[Senate Hearing 107-]
[From the U.S. Government Printing Office]

                                                      S. Hrg. 107 - 929

                      ARGENTINA'S ECONOMIC CRISIS



                               before the

                            SUBCOMMITTEE ON

                                 of the

                              COMMITTEE ON
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION


                           STATES BUSINESSES


                           FEBRUARY 28, 2002


  Printed for the use of the Committee on Banking, Housing, and Urban 

                            WASHINGTON : 2003
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                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia                 CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan            JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey           MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii              JOHN ENSIGN, Nevada

           Steven B. Harris, Staff Director and Chief Counsel

             Wayne A. Abernathy, Republican Staff Director

                  Martin J. Gruenberg, Senior Counsel

                Thomas Loo, Republican Senior Economist

      Amy F. Dunathan, Republican Senior Professional Staff Member

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor


            Subcommittee on International Trade and Finance

                      EVAN BAYH, Indiana, Chairman

                 CHUCK HAGEL, Nebraska, Ranking Member

ZELL MILLER, Georgia                 MICHAEL B. ENZI, Wyoming
TIM JOHNSON, South Dakota            MIKE CRAPO, Idaho

                Catherine Cruz Wojtasik, Staff Director

              Daniel M. Archer, Republican Staff Director


                            C O N T E N T S


                      THURSDAY, FEBRUARY 28, 2002


Opening statement of Senator Bayh................................     1

Opening statements, comments, or prepared statements of:
    Senator Hagel................................................     3
        Prepared statement.......................................    31
    Senator Miller...............................................     4


John B. Taylor, Under Secretary for International Affairs, U.S. 
  Department of the Treasury.....................................     4
    Prepared statement...........................................    31

Michael Mussa, Senior Fellow, Institute for International 
  Economics......................................................    14
    Prepared statement...........................................    34
    Response to written question of Senator Johnson..............    39

Peter Hakim, President, Inter-American Dialogue..................    16
    Prepared statement...........................................    35

William J. Haener, President and Chief Executive Officer, CMS Gas 
  Transmission Company...........................................    18
    Prepared statement...........................................    36

              Additional Material Supplied for the Record

Crying With Argentina by Paul Krugman, dated January 1, 2002.....    40
Chronology of Events by J.F. Hornbeck............................    41


                      ARGENTINA'S ECONOMIC CRISIS


                      THURSDAY, FEBRUARY 28, 2002

                               U.S. Senate,
  Committee on Banking, Housing, and Urban Affairs,
           Subcommittee on International Trade and Finance,
                                                    Washington, DC.

    The Subcommittee met at 2:30 p.m. in room SD-538 of the 
Dirksen Senate Office Building, Senator Evan Bayh (Chairman of 
the Subcommittee) presiding.


    Senator Bayh. Thank you all for coming. I am pleased to 
call this meeting of the Subcommittee on International Trade 
and Finance to order.
    I would like to say that Senator Hagel is on his way, my 
Ranking Member. I want to thank him for his interest in this 
issue. We have a good bipartisan relationship and a good 
working relationship here in the Subcommittee, so I am grateful 
to him. We will afford him the opportunity to make his opening 
comments when he arrives. The same thing for any other Members 
of the Subcommittee who may appear.
    I want to thank our witnesses for being with us today. I 
know that you are very busy and there are many other things you 
could be doing. So, I appreciate your taking the time to be 
with us today.
    Also to members of the public, and members of the press who 
are here with us to inform the public, this is an important 
topic affecting not only Argentina, but also the rest of Latin 
America and significant United States interests, as well.
    Today's hearing will explore the causes of Argentina's 
economic and financial disintegration, the consequences for 
United States businesses in our economy, as well as the 
consequences, economic and otherwise, for other South American 
nations. We will also explore what can be done to stabilize the 
situation on a sustainable basis. And the role of the Breton 
Woods Institutions and the U.S. Government, if any, in 
addressing the current crisis.
    We have here with us today four distinguished witnesses. We 
are going to begin with John Taylor.
    John, thank you for being with us, once again I should say. 
John is the Under Secretary of the Treasury for International 
Affairs. He will be our first witness and will explain the Bush 
Administration's policy towards Argentina.
    I am going to just introduce the other three witnesses 
briefly and make some opening comments, and then turn to you.
    With us is Dr. Michael Mussa. I hope that I have pronounced 
that correctly. He is a Former Chief Economist at the 
International Monetary Fund, and currently a Senior Fellow at 
the Institute for International Economics. He will comment on 
the IMF's handling of Argentina, and the Fund's effectiveness 
in dealing with economic crises like the one confronting that 
    In additon, we have Peter Hakim, who is President of the 
Inter-American Dialogue. Peter will provide testimony on the 
causes of Argentina's crisis, the potential for political 
contagion, and the implications of the Argentine situation for 
the rest of the emerging market world.
    Last--but by no means, least--we have William Haener, 
President and CEO of CMS Gas Transmission Company. This company 
is one of the most significant American investors in Argentina. 
Mr. Haener will give us the American business sector 
perspective on Argentina's economic crisis.
    I want to thank you all for being with us today.
    A few brief comments of my own, and then Mr. Taylor, we 
will turn to you.
    Argentina is the third most populous nation in South 
America. It historically has among the highest standards of 
living in that Continent. Over the last decade, Argentina has 
received substantial foreign financial assistance. Total 
external debt now stands at $128.5 billion. This includes $23 
billion in loans from U.S. financial institutions, and $14.5 
billion in direct foreign investment from U.S.-owned companies.
    The International Monetary Fund has provided $22 billion in 
assistance during the last several years. And the World Bank 
has provided $8.6 billion of assistance in the last several 
years. So the external financial support has been significant 
in recent years.
    Yet, today Argentina is in a precarious state. Its economy 
is at a virtual standstill. It has defaulted on its external 
debt. Its currency value has been cut virtually in half, and 
political turmoil and social unrest are pervasive.
    Many have suggested that this crisis was precipitated by 
several factors. Among other things, chronic prolifigate 
government spending at both the state and local levels; a 
fiscal relationship between the central government and the 
states which encourages unsustainable fiscal policies by the 
latter, with consequences disastrous for the former; an 
inefficient tax collections system--it is my understanding that 
roughly one-half of taxes owed are actually paid in Argentina--
a formerly overvalued currency, and unsustainable borrowing to 
cover deficits which created crushing interest payments with 
consequences that are now obvious.
    If possible, some of the recent attempts to address the 
situation have given cause for even greater pessimism. 
Decisions undermining the sanctity of Argentine contracts, the 
rule of law, and the fairness of the bankruptcy provisions make 
new foreign direct investment or private sector loans highly 
    A recent surge in the money supply suggests attempts to 
monetize the debt, and a possible return to hyperinflation. The 
past pledges of reform have been announced, but not implemented 
and therefore have been of little consequence, except to 
undermine the credibility of future pronouncements. For 
example, the Fiscal Responsibility Act of September 1999, and 
the Zero Deficit Law of July 2001, are examples of such past 
pronouncements of promised restructuring of the relationship 
between the central government and the states addressing the 
fiscal situation of both that were announced and yet not 
implemented to any significant degree.
    I want to emphasize that no one likes this situation. No 
one benefits from the misery and impoverishment of a great 
    It has been suggested by some, that unless we find a way to 
usher in and implement--and I want to underline ``implement''--
true sustainable reform, that virulent anti-Americanism, 
protectionism, and threats to Argentina's democracy, may be in 
store. Obviously, we do not want that. It is not in America's 
interest, Latin America's interest, or anyone's interest. But 
it raises the question, and in some ways the conundrum of 
``what can be done?''
    I am personally inclined toward engagement. I have always 
favored something that Larry Sommers once said about the 
forward defense of America's economic interests through 
proactive policies. And indeed, America and the multilateral 
institutions that we support, have played a constructive role 
in the past and stand ready to do so again.
    But given the past record of Argentina's failure to reform, 
substantial skepticism is warranted. Reforms must be 
sustainable, and implemented, not just announced. Otherwise, 
further assistance will merely perpetuate the disastrous 
policies which have lead us to this crisis and, in so doing, 
postpone the day of genuine recovery for the Argentine people 
and others with an interest in that great country.
    I look forward to hearing from my colleague, Senator Hagel, 
and from our witnesses, as we explore what the ramifications of 
this situation are and what can be done to improve the current 
state of affairs.
    Having said that, Senator Hagel, I would like to welcome 
you. I said before you arrived, I have appreciated our close 
personal friendship and good working relationship on this 
Subcommittee, and I want to thank you again today for your 
interest in this subject and helping us put the hearing 
together and would welcome an opening statement.


