Comments and Discussion on the Argentine Papers

Joyce Chang: I concur with Andrew Powell's conclusions on the roots and causality of the Argentine crisis. Powell points out convincingly that the scope of the crisis is clearly multidimensional. He also demonstrates that fiscal mismanagement and the deteriorating trend in debt dynamics, exacerbated by messy politics, provided the best forewarning of the crisis. Powell presents a thoughtful analysis of why the balance of payments and size of the current account deficit are less relevant sources of the country's crisis.

I fully agree with Powell's assessment that the fiscal adjustment did not need to be so large in the first year of former president de la Rua's administration. The biggest disappointment was that the government was not able to take the initial small steps necessary on the fiscal side to embark on a path of debt stabilization. I would argue that if the de la Rua government had posted a relatively modest increase in the primary surplus in 2001, bringing the primary surplus up to 1.5 percent of gross domestic product (GDP) in 2001 from 0.4 percent of GDP in 2000, this would likely have been sufficient to gain market credibility. By the time the de la Rua administration realized the magnitude of the crisis and called for a zero deficit, it was too late to regain market credibility. Much larger spending cuts were necessary, in the order of 25 percent, not the 13 percent announced.

Powell references a JP Morgan research report written in 2000 (before the JP Morgan Chase merger), which illustrates that the initial fiscal adjustment necessary for Argentina was not that large, and the failure to deliver that adjustment was a key cause of the crisis. ¹ I would like to point out that JP Morgan's paper was revised in 2001 (postmerger) by a new research team under my leadership to account for several factors that we felt were missing from the original exercise. ²

In the revised debt dynamics exercise, JP Morgan first questioned examining debt as a percentage of GDP. Powell argues ex post that a country with Argentina's characteristics should maintain debt-to-GDP levels lower than 45 percent. Most emerging markets countries have ratios of public sector debt to GDP that are larger than 45 percent of GDP, and this is not in itself so worrisome. In my view, debt-to-GDP ratios are imperfect measures because nominal GDP is very sensitive to the exchange rate. (Why not measure debt ratios in terms of exports?) At a different peso value, the ratio of debt to GDP ballooned to unsustainable levels. Moreover, the debt trends matter more than the stock. If Argentina's growth and fiscal adjustment prospects had been encouraging, the debt dynamics would not have been threatening.

Second, JP Morgan revised the debt dynamics exercise based on consolidated public sector balances, rather than relying only on central government data. As a result, on a consolidated basis the primary balance looks significantly worse, making the starting point, for example, a consolidated public sector primary surplus of 0.4 percent of GDP, rather than a primary surplus for the central government of 1.2 percent of GDP for 2000.

Third, the revised JP Morgan debt dynamics exercise used more conservative growth assumptions. The original report assumed average nominal 4.4 percent GDP growth, although average nominal growth for the 1994-2001 period was only 1.7 percent.

Wealso questioned the assumption that if GDP growth improved tax revenues would improve, therefore making it easier to post larger fiscal surpluses. This was a flaw in most of the debt dynamics exercises on Argentina. The historical data for Argentina do not point to a strong linkage between higher growth and the generation of a more substantial primary surplus. This goes back to the question of the capacity and willingness of Argentina's political class to cut...