IMF: International Monetary Fear-factor By Gregory Fossedal Copyright © United Press International June 24, 2005 Link to this article at The Washington Times NEW YORK -- Relations between the International Monetary Fund and Argentina have come to resemble a television reality show, each side alternately cramming worms down its throat or running along the edge of a cliff, while the other snears and taunts. In the IMF-Argentina showdown, however, there appears to be no safety net. Furthermore, the "show" seems to be running on and on well past its time slot -- an agonizing, never-eneding draw in which no one decisively wins. It's another reason to stay away from Argentine equities and, indeed, if you have them, hold on to your short positions. Cat and mouse... The Fund wants Argentina to run a substantial fiscal surplus of 4.5 per cent of GDP -- nearly as big as the U.S. budget deficit. In a presentation this week to the Fund's directors, the country's representative to the IMF, Hector Torres, reportedly complained that the Fund merely wants to "keep creditors happy, at the expense of growth and the social needs of the population." Torres is (not as to justice, but as a matter of fact) right. The surplus requirement is designed in part to provide a pool of money out of which Argentina will be able to pay off more than $35 billion in defaulted debts. The IMF, however, does not want to make this linkage explicit, fearing that Argentina might simply walk away from, if you will, the peace table. "It's a game of cat and mouse," as a well-placed Fund official put it last week. "We want the Argentines to do something about the holdouts" -- the approximately 25 percent of bondholders who rejected the government's offer -- "and they want to get a standby agreement with us without having resolved that." Sounds vague, "Bottom Line" observed. "Well, look, you're right -- yes, it's vague; it's deliberately vague. We don't condition mere discussions on their working things out with the creditors -- but we don't say that we'll ultimately be willing to approve a loan without some resolution." "We are hoping that they see that they need to resolve this problem without our having to say so. They are hoping that we fear having them so far outside the international norms that other countries will all see it as an incentive to follow their example and thumb their nose at their creditors." ... or frogs and water? Indeed the more appropriate metaphor may be the recipe for boiled frog. As any experienced chef knows, you do not boil the water and then put the frog in -- it jumps out. You get the frog into the water and then slowly turn up the heat. The only question is, who is the chef, and who is the frog? Both Argentina and the IMF are betting that they are in the diver's seat. As long as this continues, however, a resolution of Argentina's standing in the world community is many months away, perhaps longer. So is any resolution of the IMF's status: Is it capable of bringing growth to developing countries, and imposing responsible debt management policies on Argentina and others like it? Rodrigo Rato has it in his power to revive the IMF to heights it has not enjoyed since the directorship of Michel Camdessus. He also has the potential to be the last IMF Managing Director in history. Failure to bring Argentina to terms will lead to -- indeed, has already begun -- a dominoe-like series of similar defaults by others. This, in turn, will leave investors in the U.S., Japan, Italy, Germany, Britain, and France -- the principal IMF sponsors -- wondering what the Fund is good for. Bottom line In March, "Bottom Line" made the assessment that Argentina's debt rollover would now become a long, tortuous undertaking -- with the IMF lacking the guts to take Argentina out to the woodshed, but also having enough prudence, justice, and discipline to avoid explicitly giving in, either. (See "Argentina's coup d'ebtat," March 11.) That process appears to be just what is unfolding. Mr. Rato's style has been a gradualist one that avoids confrontation. This is probably about right in policy terms. But it leaves him looking weak in the near term, and gives Argentina, for its part, every incentive to play the waiting game, hoping that it, not Mr. Rato, is the party that can afford to let matters fester. Ultimately it doesn't matter to investors what the outcome is if the outcome is, indeed, perhaps six months or more in the future. In the short term, look for calm but indecisive mumblings from the Fund, and jawboning from Argentina's Nestor Kircher and his administration. Still short. Gregory Fossedal, foss@upi.com, is an advisor to international investors on global markets and ideopolitical risk, and a research fellow at the Alexis de Tocqueville Institution. Mr. Fossedal's opinions are entirely his own, and are not necessarily those of his clients, UPI, or AdTI. Furthermore, they are subject to change without notice.