Argentina’s road to disaster  
After the political change of the military junta by democracy in the 1990s, Argentina opened its financial markets and privatised its public assets. This structural evolution was supported by monetary reforms in 1991. The most important legal reform was the “Convertibility Law,” which froze the peso/dollar exchange rate and tied the peso money supply to the hard currency reserves. In 1991 the Argentine government announced a major foreign policy shift to a pro U.S.-position. This made Argentina more popular in the western world and created new opportunities for European and U.S. direct Argentina’s road to disaster(continued from page 1) investments during the privatisation process in Argentina. It led to a strong initial boost for the depressed economy. Although the investments decreased by the mid-1990s, especially because the assets to be privatised became less, capital inflows kept rising. This was primarily the case by the purchase of Argentine dollar bonds.
Pleased with the strategy, the IMF quickly granted Argentina emergency credits against the flight of capital. The strategy supported the economy during the 1995- 1996 Mexican crisis. However, the repeated credits failed to bring in new private capital. It became clear that the strategy had reached a dead end and the peso became severely overvalued.
Badly hurt, the industrial exports declined and cheaper consumer imports replaced domestic production. Therefore, industrial production stagnated while unemployment rose. The government succeeded to keep the economy floating for a while by issuing new dollar bonds. Of course, these bonds had higher interest rates. The policy managed to cover the trade deficits and expanding debt servicing. But, the overvalued exchange rate held down exports and it became evident that Argentina was heading towards a ”debt trap”. Each year’s debt service was increased and becoming unsustainable. Neither an IMF rescue package in 1999, nor a much larger one in December 2000, was able to reopen the international bond market to Argentina on reasonable terms.
Three policy changes are now certain: default on the dollar debt, new fiscal saving measures and exchange rate depreciation. Meanwhile, the formerly conducted dollarisation, is no longer an option, even if conservative Argentine economists and politicians have ever seen this as an alternative for devaluation. The Peronist party, which controls Congress, has promised to suspend service on the dollar debt immediately. In the meantime, negotiations will be held with the bondholders. During these negotiations, Argentina might try to come to a permanent write-down of at least 30% of the debt.
However, devaluating the peso will lower real wages. Therefore the government issued a new inconvertible currency, the Argentino, in order to increase the domestic money supply. Some almost bankrupt provinces had already issued a similar currency, the lecops, to make wage payments. These lecops still circulate, but at a substantial discount from the face value. As a consequence, workers paid in lecops have already undergone a real wage cut. Of course, this provoked mass protests. Lecops also have had an effect on fiscal revenues. They circulate at substantial discounts between enterprises, primarily to cut their tax bills because they are accepted at face value for payments to provincial and federal governments. Issuing Argentinos in massive amounts would further cut the national fiscal income as well as real wages. The flight to the dollar by the people of Argentina reduced the dollar reserves of the Central Bank below a critical minimum amount, putting the Central Bank in violation with the then still applicable Convertibility Law.
The Bush administration and the IMF feel comfortable with their rejection of Argentina’s cries for help. They are convinced that the immediate global effects from Argentina’s default will be minimal. The reasoning is that, in contrast to the Asian crisis, the Argentina default has given creditors enough time to take protective measures because it was long awaited. However, this optimism may underestimate some possible repercussions.
One is that sovereign bond defaults, plus the hardening of the IMF’s position, have been a signal to the international financial markets to raise the interest rates on the bonds. This has been the case for the last three years and with the last and biggest problem case – Argentina – this could very well happen again. Latin American and Asian countries, already with large hard currency debts, are facing hardening terms if they want to make new loans. Promoting exports, to diminish the higher debt service, has been more difficult since the Asian crisis of 1997. The major consumer markets of the industrial countries are all in recession. Moreover, the U.S., which was formerly the global importer of last resort, is now turning again to selective protectionism. The terms of trade - for exporters of primary materials and low technology industrial products - have been deteriorating. Increasing export promotion will intensify this deterioration. Unless the industrial countries recover soon and come out of their recession, most developing countries, putting their hopes on new exports, will only find themselves more and more impoverished. Specifically for Argentina, this negative impact might be reinforced if the Peronist government would impose higher tariffs on imports from its Mercosur partners, notably from Brazil. Instead of focussing on export and export growth, the Peronists might try alternatively to build up regional import by promoting the revival of Mercosur and strengthen this regional organisation. Success in that effort could have a positive impact in the area, but a more global one as well, since it would undermine the U.S. goals for free trade and free capital movements. A third channel is a political one. If Argentina’s new economic strategy - debt default, expanded public expenses and more protectionist import oriented growth - is to create a sustainable economic recovery, the strategy would gain popularity amongst other developing countries as a viable alternative to their troubled market. The western world could play it tough by not granting emergency loans to Argentina. In order to raise the probability of failure for Argentina’s breakaway from neo-liberalism, this might even be re-enforced by a hard line in the forthcoming debt renegotiations. However, this would also increase the risk that the resulting economic chaos could produce political chaos. It would also increase opposition within the IMF, and U.S. dominance in the IMF policy towards the developing countries. Therefore, it is expected that the debt rescheduling negotiations with Argentina can come to a positive end.