    Senator Hagel. Mr. Chairman, thank you. I am appreciative, 
I think as we all are, that you would focus on this. This is an 
appropriate area not just of jurisdiction but of interest and 
responsibility of this Committee, the Congress, and our 
    So, thank you.
    I have a brief statement that I would ask to be inserted 
into the record, Mr. Chairman.
    Senator Bayh. By all means.
    Senator Hagel. And I look forward to hearing from our 
distinguished witnesses.
    Mr. Secretary, welcome.
    Secretary Taylor. Thank you.
    Senator Hagel. Thank you.
    Mr. Chairman, thank you.
    Senator Bayh. That was commendably brief, Senator.
    You set a standard to which all of us can aspire. But thank 
you, Chuck.
    John, before I introduce you, our friend and colleague, 
Senator Miller has just arrived. Zell, thank you for your 
interest in this subject. I would give you at this time the 
opportunity to make an opening statement if you are interested 
in doing that.


    Senator Miller. I think we would get more out of listening 
to Mr. Taylor, but thank you.
    Senator Bayh. You even did better than Chuck.
    We have a healthy bidding going on here. This is going to 
help us all.
    Thank you, Senator Miller.
    Senator Hagel. Well, if we have one more come in, it will 
be two seconds.
    Senator Bayh. I was going to say, he may just say ``ditto'' 
and turn it over.
    John B. Taylor, as I mentioned, is the Under Secretary of 
the Treasury for International Affairs. As Under Secretary, Mr. 
Taylor serves as the principal advisor to the Secretary of the 
Treasury on international economic and financial issues. He 
heads the development and implementation of policies in the 
areas of international finance, trade, investment, economic 
development, international debt, and the U.S. participation in 
the International Monetary Fund, the World Bank, the Inter-
American Development Bank, and several other institutions.
    Mr. Taylor has extensive previous Government experience, as 
well as an extensive background in academia.
    John, we welcome you again and we look forward to 
benefiting from your testimony. Thank you for joining us.

