized, multinational corporations were welcomed, and the peso was
pegged to the dollar. Wall Street cheered, and money poured in; for a
while, free market economics seemed vindicated, and its advocates were
not shy about claiming credit.
Then things began to fall apart. It wasn't surprising that the 1997
Asian financial crisis had repercussions in Latin America, and at first
Argentina seemed less affected than its neighbors. But while Brazil
bounced back, Argentina's recession just went on and on.
I could explain at length the causes of Argentina's slump: It had
more to do with monetary policy than with free markets. But Argentines,
understandably, cannot be bothered with such fine distinctions--
especially because Wall Street and Washington told them that free
markets and hard money were inseparable.
Moreover, when the economy went sour, the International Monetary
Fund--which much of the world, with considerable justification, views
as a branch of the U.S. Treasury Department--was utterly unhelpful. IMF
staffers have known for months, perhaps years, that the one-peso-one-
dollar policy could not be sustained. And the IMF could have offered
Argentina guidance on how to escape from its monetary trap, as well as
political cover for Argentina's leaders as they did what had to be
done. Instead, however, IMF officials--like the medieval doctors who
insisted on bleeding their patients, and repeated the procedure when
the bleeding made them sicker--prescribed austerity and still more
austerity, right to the end.
Now, Argentina is in utter chaos--some observers are even likening
it to the
Weimar Republic. And Latin Americans do not regard the United States as
an innocent bystander.
I am not sure how many Americans, even among the policy elite,
understand this. The people who encouraged Argentina in its disastrous
policy course are now busily rewriting history, blaming the victims.
Anyway, we are notoriously bad at seeing ourselves as others see us. A
recent Pew survey of ``opinion leaders'' found that 52 percent of the
Americans think that our country is liked because it ``does a lot of
good;'' only 21 percent of foreigners, and 12 percent of Latin
Americans, agreed.
What happens next? The best hope for an Argentine turnaround was an
orderly devaluation, in which the government reduced the dollar value
of the peso and at the same time converted many dollar debts into
pesos. But that now seems a remote prospect.
Instead, Argentina's new government-- once it has one --will
probably turn back the clock. It will impose exchange controls and
import quotas, turning its back on world markets; do not be surprised
if it also returns to old-fashioned anti-American rhetoric.
And let me make a prediction: These retrograde policies will work,
in the sense that they will produce a temporary improvement in the
economic situation--just as similar policies did back in the 1930's.
Turning your back on the world market is bad for long-run growth;
Argentina's own history the best proof. But as John Maynard Keynes
said, in the long run we are all dead.
Back in April, George W. Bush touted the proposed Free Trade Area
of the Americas as a major foreign policy goal, one that would ``build
an age of prosperity in a hemisphere of liberty.'' If that goal really
was important, we have just suffered a major setback. Don't cry for
Argentina; cry with it.
Chronology of Events
Prepared by J.F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense and Trade Division, CRS
1980's
Argentina suffers through an extended period of economic
instability including the Latin American debt crisis and
hyperinflation.
1989
Peronist candidate Carlos Menem is elected President of Argentina
and appoints Domingo Cavallo as Minister of Economy. Together they
enact a major structural adjustment program including tax reform,
privatization, trade liberalization, deregulation, and adoption of a
currency board.
April 1, 1991
Argentina's Congress enacts the Convertibility Law, which legally
adopts the currency board guaranteeing the convertibility of peso
currency to dollars at a one-to-one fixed rate and limiting the
printing of pesos only to an amount necessary to purchase dollars in
the foreign exchange market. Effectively, each peso in circulation is
backed by a U.S. dollar and monetary policy is forcibly constrained to
uphold that promise.
1991-1994
Argentina enjoys strong economic growth and the currency board is
considered highly successful.
1995
Following Mexico's December 1994 peso devaluation, capitol flows
out of emerging markets. Argentina's GDP declines by 2.8 percent.
May 1995
President Menem is reelected President after convincing Congress to
change electoral laws that prohibit a second term.
1995 -1999
The U.S. dollar experiences a prolonged period of real
appreciation, resulting in similar appreciation of the Argentine peso
relative to its trading partners.
1996 -1997
Renewed period of Argentine economic growth (5.5 percent in 1996,
8.1 percent in 1997), but current account deficit and debt measures
worsen.
July 1997
East Asian financial crisis begins.
1998
Financial crisis moves to Russia and then Brazil. Argentina enters
prolonged recession in third quarter (still in effect) and unemployment
begins to rise.