Emerging markets vulnerable after attack on the World Trade Center  
All emerging markets are suffering from the impact of the attack on the World Trade Center, but the real cost will not emerge until they need to return to the capital markets to refinance borrowings. Already there is evidence that emerging countries’ debt is out of favour with investors. Trading volumes in emerging market debt are at one-third of normal levels. Risk aversion has clearly increased. The spread between U.S. treasuries and the emerging markets index has widened. Countries in Latin America with close links to the U.S. economy, such as Mexico, Brazil and Argentina are among the most vulnerable. Rising commodity prices could also be damaging to all emerging economies which import oil. Countries with weak credit rating are likely to be affected more than countries with stronger fundamentals. However, one of the key risks in emerging markets is the ability of the emerging economies to refinance maturing debt in the coming six months. At best, the cost of accessing markets would go up for most countries. At worst the events in the U.S. could close the markets to borrowers for an extended period. This would then extend the risk of falls in international reserves and a need for emerging markets governments to cut fiscally, as maturing bonds have to be repaid rather than refinanced, with consequent implications for growth. It could also increase concerns about the risk of default.

Iraqi debt  
Many enterprises, banks and insurance companies are still holding uninsured trade debts on Iraq, due to exports or loans originating from before 1990. Please be aware that these claims on Iraq may become time-barred.
East-West Debt is particularly interested in purchasing or collecting your Iraqi claims guaranteed by the Rasheed Bank and the Central Bank of Iraq.

The failure of the IMF and World Bank HIPC’s program  
The Heavily Indebted Poor Countries (HIPC)-initiative to reduce the debts of the poorest countries, already being criticized as unsuccessful, was altered last year, once again with lots of doubts remaining. Responding to the unprecedented global movement of 2000, the initiative now offered a broad debt relief and set out to secure a lasting exit from debt problems for the countries involved.
The goal of the initiative was to bring the envisaged countries’ debt burden to sustainable levels in order to ensure that adjustment and reform efforts are not put at risk by continued high debt -and debt service burdens.
However, when some countries began to receive initial cuts in their debt payments under the HIPC initiative last year, it was clear that the reductions were not likely to be enough to allow HPIC-countries to make a fresh start.
Debt payments in the first 22 countries to qualify were due to fall by 27 %, leaving them spending more on debt than they currently do on the health of their people. Projections indicated that payments in 2009 would be just 14 % below what they are now. In April 2001, an official paper from the World Bank and the International Monetary Fund admitted that HIPC debt relief alone does not ensure long-term sustainability.
It highlighted how vulnerable countries are, noting for example that, if exports continue to grow at the same rate as before, rather than the growth rates projected by the World Bank and IMF, HPIC-countries will never reach even the level that those institutions define as sustainable. Under this deal, the poorest countries will not get the debt cancellation they need. They will get what the IMF and World Bank are willing to give up, which will be next to nothing.
While the headlines have suggested billions of dollars in debt write-off, the reality on the ground has been a lot less impressive. The countries, 22 in total, that had begun to receive some debt relief by the end of 2000 are paying $735m less in total than they were before. But they are still spending more than twice the amount in continued repayments.
The World Bank and IMF are now in danger of being left as the last great debt collectors from the poorest people. After the impact of the HIPC initiative and extra steps promised by G7 countries, these 22 indebted countries would owe more to the World Bank and the IMF than they owe to their 17 next biggest creditors put together. In many countries, the impact is huge: 58 cents out of every dollar that Zambia pays out in debt service in the next five years will go into the pocket of IMF and Worldbank.
Similarly high levels of 40 cents or more per dollar will be channelled to the IMF and World Bank from Uganda, Mali, Malawi, Burkina Faso and Benin. Because of the refusal by the World Bank and IMF to match the G7 commitment to 100 % debt cancellation, these 22 countries will be denied more than $ 500m every year for the next five years and the payments will continue long after that. While the IMF and World Bank call on donors to give more, their own institutions take more than any other creditor from the poorest countries, which endangers their credibility on the issue of global poverty.

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Moldavia warns of debt default  
Moldavia will default on its international debts if it cannot secure a rescheduling agreement. The Moldavian government urged the Paris Club of official creditors to be generous and help the country, as it has the lowest per head income in Europe.
The creditors are looking favourably at Moldavia but a deal has yet to be finalised. According to data of the Central Bank of Moldavia, the country faces a jump in its debt repayments in 2002 to $277m, or over 20 % of its annual gross national product. In June 2001, it was late repaying $3.7m interest on a eurobond.
Moldavia is promising to implement market-oriented reforms and is negotiating a $142m loan program with the International Monetary Fund. The IMF is expected to approve the package if Moldavia meets several conditions, including accelerated privatisation.
A positive IMF decision would pave the way to following support from the World Bank and the European Union and conclusive negotiations with the Paris Club.