                  STATEMENT OF JOHN B. TAYLOR



    Secretary Taylor. Thank you very much, Mr. Chairman, 
Senator Hagel, and Senator Miller for putting this hearing 
together and for inviting me to testify. It is a very important 
subject, as you indicated in your opening remarks.
    I want to begin by saying that I agree with you, the people 
of Argentina are facing very difficult times right now. 
President Bush has made it clear on a number of occasions that 
Argentina is a close friend and an ally, and that we want the 
Argentine economy to grow. We want it to become an engine of 
growth for its people and for the whole hemisphere.
    My written testimony covers events in Argentina during the 
1990's leading up to the current time, as well as the recent 
IMF program and recent United States policy.
    I would like to submit that written testimony for the 
record and highlight a few issues, if I might.
    Senator Bayh. Without objection.
    Secretary Taylor. To begin to understand the current 
situation, I think it is actually helpful to go back to the 
early 1990's when the government of Argentina undertook a 
series of very impressive economic reforms. These reforms had 
to do with monetary policy, fiscal policy, international trade, 
and regulation. Perhaps the most dramatic one was the monetary 
policy change which enabled the inflation rate in Argentina to 
come down from over 3,000 percent a year, to nearly zero. 
Fiscal policy was also brought under better control. A 
significant privatization program was started which drew many 
foreign investors into Argentina. Moreover, a number of 
international trade barriers were reduced.
    Not only did these reforms bring about a much lower and 
more benign inflation rate, they increased economic growth. 
Economic growth in the 1980's in Argentina was near zero, and 
it rose to over 4 percent in the early 1990's. I would also 
note, looking at the components of GDP, that investment and 
exports grew particularly rapidly during this period. So those 
economic reforms did some real good. They were intended to be 
market oriented, and as I indicated the results were 
    However, in the late 1990's a number of policy setbacks and 
external shocks sharply reduced the economic growth rate in 
Argentina, and ultimately lead to the financial crisis that we 
are talking about today.
    If you look closely at the spending numbers and the debt 
numbers, and the deficit numbers, it is clear that the debt 
began to grow more rapidly, raising concerns about 
sustainability. Risk premia started to increase; and of course 
that caused interest rates to rise, slowing economic growth 
even further.
    This was compounded by a persistent deflation. Prices 
actually fell for a number of years in a row. With depreciating 
currencies in Europe and Brazil, it raised competitiveness 
problems in Argentina as well.
    I also think it is important to note that persistent 
expectations of depreciation of the peso during this period 
tended to raise interest rates in Argentina to levels higher 
than they would be elsewhere. In particular, higher on peso 
loans than on dollar loans.
    As we move toward the end of last year, it became clear 
efforts to deal with these problems through the budget were not 
working. People increasingly viewed the government's debt as 
unsustainable, and in November of last year in fact the 
government announced that it wanted to restructure the debt.
    As that restructuring was underway, uncertainty about its 
impact on the banks holding that debt began to lead to large 
deposit withdrawals. To stop those withdrawals, the government 
imposed restrictions on the ability of people to withdraw their 
deposits from banks. That occurred first in December. After 
those restrictions were imposed, significant social and 
political protests took place. They turned violent, and the 
President at that time, President de la Rua, resigned.
    As we move to the present, it is clear that those 
restrictions, and a number of other things, have caused 
economic circumstances in Argentina to deteriorate. With 
restrictions on deposits, the payment system does not function 
as it normally does, and it creates great shortages of 
liquidity compounding the problems as we have seen in the last 
few months.
    Argentina is beginning to remove these restrictions; and 
recently, it was made possible for people to withdraw the full 
monthly salary of their payments, for example, the full monthly 
salary from the banks. But ultimately, it is going to be up to 
the government of Argentina, as you have indicated, Mr. 
Chairman, to find ways to make economic growth more 
sustainable, and to make the policies that do that. Indeed, the 
implementation of the policies is very important.
    We have been in very close contact in the United States 
Government with the economic team in Argentina. In fact, there 
have been contacts at all levels. We are following closely what 
they are doing. The Economics Minister visited Washington on 
February 12, and met with Secretary O'Neill. A good set of 
meetings. They also met with the International Monetary Fund at 
that time.
    We are encouraged with the steps that Argentina is taking 
to deal with these problems, and as you indicated in your 
remarks, Mr. Chairman, in the last few days they proceeded to 
negotiate and establish an agreement with the Providences that 
has the goal of making the budget more sustainable and 
ultimately economic policy more sustainable.
    So let me leave it right there, Mr. Chairman. I would be 
happy to answer any questions you or your colleagues may have.
    Senator Bayh. Thank you very much, Secretary Taylor.
    Let me begin where you ended up by the pronouncement 
yesterday of the new agreement with the Providences. As I 
understand it, it would call on the provincial governments to 
reduce their deficits by around 60 percent, and that the 
central government would absorb the outstanding debt of the 
local providences.
    Having been a governor, I can tell you, cutting a deficit 
by 60 percent is a hard thing to do. And so since it is my job 
to ask the hard questions, we had a program along these lines 
announced in September 1999, the Fiscal Responsibility Law, 
which promised restructuring and more fiscal restraint. We had 
another zero deficit law enacted in July 2001.
    What would give you reason to believe that this 
pronouncement would be any more successful in actually being 
implemented than its predecessors, given the political 
difficulty at the state level of actually carrying this 
    Secretary Taylor. With respect to the first part of the 
question, on the 60 percent reduction, part of the agreement 
also has, as you say, the national government dealing with the 
debt of the provincial governments, and that reduces the 
interest payments and therefore has an impact on expenditures 
in that way. So that will be part of the way in which the goals 
of deficit reduction are reached. Although, you are quite right 
that is a large reduction.
    With respect to implementation, I think with all of the 
efforts to move policy reforms through, there are steps that 
countries must take. This is an agreement which involved 
signatures, agreements that are written, ultimately as I 
understand it, and of course the information is still very 
fresh, there will be legislation needed, and there will be more 
documents put into place. But I think the good thing here is 
that there is a start on dealing with an issue which the 
government of Argentina itself has recognized as important to 
deal with, and so the efforts in the last few days are showing 
that there is progress.
    You are correct though, Mr. Chairman, to emphasize 
