Eyewitness: IMF bails out Argentina

Argentina's government this month obtained International Monetary Fund approval for $8 billion (£5.5 billion) in emergency funding to help service a mounting debt of $130 billion. It marks Argentina's tenth IMF deal since 1983 and an ongoing 39-month recession.

Domingo Cavallo, economy minister in the government of president Fernando de la Rúa, plans to eliminate the deficit by renewing capital inflows mainly through new taxes on international investors and a push against tax evasion. Noted for having ended long-running hyperinflation in 1991 by pegging the peso to the US dollar, he now intends to replace this with a 50-50 dollar-euro "basket" when the euro reaches dollar parity, which some analysts see as de facto devaluation.

Arturo O'Connell, professor of Latin-American integration at the University of Bologna's Buenos Aires campus and an expert in international finance, says that economic recovery based on renewal of capital inflows has a negative history.

"This medicine failed again to work last year despite a massive IMF loan and is highly unlikely to work now. Reduction of fiscal deficits threatens a worsened recession in a context of near paralysis of private expenditure.

"Argentina has a serious problem in that it is unable to match expanded imports generated by the 'opening up' of the economy with a comparable increase in exports. This is the origin of the enforced recession."

Celia Szusterman, Argentine research fellow at St Antony's College, Oxford, believes that the chief cause of successive crises is governments lacking the political courage to reform the state and that action is urgently needed.

"The Argentine government must show that an open economy is based on clear, fair and predictable rules, on the fulfilment of both domestic and international commitments and in the provision of security for its citizens. It is estimated that more than 80 per cent of social expenditure is lost as a result of mismanagement, corruption and clientelism."

She suggested that Argentine default or devaluation would affect Mercosur partners (Brazil, Uruguay and Paraguay) and other neighbours such as Chile and Bolivia: "It would also further damage the credibility of emerging markets in the eye of foreign institutional investors, as Argentine foreign debt accounts for 20 per cent of all emerging market debt."