LETTERS TO THE EDITOR: IMF is putting its own interests ahead of the common good in its stance on Argentine debt
Ariel Blumencwejg

From Mr Ariel Blumencwejg.

Sir, In his article "The IMF should stand firm against Argentine blackmail" (January 28), Martin Wolf addresses the rather unhealthy relationship between Argentina and the International Monetary Fund, thus uncovering the Achilles' heel of the so-called International Financial Architecture (IFA). While he is right in his suggestion that the IMF should stiffen its position with respect to Argentina and thus be prepared to share in the losses with the private sector creditors, he does not go far enough in exposing the root cause of the problem or the consequences of his recommended course of action.

In truth, the IMF is acting as an obstacle to the proper functioning of the system it is supposed to oversee. The IMF is clearly terrified of an Argentine default because it will probably be a catalyst for some profound and overdue changes to that organisation, to bring it into the 21st century (some would say the 20th century, but we shall be kind to it).

As a result, by signing the three-year agreement with Argentina last year, as well as looking the other way the minute that country did not meet its first set of hurdles, it is putting its own selfish interest ahead of the greater common good, seemingly unaware of the implications its actions have for the IFA. Thus, by implicitly acquiescing in the deep subordination of the interests of Argentina's public external debt holders to those of both its own and the local banking system, in exchange for essentially agreeing to soft terms on structural reform, it is essentially reinforcing the signal that lending to these countries is inherently risky, not so much because of the genuine risk of policy failures but because of the significantly asymmetric negotiating position that external private creditors have at the restructuring table.

Bear in mind that this is not just the result of some loopholes in the current bond documentation as the IMF has argued but, more significantly, because of the bias towards the subordination of interests and the general lack of enforceability of property rights that its own position has produced. The logical result should be that capital markets demand a substantial premium for this risk or that financing from private sources dry up, to be picked up by public ones (that the markets are currently not really paying any attention to these facts attests more to the bubble nature of financial markets currently and in particular credit markets, which is itself another topic).

That the Argentines are so masterfully playing the system clearly shows how flawed and corrupted it has become. The analogy with Enron and the last wave of corporate scandals is not that far-fetched as in this case the guardian of the integrity of the system has let itself be co-opted by the con-man, in a manner similar to that in which Enron's auditor let itself be corrupted by the conniving greed of some individuals and times. Let their example be a warning: it is still not too late to reverse course.

Ariel Blumencwejg, Emerging Market Advisors, EMDebtAdvisors.com, Montclair, NJ 07042, US