implementation with respect to all changes in economic policy.
    Senator Bayh. So, you are encouraged by the effort, but it 
is fair to say that signatures and documents and even 
enactments are one thing, however, what really matters is the 
implementation of those steps.
    Secretary Taylor. Yes, sir.
    Senator Bayh. What about the recent reports that the money 
supply has been increasing? Is that troubling to you given the 
past record of hyperinflation in Argentina? Is there a possible 
attempt to monetize the way out of this problem?
    Secretary Taylor. I do not see that. I certainly hope that 
that is not the case.
    The central bank has made it very clear that they want to 
limit the amount of money creation. The central bank governor 
who was actually just officially confirmed yesterday in his 
job, unanimously I understand, is taking efforts to keep the 
money growth low and consistent with price stability, 
    So at this point in time, it seems to me that they have 
been very clear about the monetary side of the program and 
intend to limit the growth of money--certainly to prevent the 
kind of hyperinflation that occurred in the past.
    As I indicated in my opening remarks, one of the really 
great successes in Argentina in the early 1990's was to end 
that hyperinflation. I think that has been one of the most 
popular things in Argentina during the 1990's, to get rid of 
that inflation. It was very popular.
    Senator Bayh. If I could put one thing on your radar 
    Secretary Taylor. Yes.
    Senator Bayh. I was referring to a report, dated February 
26. George, I hope I am pronouncing his name correctly, 
Tedesco, the Deputy Minister for the Economy, said, to use his 
term, ``emissions from the central bank'' were responsible for 
what he called, a sharp increase in the money circulation. And 
so that caught my attention, given the history of the 
    Secretary Taylor. Certainly. If you look at the money 
statistics, there are going to be movements up and down. And 
remember, I think it is also important to keep in mind that 
during the last year and a half, the money statistics in 
Argentina have been coming down, down. That is that liquidity 
problem we referred to at the beginning. It is one of the 
reasons that they have had deflation.
    So an increase in liquidity in Argentina is important to 
take place. That is how you get some growth again. The 
important thing is to have that increase in liquidity 
associated with keeping inflation in check, and I see no 
evidence that the central bank has not kept that in mind with 
respect to any money supply increases that are being reported.
    Senator Bayh. Well, that is reassuring. This report went on 
to say that the central bank had already injected at least 1.3 
billion pesos into the economy this month alone, and that it 
had already printed nearly three-quarters of the two-and-a-half 
billion pesos that it said would be its limit for the year. 
That is what caught my attention, but I am glad to see you are 
focusing on this, and if you are reassured, I am reassured.
    Secretary Taylor. It is a good fraction of the total amount 
for the year, that is for sure. That does not mean that the 
amount for the year is going to be exceeded; and it does not 
mean that that increase in liquidity at this time is improper.
    Senator Bayh. Thank you, Mr. Secretary.
    My time has expired.
    Senator Hagel.
    Senator Hagel. Mr. Chairman, thank you.
    You mentioned, Mr. Secretary, in your overview a number of 
factors that led to this crisis in Argentina. And you 
referenced, of course as always, one of the consequences of 
exports' trade, and I would be interested in getting your sense 
of what you think this current crisis in Argentina may have on 
the Mercusor Free Trade Agreement that we are trying to work 
our way along in the general universe of trade agreements and 
trade for not just Argentina but Latin America and how it 
affects us.
    Secretary Taylor. Well, I think it is very important that 
we do move ahead on these trade agreements. The events in 
Argentina, as I look at them, they indicate the importance of 
having policies that keep both strong. And free trade policies 
will do that.
    Throughout the 1990's, as trade barriers were removed in 
Argentina, exports grew very rapidly and that benefited the 
economy. It was not until the last few years that things 
started to be difficult for economic growth.
    If you look at the data carefully, you see there are 
benefits to Argentina, and any country for that matter, for 
greater opening of markets and reduction of trade barriers. So 
that is the objective and the facts.
    I think your question also may raise the idea that the 
crisis itself, perhaps making people question certain types of 
policies, will make them question free trade agreements. There 
is no reason for that kind of questioning to occur. As I think 
I tried to indicate in my opening remarks, it was the opening 
in the market oriented policies that led to strong growth in 
Argentina. And it was moving back from some of those, some of 
the fiscal discipline, that led to the problems.
    The message I see, and I hope the message that is received 
by everyone looking carefully, is that this is a reason to try 
to have more free trade agreements so that you can establish 
the conditions for strong economic growth.
    Senator Hagel. Do you know if that is an area the Secretary 
touched upon in his meetings earlier this month?
    Secretary Taylor. He has always touched on the importance 
of open markets and free trade. I cannot report on exactly what 
has taken place in any particular meeting, but I would say that 
in many discussions that we have had over the months since we 
have been here, with Argentina--and again in other countries--
the idea of free trade, promoting trade, open markets, comes up 
so much because it is so important, it would be very strange to 
have a meeting on economic policy or a discussion without 
talking about the importance of this.
    Senator Hagel. But I mean specific issues related to 
Argentina. I know we all support free trade--fair trade.
    Secretary Taylor. Just one example I guess I would give is: 
Last August there was a particular effort to have some trade 
talks in Argentina, and USTR conducted some trade talks at the 
subcabinet level that involved Argentina and the other Mercusor 
countries along with the United States, of course, as a 
possibility for moving toward these free trade agreements. So 
that is an example of what took place. But with respect to very 
recent meetings with the Secretary, I cannot really speak to 
    Senator Hagel. Thank you.
    Do you know what we are doing, if we are doing anything, in 
regard to stressing the importance of the convertibility of 
currency for the free currency convertibility in Argentina?
    Secretary Taylor. What we have indicated is that it is 
important to have a unified exchange rate in that sense of 
convertibility. And Argentina has moved since the start of this 
year toward a more unified exchange rate.
    The word ``convertibility'' sometimes conveys the idea of 
the convertibility law that was in place in Argentina starting 
in the early 1990's. That has a somewhat different meaning and 
refers to that one-to-one peso peg, and the currency award that 
was in place.
    They now have decided to have a floating exchange rate, a 
flexible exchange rate, and that coupled with the good control 
on money that Senator Bayh asked about, will lead to low 
inflation just like the Convertibility Law did.
    Senator Hagel. And we continue to stress that point with 
    Secretary Taylor. Stressing the importance of price 
stability and low inflation, certainly.
    Senator Hagel. Thank you.
    Senator Bayh. Thank you, Senator Hagel.
