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From No Aid to a Bailout for Argentina

Joseph Kahn.
Produced by
The New York Times

WASHINGTON, Aug. 22 — Despite negotiations that covered 12 days and several midnight bargaining sessions, many of the people involved in emergency talks to bail out Argentina's floundering economy went to lunch on Tuesday believing that the United States would say no to new aid.

Bush administration officials had taken office declaring their intention to end President Clinton's repeated bailouts of chronically ailing economies like Argentina's. And Treasury Secretary Paul H. O'Neill lamented in negotiating sessions over the past week that nobody seemed to be thinking creatively about ways of alleviating the country's debt problems without more loans. Publicly, he fretted about American "plumbers and carpenters" who pay taxes and "wonder what in the world we're doing with their money."

But by late Tuesday afternoon, Mr. O'Neill appeared to have changed his mind, and the administration voted to support the International Monetary Fund's plan to provide $8 billion in new loans for Argentina on top of a $13.7 billion package the country received just eight months ago.

Ostensibly the administration's shift occurred because Argentina agreed to restructure its debt. The new I.M.F. loan program also pressures private lenders to help Argentina reschedule some loans.

But while those are novel provisions for an international bailout, they represent a 30-degree tack, rather than the 180-degree turn- around that the Bush administration had once indicated it preferred when it came to repeat borrowers at the financial bailout window.

The decision underscored that even at times when the United States holds most of the cards — it is the largest single shareholder in the I.M.F. and is generally thought to have veto power over new loans — it finds it difficult to deny an urgent request from an ally. It also cannot simply walk away from the interventionist financial diplomacy of the Clinton administration. That is, at least in part, because after a decade of fast-paced economic integration it is hard to separate financial rescues from other foreign policy priorities the Bush administration puts higher on its agenda, like free trade, open stock and bond markets, even democracy.

"You have to worry about collateral damage to the global financial situation, free trade, and open economies," said Edwin M. Truman, a former Treasury and Federal Reserve official who worked on many international financial rescues. "It's not like you can just categorically turn off the bailout switch."

President Bush has stressed the need to expand ties with Latin American leaders and has pushed a plan to create a hemispheric free trade zone modeled on Nafta. That goal would likely have receded had Argentina collapsed after its leaders got a polite no to their aid request from the United States, people involved in the talks said today.

It is no coincidence that Robert B. Zoellick, the United States trade representative, today invited Argentina, Brazil, Paraguay and Uruguay to join the United States in reviving the so-called Four-Plus-One trade group that pushed for trade expansion in the first Bush administration. Mr. Zoellick called free trade an engine of economic growth for Argentina and the region that would supplement the I.M.F. rescue package.

The Bush administration also has come under repeated fire, especially from European allies, for abandoning international commitments made during the Clinton years, including agreements to reduce global warming, control germ warfare and to crack down on tax evasion. White House officials have recently been scrambling to demonstrate that they value cooperative relations with major allies. Scuttling a rescue for Argentina could have undermined that.

Interestingly, many economists agree with Mr. O'Neill's skeptical approach. Argentina's problems have become severe enough that new loans are seen as having no more chance of success — and maybe less chance — than the last round agreed to during the final months of the Clinton administration. Argentina's economy has been shrinking for three years. Falling exports and capital flight has threatened its ability to repay some $128 billion in dollar- denominated foreign loans.

But while it is hardly a model for economic development among emerging markets, Argentina has often followed the advice of the I.M.F. In the early 1990's it committed itself to keeping its peso equal to a dollar in an effort to tame inflation, and overhauled its banking system, which was mired in mismanagement.

Moreover, political support for fiscal austerity and open markets is shaky, both in Argentina and neighboring Brazil. Some fear a popular backlash if the experiments fails.

"If these talks had not had a positive result, we would definitely have had effects — political, economic and in other areas — that we all definitely wanted to avoid," Daniel Marx, Argentina's finance secretary, said today. Mr. Marx led his country's negotiating team.

For days, Mr. O'Neill pressed I.M.F. officials, Mr. Marx and his staff to find a way to solve Argentina's problem without new loans. Mr. O'Neill explored the idea of an Argentine-led debt restructuring backed by the I.M.F. or another multinational lending agency that would not require up-front loan commitments, for example, people involved in the talks said.

To the extent Mr. O'Neill and others countenanced new lending, they wanted assurances that the loans would resolve Argentina's woes long- term. Given market uncertainties, I.M.F. and Argentine officials were unable to provide the hard, multi- year projections Mr. O'Neill demanded, the people said.

Timing also worked against the administration. Argentine officials had made clear they were seeking up to $9 billion in new loans. As negotiations dragged on, investors lost faith in new aid.

Mr. O'Neill's scathing public assessment of Argentina's dependence on foreign aid — he referred to a 70- year record of borrowing with poor results — also struck at confidence. Argentine stocks plummeted and the bond market soured.

Ultimately, the administration was backed into supporting new aid just to control matters. The aid buys time for Argentina and the I.M.F. to pursue the creative long-term solution that Mr. O'Neill sought.

"The reason the talks took so long is that O'Neill really wanted to do something creative and longer lasting," said William R. Rhodes, a Citigroup vice chairman who tracked the talks for his bank. "But ultimately to get that done you need calm and tranquillity in the markets."

(c) Copyright: The New York Times

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