You could almost hear the yelp when the U.S. Treasury yanked the IMF's chain.
On the first of April, IMF deputy managing director Ann Krueger told Washington's Institute for International Economics that she supported the creation of a "single international judicial entity" to oversee and arbitrate debt restructuring of bankrupt governments.

The very next day, John Taylor, the international under-secretary at the U.S. Treasury, disagreed. "The most practical and broadly acceptable reform," he said, "would be to have sovereign borrowers [national governments] and their creditors put a package of new clauses in the debt contracts." In other words, the U.S. is willing to go as far as collective action clauses in bonds, but not a step further. This is a public setback for Krueger who has been shopping her ideas around governments, lawyers and investors for several months. Maybe she just forgot to ask U.S. Treasury Secretary Paul O'Neill or maybe it's a well-choreographed exposition of the already limited terms of debate. Whatever the game plan, any reforms along the lines proposed by Krueger would require a change to the IMF constitution which, in turn, requires an 85 percent majority vote. As luck would have it, the U.S. controls 17 percent of the votes. [Editor's Note: Krueger, an American and a former World Bank official, was installed in the #2 position at the IMF by the Bush Administration - a fact which has made this public disagreement the object of great confusion in international financial circles. A few days after this article was written, another Treasury official said that it was all a misunderstanding: Taylor meant that for the immediate future, only the bond contract clauses were plausible, but that Krueger's ideas should be the basis for a medium- or long- term solution. Secretary O'Neill has confirmed that account, however much it may contradict Taylor's initial statement.]
Broadly, Krueger's proposal is to establish a set of binding international rules on debt restructuring that could override national courts. These rules would allow the establishment of a "single international judicial entity" that would "oversee disputes and oversee voting" in sovereign bankruptcy and debt restructuring negotiations. IMF officials suggest that the "entity" could be modeled on the WTO disputes panel. Such an approach would give the IMF a quasi-legal status overseeing the establishment and implementation of binding international rules. Given the current balance of power within the IMF the resulting framework is most likely to be biased in favor of the creditors and could seriously undermine national sovereignty. What's more, the mere suggestion that it would be modeled on the WTO, where the processes and rules are dictated by the major powers, should set alarm bells ringing.

The IMF proposal is not progressive and portends an even greater concentration of power in the Fund. Although the European Union supports the IMF proposal, the U.S. is clearly willing to use its weight to sink the initiative because it prefers a laissez-faire approach and because it doesn't want the IMF to assume a life of its own. In fact, strong sentiments must have been stirred in the U.S. Treasury because it is usually more discreet when issuing its directives to the Fund. But, it's a useful reminder to see the puppet master's hand from time to time.

Caught Between the Devil and the Deep Blue Sea
Deep divisions between the World Bank, the EU and the U.S. are also coming to the surface in the great "loans versus grants" debate. The splits first appeared at last year's G7 meeting in Genoa when Busrode into town announcing that the U.S. wanted to see the World Bank use up to 50 per cent of its $6 billion annual outlay for grants to the poorest countries. Currently, the level is about one per cent.

World Bank president James Wolfensohn and the EU reject the idea, saying that unless the U.S. is committed to dramatically increasing its contributions such a plan would bankrupt the Bank. The EU has also put forward the strangely Calvinistic argument that paying interest "instills disciple" among borrowers and lenders. What is not stated, by either the Bank or the EU (for obvious reasons of good taste) is that they fear a reduction in tied-loans would reduce their power to dictate the economic policies of poor and low-income countries. In contrast, others - such as Jubilee South - believe that the U.S. proposal would simply give the Bank even more leverage to impose conditions because poor countries would jump through any old hoop to get free money. At first glance, this does not seem convincing because borrowing countries are jumping through the hoops already and pay interest for the pleasure. However, if the ideas of Lerrick and Meltzer (see below) were implemented, they may be proved right.

Wolfensohn doesn't like the idea because he fears that increasing the grants portfolio would eventually bankrupt the Bank and reduce their policy leverage. But he is trapped by his need for the political patronage of the U.S. Treasury (and besides, who's going to get access to all that lovely new money that Bush promised in Monterrey, Mexico at the U.N. Financing for Development conference?).

Despite the poor hearing in Genoa, the U.S. keeps pushing the proposal. When Secretary O'Neill raised it at the International Institute of Economics in February this year, he said that the World Bank had "driven poor countries into a ditch" by lending money for projects to fight poverty rather than making grants.