    Senator Miller.
    Senator Miller. Mr. Secretary, I would like to get your 
thoughts on the future of foreign-owned banks in Argentina. We 
know that a number of them, like Citibank and Morgan and Chase 
have had to shoulder some losses after the peso devaluation. We 
know about the protests in Buenos Aires against foreign-owned 
banks. What is the situation there? Is there a possibility that 
some U.S. banks just simply write off their losses, and 
withdraw? What do you see the future to be?
    Secretary Taylor. Well, we have been in close contact with 
a lot of foreign banks in Argentina, and have had a lot of 
discussions, and they have a difficult time in the current 
situation with the revaluation of the currency and the other 
problems with the economy. The economy is not growing and it is 
tough to do business in that situation.
    I cannot help but ultimately be optimistic though. This is 
a country with so much potential. It opened up its financial 
sectors in a way that ultimately will pay off and be very 
healthy. But right now there are some restructurings that have 
to take place. There is some revaluations. That means that the 
banks and others who are creditors, will have to make some 
    We have always emphasized that that should be fair. Treat 
people fair whether they are foreign or domestic regardless of 
what country the investment is coming from. But I think once 
Argentina is able to get over these payments' problems and 
restructuring problems, that the future will be good.
    Senator Miller. What about U.S. exports? What do I tell my 
Georgia computer and electronics companies that are our State's 
leading exporters to Argentina. What should I say to them about 
what to expect in the next few months?
    Secretary Taylor. The next few months are going to be 
difficult, as the last few months have been, but I think we see 
some signs for improvement. And there are still a lot of 
unresolved questions which people in Argentina are asking us 
all the time about how the debt will be restructured. How will 
payments be made? But again I do not know exactly what the 
business is that you might be discussing something with.
    Different businesses are faring in different ways. The 
exchange rate change itself has caused these revaluations which 
affected different businesses in different ways.
    So, I would say in terms of talking to your exporters from 
your State to ask them to be patient. Ask them to demand fair 
treatment. Remind them that there is an investment treaty in 
place, a bilateral investment treaty in place, if it is a 
foreign investment issue, and to be in touch with people like 
me, and others in the U.S. Government.
    Senator Miller. Thank you.
    Senator Bayh. Mr. Secretary, we are going to have a second 
round. I have three more questions, and then that exhausts my 
questions for you today.
    Let me say that I am delighted to hear of your optimism.
    I am reminded of something that a well-known economist, 
Lester Thoreau from MIT, I saw a speech that he gave back in 
the early 1980's when there was a lot of pessimism about the 
U.S. economic situation, and he was asked his general state of 
mind about the U.S. economy. He described himself as an 
``intellectual pessimist but an emotional optimist.'' The more 
he analyzed the problems, the more it was hard to see how they 
would be resolved, but he just knew they would be. And 
hopefully that will be the case here with Argentina, as well.
    I am glad to hear about your optimism. Can you tell us a 
little bit about your meetings with the new Minister of 
Economics? There were some suggestions in the press that the 
figure of $22 to $23 billion of additional IMF assistance was 
just floated. If true, can you give us any idea of how that 
figure was derived?
    Secretary Taylor. No, I cannot give you any idea of how 
that figure was derived. I personally have not been given----
    Senator Bayh. It appeared in the press.
    Secretary Taylor. --figures like that. Perhaps it appeared 
in the press. When Minister Rems Lenicov came to the United 
States, it was a very good meeting. He met with Secretary 
O'Neill. He met with the IMF. But the particular numbers you 
are talking about here are just in the newspaper as far as I 
    Senator Bayh. So, you do not believe everything you read in 
the press?
    I do not expect you to comment on that, Mr. Secretary.
    I have two other questions. First, in the interests of 
fairness let me present the other side of the fiscal argument. 
I read with interest the other evening a paper by I think the 
Harvard economist Jeffrey Sachs--you may be familiar with this 
distinguished gentleman. Let me just quote from his paper. He 
says: ``Contrary to that widespread view''--which I 
incorporated in my opening statement about fiscal problems 
being one of the root causes of the current crisis--
``Argentina's public sector is not grotesquely bloated or 
wasteful. For a country of Argentina's GDP, the share of 
government consumption, Federal Government expenditures, and 
total government expenditure is actually at the low end.''
    I read this with some surprise. Do you have a reaction to 
the professor's statement about Argentina's public sector being 
actually fairly modest in size for a country of that GDP? I had 
always heard to the contrary.
    Secretary Taylor. Yes. The measures of spending as a share 
of GDP are exactly what is indicated there. What is needed in 
terms of the budget is making the expenditures come in line 
with the revenues. There are all sorts of decisions a country 
can make about expenditures, of course, but the important thing 
here is to get things in line.
    Senator Bayh. So if the government is modest in size but 
the revenues are even more modest, that is the problem?
    Secretary Taylor. Yes.
    Senator Bayh. Very good. I intend to contact the professor 
at some point, and I will ask him how he arrived at this.
    Let me just offer my own opinion. If so, then possibly we 
face as much of a political difficulty as an economic or fiscal 
one. The decisions to redress the fiscal imbalance are very 
difficult, and that requires real political fortitude. Perhaps 
that is one of the major problems that we face in this 
circumstance. Would you care to comment on that observation?
    Secretary Taylor. I agree. In a way, the economic goals, or 
the economic policies are straightforward. They have worked in 
other countries that have adopted them. That is, a monetary 
policy to have a low inflation; a fiscal policy that keeps the 
revenues in line with expenditures and keeps the debt from 
becoming unsustainable; a trade policy which is oriented to its 
open markets; a regulatory policy with low regulation and 
privatization activities.
    So those are all easy things to say. But, Senator, as you 
indicate, getting those through a political system is sometimes 
very difficult. I think you are seeing that in Argentina right 
    And maybe just a comment on your reference to my optimism, 
I see in a way the gains that can be achieved by getting the 
right policies. I am just an optimist because I see eventually 
people will realize that and will find a way to get these 
things through the political system.
    But I recognize, and as my realism comes into play for just 
the reasons you indicate, that it is difficult politically to 
do. But as I indicated, we had a good visit from Minister Rems 
Lenicov, and he had a good meeting with Secretary O'Neill. He 
knows the things that need to be done, and that is the reason 
we can be optimistic.
    Senator Bayh. I am glad to hear it. Thank you, Mr. 
    Senator Hagel, other questions?
    Senator Hagel. Yes, Mr. Chairman, thank you.
