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Former IMF Economist Blames Fund For Argentina's Economic Collapse - 2002-07-16

The International Monetary Fund's former chief economist, Michael Mussa, took a swipe at his own ex-employer, blaming the IMF for Argentina's economic collapse.

Mr. Mussa argues in a new book that the IMF bears heavy responsibility for Argentina's financial collapse at the end of last year. Mr. Mussa, a University of Chicago professor who served as IMF chief economist from 1991 to 2001, is particularly critical of the large loan the IMF extended to Argentina last August. He says that loan should have never been made because by then, the government's failure to close its chronic budget deficit had made a financial meltdown inevitable.

It was obvious by late 2000, says Mr. Mussa, that the fixed peso-dollar exchange rate could not hold, that the banks would collapse and that Argentina would default on its foreign debt. In short, says Mr. Mussa, the situation had become hopeless by late 2000.

Mr. Mussa makes clear that there were no easy answers for Argentina, which from the early 1980s until 1996 had made a remarkable transition from chaos and hyper-inflation to stability and steady growth. It had become the prize student of IMF financial orthodoxy. But the eventual end of the miracle became apparent as early as 1998 when the global financial crisis hit neighboring Brazil. Unlike Argentina, Brazil allowed its currency to decline against the dollar.

The price of monetary orthodoxy for Argentina, says Mr. Mussa, was a deep recession and falling living standards.

Mr. Mussa says he hopes the IMF will now play a more constructive role in Argentina. He is cautiously optimistic that the government will soon agree to an IMF approved program that would forestall hyper-inflation.

"I think it is very clear that in Argentina's present desperate situation where the government is in default and really can't finance a deficit except by printing money or money substitutes, and has a lot of demands on it, there's a lot of money that has been printed and a lot of money substitutes that have been printed," he said. "And that is not going to stop overnight. It needs to be contained within some plausible, quantifiable limit."

Earlier this week, the IMF gave Argentina a breathing space, allowing it to defer some debt repayments.

But Mr. Mussa says the financial collapse has set Argentina's economy back for decades and the risk of hyperinflation is not over.