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Continuing the discussion on the Argentine
economy: note references to Brazil and American dollars elsewhere in S.A. The phrase “half-baked plan” seems to
be cropping up lately whenever Bush administration policy is being debated. Perhaps these columnists read each other’s
work and inadvertently use the same descriptions? Or is there general
agreement? Comments? Karen Watters Cole Between a Rock and A Bailout http://www.washingtonpost.com/wp-dyn/articles/A5720-2002Jun30.html By Sebastian
Mallaby washingtonpost.com Monday, July 1, 2002;
Page A17 George Bush wanted to
stay out of the Israel-Palestine conflict. Then he realized that America's
president has to stay engaged -- even if he's only got a half-baked plan and the mess is basically insoluble. Now Bush may be forced into a similar change
on the issue of emerging markets. Bush came into office
skeptical of bailouts. He thought U.S. handholding discouraged emerging markets from sorting out their own
troubles, much as he argued that U.S. efforts in the Middle East would be
fruitless until the two sides decided of their own accord to get serious about
peace talks. His White House economics adviser, Larry Lindsey, had argued against bailouts during the Asian
crisis. His treasury secretary, Paul O'Neill, denounced them frequently during his first months in
office. This anti-bailout
philosophy was sometimes honored in the breach. Bush backed a rescue for Turkey, figuring it was too strategically important to
let go, a calculation only reinforced by Sept. 11. He also supported, albeit half-heartedly, a failed bailout for
Argentina
last August. But then, in December and January, the Bush team stood back and
let Argentina crash. This time there was no bailout: The Bush philosophy was
for real. For a while the philosophy fared rather
well. Yes, there were riots and political chaos, but at least the Bush
administration had delivered the message that Argentina had to break with its
failed economic policies. Moreover, the fear that Argentina's default would
spread to other countries did not prove warranted at first. Since the threat of
"contagion" had provided one of the main arguments for bailouts, its
absence was a victory for Bush's hands-off attitude. Six months on,
however, that victory is fading. Contagion is coming back. Hard-pressed
Argentines have yanked their money out of banks in neighboring Uruguay, triggering a banking crisis there and forcing
a currency devaluation. Other Latin countries with a lot of dollar deposits in
their banking system are looking vulnerable: Argentina's dollar depositors have
been clobbered, so their counterparts elsewhere are not feeling too confident.
Meanwhile the perceived
failure of orthodox economics
in Argentina is fueling populist alternatives. In Peru, riots against privatization recently left two dead. Then there is Brazil, whose soccer prowess does not extend to
economics. Brazil's currency has been sliding, and investors are starting to
wonder whether it too may default. There are homegrown reasons for these fears
-- a left-wing presidential candidate is doing well, and Brazil's debt is
mountainous. But contagion from Argentina compounds the trouble. Investors who
saw Argentina go under are waiting for the next country to crash. And so they
drive interest rates skyward, increasing the chances of the dreaded meltdown. But it's not just
contagion that raises questions about Bush's anti-bailout stance. The notion that a hands-off policy would
drive countries to improve their economic management is under strain also. Far from putting their own house in
order, Argentina's leaders have shifted from blunder to blunder, repeatedly
failing to come up with a stabilization package that makes sense. In the latest
signs of chaos, the respected central bank governor quit in frustration on June
21, and violent riots broke out last week. The administration may have
delivered a tough message to the Argentines, but there's no evidence that
Argentina has benefited. This shouldn't really
surprise us. The unmanaged
chaos of the 1980s debt crisis triggered a wave of crazy policies across Latin America, whereas the bailouts of the Clinton
period minimized the
wacky stuff.
After defaulting in 1982, for example, Mexico nationalized its banks. After
being rescued by the Clinton team in 1995, by contrast, Mexico stuck to
orthodox policies. The
mantra of the no-bailout people -- that a crisis is the medicine that will cure
bad policies -- may sometimes be exactly wrong. Crises can be the poison that
brings on even worse policies -- both in Latin economies and in Israel lately. So
the Bush team faces some tough choices. On the one hand, bailouts are no panacea. On the other,
standing back can cause problems to grow deeper. If giant Brazil gets more wobbly in the run-up
to its October election, will Bush really refuse help? Treasury Secretary
O'Neill recently suggested that the no-bailout philosophy would hold, but
others in the administration quickly rolled him back. The betting is that Bush
would end up wading in, even if he's only got a half-baked plan and even if the mess is basically insoluble. About This Columnist |