    Mr. Secretary, are we doing anything to encourage the 
Argentine government to amend its recent law which allows for 
nonpayment to creditors of up to 6 months? Even though it is my 
understanding that those companies may have that capital, but 
they have that 6 month period. We, as you know, have American 
corporations who have provided services and goods and who are 
affected by this. I would be interested in your thoughts on 
what we are doing or not doing about that.
    Secretary Taylor. We are making every effort to find out 
about issues like that. Then when we find out about them, to 
convey our concerns to Argentina, to the relevant authorities.
    There are a number of things that have occurred like the 
one you are mentioning as part of this effort to reconcile the 
gaps that have occurred because of the revaluation of the 
    It is very difficult. Someone, in general, has to make some 
adjustments to that. It should be fair in a sense that not one 
party, creditors or debtors, should take the large bulk of 
that. It should be done in a way that is fair and that will get 
things back on course again. So, we have expressed the views 
very strongly. It is a very high priority for us that this 
adjustment be done fairly and even-handedly.
    Senator Hagel. You, I note from your written testimony, 
started to get into the current IMF negotiations, and the 
Chairman asked you a question about it. Would you care to just 
give us a quick 
status on those IMF negotiations and how we feel they are 
going, and if they are going in the right direction?
    Secretary Taylor. I think they are going in the right 
direction. The economic team came up and met with the IMF on 
February 12. They exchanged information about the situation.
    Once the economic team went back to Argentina, they have 
been in touch with the IMF and the IMF has been very clear 
about the nature of the things that would be required for 
sustainability. Sustainability is essential for an IMF program. 
As Chairman Bayh indicated, you cannot lend into unsustainable 
situations. You have to lend into sustainable situations.
    I think the IMF is in good discussions with Argentina and 
we, as shareholders in the IMF, keep in close contact and try 
to track what is happening, and I think it is going well. I am 
not sure when the next formal interaction such as a mission 
will take place, but I hope it is very soon.
    Senator Hagel. So generally you were of the opinion that 
what is happening in those negotiations and the IMF's 
participation is helpful and productive and they are doing the 
right thing?
    Secretary Taylor. Yes. I think the exchange of information, 
the perspective that people giving advice can contribute to 
people at the IMF is helpful. I think there are people in 
Argentina from the central bank to the economics ministry who 
recognize that.
    Senator Hagel. Thank you.
    I thank you very much, Mr. Chairman.
    Senator Bayh. Thank you, Senator Hagel.
    Senator Miller.
    Senator Miller. Mr. Secretary, one of the factors that has 
been cited as a cause of Argentina's persistent budget problems 
has been the relationship between the Federal Government and 
the provinces. It is almost as if they have an incentive to run 
deficits. Do you think that President Duhalde's reforms 
adequately address that issue? And I guess also, the hard 
question, do you think that President Duhalde has the political 
capital to bring about these 
reforms? They are pretty painful reforms, as Senator Bayh 
mentioned in his earlier statement.
    Secretary Taylor. I think that the economic reforms have to 
deal with a relationship between the national government and 
the provinces. They have started along a route to do that. The 
details are coming out. But again as I indicated before, there 
is progress being shown on this very difficult problem. And, 
yes, it has to be addressed. We know in our Federal system the 
relationships between the Federal Government and the States are 
essential to get right, or you can create fiscal problems.
    Brazil, just in the last few years in the 1990's, went 
through some major adjustments by the national government that 
relates to the local governments and the provincial 
governments, state governments. So it is very important to get 
in place.
    I see the discussions that are taking place, and there are 
agreements that are being negotiated, and it seems to me that 
the progress is there. But we need to look at it carefully as 
everyone else does, as the people in Argentina do.
    So, I think I should probably leave my answer to your 
question there. You did ask about the political ability to 
carry things through, and all I can say is it seems to me that 
it should be clear, and it is becoming clear about what should 
take place. And if the interests in the Argentine people are 
clear on how beneficial a growing economy will be, then I think 
that will help the political parties come together. But I 
cannot really attest to the particular capital, the political 
capital that you were asking about. Sorry.
    Senator Miller. Thank you.
    Senator Bayh. Mr. Secretary, thank you very much. We 
appreciate your presence so much and look forward to working 
with you.
    Secretary Taylor. Thank you.
    Senator Bayh. Thank you to our next panel of witnesses. We 
have three very distinguished guests that we are looking 
forward to hearing from.
    Michael Mussa--I hope I am pronouncing that correctly--is a 
Senior Fellow at the Institute for International Economics. Mr. 
Mussa has previously served as Economic Counsellor and Director 
of the Department of Research at the International Monetary 
Fund for a decade from 1991 to 2001, where he was responsible 
for advising the management of the Fund and the Fund's 
executive board on broad issues of economic policy and 
providing analysis on ongoing developments in the world 
    Michael, thank you for joining us.
    Next, we will hear from Peter Hakim. Peter, I hope I 
pronounced that correctly.
    Mr. Hakim. Perfectly.
    Senator Bayh. As someone whose last name is often 
mispronounced, I always do my best.
    Peter is President of the Inter-American Dialogue, a 
Washington-based center for policy analysis and exchange on 
Western Hemisphere relations. He writes regularly for The 
Christian Science Monitor. He was the Vice President of the 
Inter-American Foundation, a U.S. Government foundation that 
supports grassroots development projects in Latin America. 
Previously, he managed the International Resource and 
Environmental Program at the Ford Foundation, and worked for 
the Foundation in South America.
    Last, but not least, we will hear from William Haener.
    Mr. Haener. That is correct, Senator.
    Senator Bayh. Mr. Haener is the President and Chief 
Executive Officer of CMS Gas Transmission Company, one of the 
largest United States investors in Argentina. Mr. Haener, I 
should say that one of your home State Senators, Senator 
Stabinow, has looked forward to coming to the Committee today 
to hear your testimony. Unfortunately, she is the Presiding 
Officer of the Senate as we speak. There is very little you can 
do to get out of being Presiding Officer, but she did want me 
to give you her best regards. She looks forward to reading your 
testimony and she apologizes for not being able to be in 
attendance. You can turn on C-Span and see that she is not 
making this up. She is in the Chair presiding.
    Mr. Haener. I do appreciate that, and there certainly are 
higher priorities.
    Senator Bayh. Well, I would not say higher priorities, but 
it was unavoidable. When you get called, you have to sit.
    Mr. Haener. I understand.
    Senator Bayh. Mr. Mussa, we will begin with you. Thank you 
for being here today.