1999
January
Brazil facing its own financial crisis, devalues its currency,
hurting Argentine
exports, 30 percent of which were traded with Brazil.
September
The Argentine Congress passes the Fiscal Responsibility Law,
committing to large reductions in both Federal and provincial
government spending.
October 24
Fernando de la Rua of the Radical Civic Union (UCR), the opposition
coalition candidate, running on a platform to end corruption (under
Menem) and the recession defeats Peronist candidate Eduardo Duhalde for
president.
December 10
De la Rua is inaugurated President of Argentina and shortly
thereafter seeks
assistance from the IMF.
2000
March 10
The IMF agrees to a 3 year $7.2 billion stand-by arrangement with
Argentina conditioned on a strict fiscal adjustment and the assumption
of 3.5 percent GDP growth in 2000 (actual growth was 0.8 percent).
May 29
The government announces $1 billion in budget cuts in hopes that
fiscal responsibility will bring renewed confidence to economy.
September 15
The IMF concludes an Article IV Consultation, the required annual
comprehensive review of member country economics.
October 6
Vice President Carlos Alvarez resigns over de la Rua's decision not
to replace two cabinet members linked to a recent Senate bribery
scandal.
December 18
The de la Rua government announces a $40 billion multilateral
assistance package organized by IMF (see below).
2001
January 12
Argentina's continued poor economic performance prompts the IMF to
augment the March 10, 2000 agreement by $7.0 billion as a part of a $40
billion assistance package involving the Inter-American Development
Bank, the World Bank, Spain, and private lenders. The agreement assumes
GDP will grow at a rate of 2.5 percent in 2001 (versus actual decline
of 3.7 percent).
March 19
Domingo Cavallo, Minister of Economy under Menem and architect of
the currency board 10 years earlier, replaces Ricardo Lopez Murphy, who
resigns as the
Minister of Economy.
June 16 -17
The de la Rua government announces a $29.5 billion voluntary debt
restructuring in which short-term debt is exchanged for new debt with
longer maturities and higher interest rates.
June 19
The peso exchange rate adjusted to allow for effective 7 percent
devaluation for foreign trade in hopes of improving Argentina's
international competitiveness. Many raise concern over the effects on
the credibility of the convertibility regime.
July 10
Cavallo announces a plan to balance budget, but the markets react
negatively,
expressing lack of confidence.
July 19
Unions call a nationwide strike to protest government austerity
plan.
July 29
The Argentine Congress passes ``Zero Deficit Law,'' requiring a
balanced budget by the fourth quarter of 2001.
September 7
Based on Argentina's commitment to implement the ``Zero Deficit
Law'' immediately, the IMF augments its March 10, 2000 agreement for a
second time, increasing lending commitment by another $7.2 billion.
October
The use of provincial bonds as ``scrip'' to pay public salaries
becomes more widespread as Federal revenue transfers decline.
October 14
The opposition Peronist Party wins control of both Chambers of the
Congress in
mid-term elections.
November 6
Argentina conducts a second debt swap, exchanging $60 billion of
bonds with an average rate of 11-12 percent for extended maturity notes
carrying only 7 percent interest rate. International bond rating
agencies consider is an effective default.
November 30
A run on the bank begins, with central bank reserves falling by $2
billion in 1 day. President de la Rua imposes $1,000 per month
limitation on personal bank withdrawals.
December 1
Protests begin over bank withdrawal limitations.
December 5
The IMF withholds $1.24 billion loan installment, citing
Argentina's repeated
inability to meet fiscal targets.
December 7
Argentina announces it can no longer guarantee payment on foreign
debt.
December 13
The government announces that the unemployment rate reaches near
record of 18 percent. Unions call nationwide strike.
December 14
Supermarket looting begins.
December 19
Rioting spreads to major cities over deep budget cuts. The
government declares a state of siege. Minister of Economy Domingo
Cavallo resigns.
December 20
President de la Rua resigns in the wake of continued rioting,
leaving 28 people dead.
December 21
Congress accepts President de la Rua's resignation. Senate
President Ramon Puerta is named Provisional President for 48 hours.
December 23
Congress appoints San Luis Governor Adolfo Rodriguez Saa as Interim
President until elections can be held in March 2002.
December 26
The liquidity standards for banks are relaxed. Rodriguez Saa
announces a new economic plan based on: (1) suspension of payments on
public debt; (2) new jobs creation program; and (3) creation of new
currency (the Argentino) to begin circulating in January 2002 and not
to be convertible to the U.S. dollar.
