FT Letter: Argentina deserves more credit for its economic progress

(18th February 2004)

Sir, Martin Wolf asked for a firmer International Monetary Fund stand on Argentina ("The IMF should stand firm against Argentine blackmail", January 28). It is not true that Argentina is making an insufficient fiscal effort, offering an inadequate treatment to creditors, or lacking a credible solution to the problems of the banking system or privatised companies.

One of the outstanding elements of Argentina's recovery is the remarkable improvement of public accounts, as a result of the increase in revenue and of the stability of public expenditure levels in relation to gross domestic product (from neutral in 2002 to 3 per cent of GDP in 2003 - above 2.5 per cent of GDP, as agreed with the IMF). This an unprecedented fiscal effort in the recent history of the public sector in Argentina.

Mr Wolf contrasts Argentina's target of 3 per cent of GDP with the 4.25 per cent agreed by Brazil. That is erroneous, since we carried out in the mid-1990s a reform of the pension system (as advised in all the orthodox economics texts) that replaced a public system with a mixed one that created a 1 per cent loss for the Treasury.

Any added greater fiscal effort would ignore Argentina's social realities - 15 per cent unemployment and 50 per cent poverty - thus increasing chances of political instability and compromising the 8 per cent GDP growth in 2003.

Since September 2003, when a medium-term programme was agreed with the IMF, my government has also made progress in the renegotiation of its debt. As for the external debt, in the very same month of that IMF agreement, the debt restructure proposal was presented, consultative meetings took place and selection of the syndicate of banks began.

Promising a greater fiscal effort would entail a non-serious proposal of difficult fulfilment. It would be useless for the interest of creditors.

The Argentine government chose a conservative but achievable proposal instead of a short-sighted one that could seem initially more generous but would lead in a few years to default and renegotiation.

Mr Wolf makes no mention of improvements: the end of restrictions on banks; Central Bank regulations to stimulate the return of credit; compensation to the banks due to the asymmetric indexation being settled; and the rescue of all provincial quasi-currencies. In the meantime the financial institutions restructured half of their debt with external creditors ($13.bn).

Bank safes hoard the record figure of $28bn while the liquidity of the system has reached its highest levels in history (29 per cent on the deposits) and credit to the private sector stopped falling in the final semester of 2003. From $700m monthly losses at the beginning of 2003, banks approached a point of equilibrium in the last quarter.

In short, at least four elements are absent from Mr Wolf's article: 1) the substantial fiscal effort; 2) the present normal functioning of the financial system; 3) the new regulatory framework for public utilities; 4) the fulfilment of all IMF commitments.

The strategy reflects the determination of the Argentine government to lead the country towards sustained growth with social inclusion. Delays in debt negotiation are not part of a strategy. It would have been useless to approach the creditors before stabilising the economy and signing an agreement with the IMF - simply because no deal would have been credible.

Assessing the renegotiation of the external debt as an isolated fact, without taking into account the historic perspective of a developing country, is either ignorance or bad faith.

Rafael Bielsa, Minister Of Foreign Affairs, Argentine Embassy to the UK, London W1K 4AH, UK