                         SENIOR FELLOW


    Mr. Mussa. Thank you, Mr. Chairman.
    It is a pleasure to be able to testify on the economic 
tragedy now gripping Argentina, on how it got into this mess, 
and on how, with the help of the international community, it 
might get out of it.
    The economic performance of Argentina during the past 
decade has encompassed a remarkable transition from 
hyperinflation and deep recession at the end of the 1980's 
through a spectacularly successful period of stabilization and 
economic growth from 1991 through 1998. Then into a deepening 
recession and deflation. And finally, late last year, into a 
catastrophic collapse economically and financially.
    What was responsible for the tragic collapse of Argentina's 
initially successful efforts of stabilization and reform? Well, 
a variety of factors could be mentioned and weighed, but I 
think it is most important to emphasize that the tragedy was 
due primarily to 
Argentina's economic policies, either directly or in their 
failure to respond adequately to other adverse developments.
    Argentina's key policy failure was the inability and 
unwillingness of the government at all levels to run a 
sustainable fiscal policy. Even when the Argentine economy was 
turning in by far its best performance in many decades, as it 
was between 1991 and 1998, the ratio of total public debt to 
GDP was rising.
    You may recall in the United States when we had good growth 
the debt came down and the deficit came down and went away and 
turned into a surplus. That did not happen in Argentina in even 
better circumstances.
    Senator Bayh. We remember those days with great fondness.
    Mr. Mussa. In fact, after the Brady bond deal that helped 
cut the debt ratio in 1993 to 29 percent of GDP, total public 
debt rose to 41 percent of GDP by 1998. And then when the 
economy slowed down and deflation began, the debt moved up to 
50 percent of GDP. Moreover, not only was the Argentine 
government running up large debts, it was also enjoying very 
large privatization revenues, all of which were being spent 
during this period.
    When financial markets became persuaded that this game was 
not going to have a good end in the middle of last year, then 
sovereign default became inevitable.
    Argentina's Convertibility Plan, which rigidly linked the 
peso to the dollar and tightly constrained monetary policy, 
also played a critical role in the transformation from success 
to tragedy. Early in the last decade, the Convertibility Plan 
helped enormously to bring financial stability and economic 
recovery after decades of chaos. It was a rigid framework that 
made it more difficult for the Argentine economy to adjust 
successfully to adverse shocks of the late 1990's; and this did 
not make the problems for fiscal policy any easier. However, in 
the end I would say that fiscal imprudence killed the 
Convertibility Plan, rather than the other way around; and then 
both together killed the Argentine economy.
    What was the role of the International Monetary Fund in all 
of this? The Fund was deeply involved with Argentina throughout 
the past decade, as Argentina operated under the close scrutiny 
of a 
series of IMF-supported programs. The Fund generally praised 
most of Argentina's policies and pointed to them as a model for 
other emerging market economies. Thus, the Fund must take some 
responsibility for Argentina's tragedy. To be fair, it is 
important to emphasize that the policies that led to 
Argentina's tragedy were well and truly owned by the Argentine 
authorities; Argentina was not pushed into bad policies by the 
Fund. Rather, the failures of the Fund were sins of omission.
    I would emphasize two such failures. First, when the 
Argentine economy was performing well, the Fund did not press 
the Argentine authorities as hard as it could have and should 
have to run a more responsible fiscal policy. This was a 
serious failure of the Fund to do the job that it is expected 
to do for a program country like Argentina that had a long 
history of fiscal imprudence. Second, I believe that the Fund 
was right to organize a large international support package in 
December 2000 to help give Argentina one last chance to avoid 
disaster. However, by the middle of last year, it was clear 
that the Argentine authorities could not implement the policies 
required to take advantage of this one last chance. At that 
time, the Fund made another serious error in significantly 
augmenting its financial support for Argentina. Money that 
might be far more useful in aiding Argentina now was wasted in 
a futile effort to sustain the unsustainable. And the Argentine 
authorities were not given a forceful message of the need to 
change fundamentally their policies at a time when the 
inevitable turmoil arising from such a fundamental change might 
have been better controlled than it has subsequently proved to 
    Looking at the future, no one should underestimate the 
immense difficulties faced by the Argentine authorities. The 
Duhalde administration has taken several important steps, 
painful but necessary steps, in the right direction. However, 
my understanding is that they are still somewhat short of the 
consistent, credible, and comprehensive set of implementable 
policies that the Fund and others rightly insist are needed to 
provide assurance of a successful stabilization effort.
    In the extremely difficult economic and political 
environment of today's Argentina, I think that one must 
recognize that the Duhalde administration may not be able to 
put together and implement a credible program. The effort may 
fail, and stabilization and recovery may only come after 
Argentina has gone through a more prolonged period of economic 
and financial chaos and political and social upheaval.
    However, I believe it would be unwise to surrender to this 
prospect because the policy program that might avoid it is 
somewhat less than fully credible. At some point--perhaps 
sooner rather than later--it makes sense to take some risk by 
extending international support to the best policy program the 
Argentine authorities are capable of proposing, even if it has 
some significant weaknesses. For the Fund and the international 
community, the risk inherent in supporting such a program can 
be contained within reasonable limits: By insisting on a 
reasonable, if not perfect, set of policies that have some 
chance of successful implementation; by keeping the amount of 
net new financial support within reasonable limits; and by 
tranching the disbursement of this support in relatively small 
monthly packages so that if the program goes seriously off 
track, remedies may be expeditiously sought.
    Senator Bayh. Thank you very much, Mr. Mussa.
    Mr. Hakim.