Pakistan wins official debt rescheduling deal  
Pakistan secured a debt restructuring deal from the Paris Club of official creditors in recognition of its economic reforms and its role in the war in Afghanistan.
The creditors from the Paris Club agreed to restructure the country’s $12.5bn sovereign debt, extending its maturity and granting a grace period during which no principal has to be repaid. Two-thirds of the $12.5bn debt was rescheduled for 38 years from now with a grace period of 15 years. The maturity of the rest of the debt was extended to 23 years from now with a five-year grace period. Pakistan’s finance minister negotiated the deal.
The deal would save Pakistan about $3bn in the first three years alone. Japan and the U.S. are Pakistan’s two largest creditors in the Paris Club. Pakistan’s total external debt is estimated at about $38bn, which includes loans from the IMF, Asian Development Bank and the World Bank.
Although Pakistan’s domestic and external debt burden stands at 115% of its GDP, it is not considered to be among highly indebted countries that qualify for a debt write-off. In addition, the $12.5bn debt was overseas development aid, which has a low interest rate of about 2.5% but which, once again, cannot be written off.

UN embargo against Iraq  
Convinced that U.S. sanctions would be in place for a very long time, President Saddam Hussein of Iraq has been seeking for years to erode the embargo by developing business links through the legal United Nations oil-for-food deal -the exemption to the sanctions - or by providing incentives for countries to circumvent the UN-monitored programme and trade directly with Baghdad.
Saddam Hussein gained nearly $3bn, circumventing UN-sanctions by smuggling oil and demanding that buyers pay kickbacks. The U.S. and United Kingdom believe Baghdad is spending at least some of that money redeveloping its illegal weapons arsenal. Iraq’s biological weapons programme in particular has been put back into the spotlights following the recent attack of anthrax-laced letters in the U.S.
Russia complained that the decade-long embargo has cost Russia $30bn in business. Russia and Iraq have signed numerous contracts under the UN’s oil-for-food deal. Baghdad has already promised Russia a favoured status of oil exploration projects once sanctions on oil investments are eased because Iraq still owes Russia $8bn in military debts.
The U.S. is unlikely to resurrect a new proposal to amend the sanctions - as it did last July - if it is unable to win the support from Russia. However, the U.S. could revert to one topic that the members of the Security Council have already agreed on: the return of weapon inspectors to Iraq.
Iraq’s trade strategy has come into sharp focus in recent months. Its priority now is to offer as many incentives as possible to Russia to preserve its political support at the UN Security Council while creating economic dependency in neighbouring countries, most notably Syria and Egypt.
The ability to use trade links to influence political realities has limits. However, the award of import and export contracts has created some victories at crucial times. In July, Russia, one of Iraq’s largest trade partners, blocked U.S. proposals to amend the sanctions and introduce tighter smart sanctions on the regime while facilitating the flow of goods to the civilian population.
Iraq’s economic potential has long been seen as one reason behind Russian, Chinese and French lobbying for an easing of the sanctions regime. With barrels of proven crude oil reserves - worth more than $112bn and only second to Saudi Arabia - and an underdeveloped industry with lots of potential, Iraq has raised the prospects of oil-contracts in a post-sanctions era as an incentive for western governments to back a lifting of sanctions.
But it is the expansion of the oil-for-food deal that has provided opportunities to use trade in order to reach political goals. Iraqi oil sales rose to $18bn last year, up from a $4bn in 1997. Russian officials deny that trade lies behind their support for Iraq. But in Baghdad, Russia has been identified as the Security Council member most likely to be influenced by economic relations. Moscow is owed some $8bn in debt and annual trade with Iraq has reached $1.2bn.
As ties with Russia have expanded, Iraq’s attention has also turned to the Arab world, where most governments are struggling with weak economies. There has been quite a shift in tactics. The Iraqis are concentrating this year on their neighbours to create a political dependency influenced by trade.
Until recently, Jordan was Baghdad’s closest trading partner. But Iraq’s suspicion of Jordan has led it to seek to diversify its business links, targeting Syria and Egypt. Last year the Iraqi government signed a free trade agreement with Egypt. Economic exchanges are believed to have reached over $1bn and there are plans to double them.
Political relations with Syria, which contributed to the Gulf War alliance, that drove Iraq out of Kuwait in 1991, also remain tense. But the Syrian President took the unusual step of sending Mustafa Mero, his Prime Minister, to Baghdad a few months ago, to sign a series of economic agreements that aimed to lift trade from the current $500m to $1.5bn. Syria is also believed to assist actively in smuggling. Almost a year ago Syria was reported to have opened an oil-pipeline through which more than 120,000 barrels a day of oil are believed to be flowing. The oil, bought at a discount, is used in domestic refineries, allowing Syria to raise its own oil exports. Both Syria and Egypt say they remain committed to UN sanctions, though analysts suspect that unofficial exchanges are rising.
In trying to convince Security Council members to back new sanctions, the U.S. has offered few advantages to Iraq’s trade partners. While it was discussing smart sanctions with China, a country traditionally sympathetic to Iraq, the U.S. released more than $80m of Chinese business deals with Iraq that Washington had blocked at the UN on grounds that they included material that could be used in weapons programmes.
Now, the U.S. focus is on Russia, the only Security Council member still opposed to amending the sanctions.