International Financial Institutions and their blow to global economy
It is now little
over 10 years since Argentina defaulted on its debt to the WORLD BANK. Since the
default Argentina experienced an astonishing economic recovery and now can look
upon the EU, where some of the member states face similar situations as did
Argentina 10 years ago. I have expressed my views on this subject numerous times
on this block and will not reiterate those views. The reason I once again raise
the subject is because I found an interesting article written in 2002 on Odious
Debts website which does confirm my thesis on subject matter. I have added my
comments below some of the paragraphs. The controversial actions and policies
of the IMF and other International Financial Institutions has not changed the slightest,
they are applying these devastating tactics today as much as they did 10 years
ago!!
In
November 2002 Interpress Service published an article written by Emad Mekay
which reads as follows:
Interpress Service November 22/2002
Argentine government may gain from World
Bank default
by Emad Mekay
Argentina's decision to default on
its debt to the World Bank could hurt the country's poor but might also prove
beneficial in the long run, some analysts here say.
Thursday's decision could also harm
the World Bank and the International Monetary Fund (IMF), both interested in
maintaining their positions and reputations as superior patrons of the world
economy.
The IMF and its doctrine stirred Argentina’s
economy into default in the first place, as it did to numerous other countries
which were exposed to IMF policies.
Argentina defaulted Thursday on its
$ 805-million debt to the Bank, paying only a token amount of $ 79.2 million,
prompting questions on the future of the cash-strapped Argentine economy and
its relationship with the Bank and the Fund.
By breaking its ties with the IMF and the
World Bank, Argentina managed to resurrect itself from the deathblow obtained
from the two organizations.
On Friday, Argentina blamed the
default on savage policy recommendations by the IMF, which require the
government to tighten its budget and anti-inflation measures before it can
strike a deal for emergency funds. But Argentina may be already benefiting from
the default decision, since it will have more cash on hand for social and
health programs, much needed as the economy recovers painfully slowly.
Cash for social and health programs to recover
the economy is something the IMF and the Word Bank oppose vehemently because it
lessens their influence and profit. The first austerity measures the IMF and
World Bank ( who are technically speaking one entity) imposed on Greece and
Italy were cuts in healthcare, education and social programs, thus leading the
two nations into the same dilemma as Argentina faced 10 years ago.
"In the long term, and for
other countries, the impact could be very positive," said Soren Ambrose,
of the Washington-based 50 Years Is Enough network.
"This unique challenge to the power of the World Bank
and IMF to dictate both macroeconomic policy and debt repayment terms could
change the perception of their infallibility (or infinite power), he added.
Ambrose says that would give
governments and civil society forces more room to plan, and to begin to whittle
away at the overwhelming power wielded by the IMF, the Bank and other
international financial institutions (IFIs), which has caused so much
unnecessary poverty, deaths and suffering over the past few decades.
By defaulting to the Bank, Buenos Aires may also be sending
a message that it may no longer feel forced to accept the IFIs' programs, and
that there are other alternatives, he added.
Argentina has proved that there are other
alternatives then IFIs programs and thus managed to recover its shattered
economy without IFI “advises”, the results of which we are currently facing in
Europe and the USA.
In a report distributed
electronically, the Brussels-based anti-debt group Eurodad argues that the
World Bank might be equally harmed by the high-profile default, which could
call into question the Bank's own creditworthiness and reputation. Bond-rating
agencies could downgrade the ratings of the Bank's bonds, depriving the
institution of its AAA rating, which allows the Bank to sell bonds to
institutional investors as "blue chip" investments.
Well that that did not happen because as it
turned out the USA and the EU are waging a financial war and thus US rating
agencies will hardly attack its own financial entities, which in a way the Word
Bank is. See http://en.wikipedia.org/wiki/World_Bank
If the contagion pushes other
countries in the region into making similar defaults or refusals to deal on the
IFIs' terms, the trend could spread, says Eurodad.
Already one of the biggest U.S.
pension funds, TIAA-CREF (for retired teachers) has sold all its World Bank
bonds, for what it called economic reasons.
But World Bank officials Friday
vehemently denied that they would be hurt by the default. "Our capital is
strong," said Chris Neal of the Bank's external relations arm.
After Thursday's default, Standard
and Poor's Ratings Services said that it was affirming its credit ratings and
outlook on the World Bank at 'AAA/Stable', along with those of other
multilateral lending institutions with large credit exposures to the Argentina.
Eurodad also believes that if a
country the size of Argentina defaulted, then others could follow. The South
American nation is the fourth largest debtor of the Bank after China, Indonesia
and Mexico and it is number one in terms of per-capita income.
It also differs substantially from
other states to have already defaulted on World Bank debt - including Somalia,
Iraq and Zimbabwe - in that it is part of the Western world and has
considerable links with Northern institutions. The default could eat away at
their credibility also, according to Eurodad.
Argentina owes $ 8.5 billion to
another Washington-based IFI, the Inter-American Development Bank (IDB).
If Argentina were to default on that
loan, the IDB risks losing its triple-A rating, which could increase the cost
of borrowing from the institution for other Latin American countries.
It is now 10 years later, and Argentina still
has not paid the IDB without facing serious consequences. Argentina always
expressed its willingness to pay its debt with the IDB and Paris Club if the
conditions are fair and reasonable, but not under vulcher finance terms.
Regardless of the potential damage
to the IFIs from the defaults, Argentina still faces many hurdles to get its
economy back in shape and rescue its population from internecine poverty.
We write 2012 and Argentinean economy is
growing at rapid pace and poverty has been reduced significantly, despite being
expelled from the international
financial system, or as cynics might argue, because of being expelled Argentina managed showcase economic
growth.
The main obstacle, many say, is
reaching a deal with the IMF, whose job is to bail out countries in fiscal
trouble. The Fund has not reached out to Argentina since the country defaulted
on its $ 140-billion debt last December, owed in part to private lenders.
The Fund is worried that plans put
forward by President Eduardo Duhalde do not have enough political support at
home. The Bank has backed IMF demands for a viable economic plan that has such
support.
"Argentina needs to get an
economic plan that has all of the political actors behind it and support first
from Argentine's political class and then from the international community,"
said Neal of the Bank.
Among the sticking points in the
talks is the IMF's request that Argentina increase the price of privatized
public services. The IMF asked for a 30 percent increase while Argentinean
officials offered 10 percent. The Fund also wants a tax increase but the
government refused.
Applying austerity on common citizen by
requesting price hikes on privatized public services leads to stagnating growth.
Since the European Union applied its austerity measures in 2011, as dictated by
the IMF, its economy stagnated even more. “The IMF's recipe for default.”
The Fund also wants the country to
immediately liberalize its exchange market, while leaders want a gradual move.
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