So far though, the U.S. proposal, as articulated by Bush and O'Neill, has been long on rhetoric and short on detail. However the clue to what the U.S. Treasury has in mind may lie in a recent paper entitled "Grants: A Better Way to Deliver Aid' by Adam Lerrick and Alan Meltzer (of the Meltzer Report, written for the U.S. Congress in 1999, which suggested significant cuts and changes at the IMF and World Bank).

Based on a briefing note (and not the paper itself), their proposal seems to be a cunning mechanism for liberalizing services in developing countries via grants. The bottom line is that social service programs eligible for grants, such as education and health, would be put out to tender for competitive bids from both local and foreign public and private providers. Such an approach would segue very neatly into the WTO's General Agreement on Trade in Services (GATS) negotiations and raise the bar of aid conditionality to unprecedented levels. Perhaps this is what the WTO and the World Bank mean by "policy coherence."

But the U.S. administration's basic proposition (while we await the details) has merit.
Poor countries would be absolutely better off with much greater access to free and unconditional money so they can guarantee health, education, housing, water and other fundamental economic and social rights. But we know that neither the U.S. nor the Bank works that way, so we are still left wondering why Bush and O'Neill are pushing the "grants barrow" in the first place. It's probably not altruism. It may be a desire to weaken the Bank (Republicans, after all, are far less attached to the Bank and the Fund, having little appreciation of how much bang they actually get for their buck). It may, on the other hand, be part of a more complicated plan to link "grants" to liberalization of services such as health and education. In short, yet another way of channeling public money into private hands in the name of aid effectiveness.

Until we know what the U.S. is up to, it is impossible to "take sides" in this debate. Paul O'Neill, however, is right about one thing: poor countries have been driven into a ditch by loans. We should, therefore, support the essential proposition that poor and low-income countries should have access to "no-costs no-conditions" grants from the Bank, especially for the universal and free provision of social services such as health, education, housing and water.

IMF "Stung" by Charges of Leniency
Finally, congratulations are due to the IMF's public relations department. Without missing a beat, they have shown their Teflon-like ability to deflect any responsibility for the crisis in Argentina AND re-write history.

In the latest wave of public relations revisionism, IMF officials are apparently "stung" (sensitive creatures that they are) by criticisms that they were "too lenient" with Argentina. Not wanting to be seen as softies, the IMF has vowed to take a tough line in the latest round of negotiations, insisting that Argentina trim its budgets even further, change its bankruptcy laws (which apparently make it "hard for creditors to collect on bad debts"), revise tax sharing arrangements with provinces, and stamp out "pseudo-currencies."

The pressure to cut public expenditure is particularly bloody-minded, and not only politically. A recent study [www.cepr.net] by the Washington-based Center for Economic and Policy Research (CEPR) shows that from 1993 to 2000, Argentina's spending on government salaries, programs and operations was stable, while interest payments tripled due to a lethal combination of high interest rates and the currency peg to the ever-rising dollar. As the authors conclude, "the commonly believed story that the government could not accept a sufficient dose of the painful medicine of austerity, or spent its way into a hole, is not supported by the data."

The IMF's record in Argentina is disastrous: their policy advice, backed by loan conditions, created and perpetuated the ruinous combination of a fixed exchange rate and capital account liberalization. Then, when default seemed the only option, they tossed the hot-potato of "restructuring" to their Man in Buenos Aries, Finance Minister Domingo Cavallo, who spectacularly dropped the potato and is now behind bars for his alleged involvement in illegal arms deals. (And, although harshly rejected by his own people, Cavallo must be comforted to know that he is still a welcome member of the unofficial club of international financiers, the Group of 30, which includes Paul Volcker [former chair of the U.S. Federal Reserve], Larry Summers [former Treasury Secretary and now president of Harvard University] and Stanley Fischer [former #2 at the IMF].)

The IMF's reckless (and unfathomable) attitude to Argentina seems likely to continue. They know that insisting on more belt-tightening, more austerity and more sacrifices from the population will almost certainly push Duhalde's government to the precipice. What is the IMF's objective? Is it ideological bloody-mindedness, or are they simply protecting their shareholders' interests? As always with the Fund, it's impossible to know where the economics ends and the politics begins.

This article first appeared in Focus on the Global South's electronic newsletter, Focus on Trade. To subscribe, write <admin@focusweb.org> or visit <www.focusweb.org>.