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87–033 PDF 2003

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

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

DANIEL K. AKAKA, Hawaii

PHIL GRAMM, Texas

RICHARD C. SHELBY, Alabama

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

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

TIM JOHNSON, South Dakota

DANIEL K. AKAKA, Hawaii

MICHAEL B. ENZI, Wyoming

MIKE CRAPO, Idaho

CATHERINE CRUZ WOJTASIK, Staff Director

DANIEL M. ARCHER, Republican Staff Director

(II)

CONTENTS

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)

(1)

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.

2

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 InterAmerican 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 ReVerDate 11-MAY-2000 10:58 May 14, 2003 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 87033.TXT SBANK4 PsN: SBANK4
3

sponsibility 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.

4

[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.

5

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

6

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

7

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

8

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.

9

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

10

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.

11

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?

12

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

13

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 Washingtonbased center for policy analysis and exchange on Western HemiVerDate 11-MAY-2000 10:58 May 14, 2003 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 87033.TXT SBANK4 PsN: SBANK4
14

sphere 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

15

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.

16

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

17

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?

18

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

19

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 fingerpointing 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.

20

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.

21

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

22

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.

23

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 Orte ́ga, 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

24

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.

25

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.

26

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,

27

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

28

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.

29

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.

30

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:]

31

1This 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.

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. TAYLOR1

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.

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

32

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 packVerDate 11-MAY-2000 10:58 May 14, 2003 Jkt 000000 PO 00000 Frm 00036 Fmt 6621 Sfmt 6621 87033.TXT SBANK4 PsN: SBANK4
33

age, 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

34

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

35

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 proVerDate 11-MAY-2000 10:58 May 14, 2003 Jkt 000000 PO 00000 Frm 00039 Fmt 6621 Sfmt 6621 87033.TXT SBANK4 PsN: SBANK4
36

gram; 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 IMFsupported economic recovery based on sensible, transparent economic policies and

37

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

38

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.

39

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.

40

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.

41

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-toone 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.

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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.

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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

44

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.

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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.