December 30
President Rodriguez Saa resigns after continued rioting and loss of
party support. Senate leader Puerta resigns to avoid second appointment
as Interim President. No immediate successor emerges to take over the
Presidency.
December 31
The Argentine Congress selects Peronist Senator Eduardo Duhalde to
complete December 2003 Presidential term.
January 1
Senator Duhalde sworn in as President. He blames Argentina's
economic problems on the free market system and vows to change economic
course. Except for the debt moratorium, new economic policies are
unclear.
January 6
After the Argentine Congress passes necessary legislation,
President Duhalde announces the end of the currency board and a plan to
devalue the peso by 29 percent (to 1.4 to the dollar) for major foreign
commercial transaction, with a floating rate for all other
transactions. Other elements of economic plan include: Converting all
debts up to $100,000 to pesos (passing on devaluation cost to
creditors); capital and bank account controls; a new tax on oil to
compensate creditors for the losses that will ensue; renegotiating
public debt, and a balanced budget.
January 10
Government announces it will ``guarantee'' dollar deposits, but to
curtail bank runs, the $1,000 (1,500 peso) limit on monthly withdrawals
is maintained and all checking and savings accounts with balances
exceeding $10,000 and $3,000 respectively, will be converted to
certificates of deposit and remain frozen for at least 1 year. Smaller
deposits have the option of earlier withdrawal by moving to peso
denominated accounts at the 1.4 exchange rate.
January 11
The government extends the bank holiday two extra days, while the
foreign currency market opens for first time in 3 weeks. The peso falls
immediately to 1.7 per dollar.
January 15
The peso fall as low as 2.05 to the dollar in active trading.
January 16
The IMF approves request for 1 year extension on $936 million
payment due
January 17, keeping Argentina from falling into arrears.
January 17
The government announces that dollar denominated loans exceeding
$100,000 will be converted to pesos at 1.4 for fixed rate, deepening
the balance sheet mismatch of banks.
January 19 -20
Duhalde reverses his decision to guarantee dollar deposits, which
will be converted to pesos at some undefined devalued exchange rate.
January 23
The Argentine Senate passes bankruptcy law that would use capital
controls to restrict payment of foreign private debt payments through
December 2003.
January 28 -29
Foreign Minister Carlos Ruckauf visits with Bush Cabinet members to
appeal for political and financial support (including IMF assistance)
as protests continue in
Argentina.
January 30
IMF team meets with Argentine officials, who declare intention to
adopt a floating exchange rate in near future. Argentina's Chamber of
Deputies passes controversial bankruptcy law, stripping it of the
Senate provision prohibiting foreign debt payments, but other capital
controls remain in effect. It retains language allowing
conversion of dollar denominated debt below $100,000 to pesos at 1-to-1
rate (benefiting debtors) and suspending creditor action on loan debt
defaults for 180 days.
February 1
Argentina Supreme Court rules that government restrictions on bank
deposit withdrawals are unconstitutional.
February 3
By decree, Duhalde eases the restrictions on bank withdrawals, but
places a 6 month moratorium on enforcement of Supreme Court order.
Congress moves to impeach all nine members of the Supreme Court.
Government closes foreign exchange markets, declares an end to dual
exchange rate system in favor of floating peso, and requires all
deposits to be converted to inflation-indexed peso accounts at the
previous official rate of 1.4 to the dollar. The dollar ends as an
official circulating currency.
February 6
Government announces new Federal budget with 15 percent cut in
expenditures, including agreement with provincial governments to reduce
the number of Chamber of Deputies and their staff by 25 percent.
February 11
Foreign exchange market opens for first time with a free floating
peso, which depreciates 20 percent to 2.5 to the dollar before
rebounding to 1.9 to 2.2 by early afternoon.
February 13
Government announces that 20 percent energy export tax will be used
for general government expenditures rather than dedicated to bond
repayments in support of banking system, as promised when unveiled 2
days earlier.
February 14
In meeting with IMF officials, Argentine representatives suggest
that the country will need $22-$23 billion in assistance.
February 18
Petroleum industry workers begin strike to protest energy export
tax. Unemployment reaches 22 percent, general protests erupt into
violent attacks on banks over continued restrictions on withdrawal.
February 22
Social unrest continues and the peso trades at 2.15 to the dollar,
a 54 percent
depreciation since a unified floating exchange rate was adopted on
February 11.