LETTERS TO THE EDITOR: Return to rules-based policy may help IMF avoid future disasters 
By Desmond Lachman
Financial Times; Feb 02, 2004

From Mr Desmond Lachman.

Sir, Martin Wolf is to be commended for exposing the charade in the International Monetary Fund's present lending arrangement to Argentina, which in essence amounts to the IMF's relending Argentina the principal that it owes to the Fund ("The IMF should stand firm against Argentine blackmail", January 28). He is also to be complimented for asking whether the IMF should not pay for the egregious mistakes it made in its past Argentine lending programme and whether it should not share in the losses of Argentina's private creditors.

Last September, by agreeing to a three-year stand-by credit for Argentina that did not require an adequate primary budget surplus target, the IMF ensured that Argentina would not be in a position to make its private creditors a reasonable offer even had it wanted to do so. By now turning a blind eye to the unrealistically low prices charged by Argentina's public utilities, the IMF is cynically making sure that it does not need to recognise arrears on its past Argentine lending, irrespective of the very negative message that this may be sending to other IMF borrowers.

One may question whether broader lessons for the IMF should not be drawn from its highly unfortunate Argentine lending experience. In particular, one may ask whether the IMF should not be required to move away from its "exceptional circumstance" lending policy, which was introduced at the time of the 1995 Mexican peso crisis and which in effect gives the IMF complete discretion in deciding how much money to lend any particular country. One would think that a return to a more rules-based system, which imposed limits on a country's maximum access to IMF resources and characterised the IMF's lending policy prior to 1995, might save the IMF from future Argentine-like debacles.

The IMF's present large outstanding loans to Brazil, Indonesia and Turkey should remind us that Argentina is not the only country that might have difficulty in repaying the IMF. It should also alert us to the fact that once the present global liquidity cycle turns, there are likely to be other large emerging markets knocking at the IMF's door for outsized loans. A rules-based system might spare the international community from yet another round of moral hazard type lending, which all too often ends in tears.

Desmond Lachman, Resident Fellow, American Enterprise Institute, Washington, DC 20036, US