                    STATEMENT OF PETER HAKIM


    Mr. Hakim. Thank you, Senators Bayh and Miller. I am glad 
you are holding this hearing. I have actually found not a whole 
lot of interest in what is going on in Argentina in Congress so 
    You may remember we did try to organize a small group, the 
Inter-American Dialogue, to take a few Congressmen and Senators 
to Buenos Aires. We came close, but we could not quite get 
people. They had other things on their schedule, as you well 
    Let me say that in your letter to me you asked me to 
address a large number of questions in a very short time, and I 
decided in fact to focus on one question that I think has been 
given too little attention even in this hearing today. That is: 
What is it that the United States should and can be doing?
    As you will see, I think the United States should and can 
be doing a lot more than it is now doing.
    Before getting to that, I do want to say that I fully agree 
that Argentina is in a mess. It is a terrible tragedy. I agree 
that most of the blame, if not all of the blame, falls on the 
Argentine policymakers and politicians and officials; that it 
is not a problem of the international organizations. The 
Argentines were the ones that were making decisions about their 
own country. I also agree that they need a real, sustainable, 
coherent program for their economy to recover. That is 
absolutely essential.
    What I do not agree with, I certainly do not share John 
Taylor's optimism. I probably share more of Michael's pessimism 
here. I think it is a disaster. I think it is going to get 
worse in Argentina, and I think it is going to last for a long 
    What I think is clear, and Michael Mussa made mention of 
it, is that Argentina does need some external support to 
resolve the crisis. I do not think there is any question of 
    I think at the same time the U.S. Treasury and the IMF have 
made clear that there will be no aid without a sustainable 
program of the kind that I already said was absolutely 
    President Duhalde has made some progress toward coming up 
with a program, but he still has a long way to go to really 
produce the kind of sustainable program that might be 
convincing to the U.S. Treasury or to the Fund. And indeed, I 
think the consensus is increasing that he probably will not be 
able to come up with such a program, at least any time soon. 
That he--Senator Miller, you asked this question directly--does 
not have the political capital to pull it off.
    Either the United States and the international community 
steps in much more vigorously than they have to date, or 
Argentina will fall into a deeper and more dangerous crisis.
    Michael Mussa has already mentioned the possibility of a 
devastating hyperinflation. Let me add that nobody knows where 
the country's politics may wind up. But certainly the country, 
25 years a democracy, is I think in some substantial danger.
    This is a disaster not only for Argentina, but it could be 
a very serious blow for a number of other Latin American 
countries, and a lot of them are facing their own very 
difficult problems at this point. I think it will, if things 
continue to deteriorate, play havoc with U.S. objectives in 
this hemisphere. We can talk about each of those more.
    So far the economic contagion has been contained. Only 
small neighboring--Uruguay has really been affected--but there 
are indications that there may be a decline in investment 
capital to Latin America, which could seriously undercut the 
region's prospects.
    And like I said, the danger to United States relations with 
the region, which are already, Argentina is already seen as an 
example of a United States that is somewhat indifferent to the 
region. I think this is compounded by the obvious distraction 
that occurred after September 11.
    Again, this is something I would be delighted to talk 
about. What can the United States do, and what should the 
United States do?
    Certainly more involved than Mr. Taylor suggested than a 
shareholder in the IMF. Let me be very clear. I do not think 
the IMF is going to take any action or a decision without the 
United States taking the leadership on this. The United States 
is the one that is really going to be calling the shots. I 
think the Administration in tandem with the IMF should provide 
the Argentine government with a clear and precise statement of 
the essential elements of a program that the United States 
could support.
    What does the U.S. Treasury want?
    And then make plain what level of resources the United 
States would help to try and mobilize. I do not say 
``provided.'' I say ``try to help mobilize'' to support the 
    If the Argentine government is prepared to accept these 
principles, these basic elements as a basis for moving forward, 
the United States should join with the IMF and begin 
intensively working with the Argentine government to develop a 
full-fledged policy blueprint. And then work to get the 
necessary international contributions from the financial 
institutions, the IMF, private investors in the G-7 countries.
    This is a high level of intervention. I rarely recommend 
this. But I do not think the Argentines are going to be able to 
put this together without it. And when you have a house burning 
down in a neighborhood, you try to help put it out. You do not 
wait for it to continue burning.
    Let me say, with appropriate prior consultations. I think 
the set of initiatives I have outlined would gain strong 
political backing from most Latin American countries. Most of 
them have already been urging the United States to provide this 
    I think--and this is just a supposition--there is a good 
chance that an intensely engaged United States with broad 
regional support could end some of the political impasse in 
Argentina, could give the Argentine government the political 
capital it needed to begin to effectively resolve the crisis.
    Let me say, all this may not work. But without the 
leadership and intense engagement of the United States, the 
Argentine government will likely remain immobilized. The 
country's economy and politics will continue to deteriorate. 
The end will be a terrible and lasting damage to Argentina, 
possibly spreading harm to other Latin American countries and 
potentially undercutting our policy objectives in the 
    Thank you.
    Senator Bayh. Thank you very much, Mr. Hakim.
    Mr. Haener.




    Mr. Haener. Thank you very much, Mr. Chairman.
    First, I have already submitted some formal testimony. I 
would ask that that be adopted into the record.
    Senator Bayh. Yes.
    Mr. Haener. Thank you.
    I will try and keep my remarks brief, but frankly this is 
very important to United States business and to the citizens of 
Argentina. I am going to talk about it from an energy 
perspective. The Argentine government's new economic regime is 
far more than a simple devaluation. It is really much worse 
than that.
    The government has abrogated the contracts of existing 
investors, and is issuing arbitrary decrees to limit the 
revenues of energy projects, actions that have no relationship 
to market forces, and that are without regard to the external 
debt obligations of those projects. As a result, the government 
is forcing the energy sector into a crisis. Since 1993, the 
Argentine economy was fueled by free market principles and 
privatization policies really that I think benefited the 
government and the people.
    United States and other foreign investors invested over $6 
billion in the energy industry alone, and brought that 
equivalent credit. The investments were based on specific 
commitments and guarantees from the government. For example, 
dollar-denominated, or peso equivalent, not necessary linked, 
but peso equivalent rates were allowed to be charged.
    Now the impact of this international investment in energy, 
what is it? Let me tell you what it is. Energy prices have 
fallen, and reliability and availability have increased. Low 
energy prices, lots of it, are good for the economy. I think we 
all know how GNP growth is linked to energy.
    Despite the current government rhetoric and somewhat 
finger-pointing at United States and foreign investors were the 
cause of the current economic and social turbulence, it has 
really been the sovereign debt incurred by the central 
government and provinces due to their inability to limit 
spending. Period.
    We have not taken huge projects out of the country, or 
profits off the backs of the Argentine citizens. Just the 
opposite. Let me give you an example. We are a major owner in 
the TGN Pipeline System. When that System was privatized, the 
owners--and there are five of us--spent $392 million to buy 
that from the government. Since that time, we have reinvested 
$1 billion to upgrade that System so it met international 
safety reliability standards and have expanded deliveries to 
other parts of Argentina that did not have natural gas service 
before. I think that is a benefit to the economy.
    Now the government has arbitrarily changed policies and 
laws in results that are punitive and discriminatory to the 
United States and foreign investors.
    Let me be clear. It is not the peso devaluation we are 
concerned about, but the abrogation of our contracts and the 
illegal delinking of the peso to the dollar. As an example, 
under the TGN privatization rules--again, that is their 
pipeline--the government rules provided that our tariff rates 
be calculated in dollars or the equivalent in pesos. As a 
result, companies like TGN received loans and entered into 
services and supply contracts in dollars. Since revenues would 
match up in dollars or the peso equivalent, everything was in 
    Now as a result of a recent change in law, it is now 
illegal to make that link. You can go to jail for trying to do 
    Obviously, what has happened now with the peso devaluation 
and delinking the ability to collect what the fair tariff is, 
our foreign debts effectively doubled compared to our revenues. 
And if the projections are right that the peso devaluation will 
be even further, that debt situation is going to go further. 
So, we won't be able to even think about a profit. You won't be 
able to pay your debts. We have a problem.
    I think in the real world of energy companies, our projects 
could be expropriated. We will not be able to purchase spare 
parts, keep up the maintenance. Service will be disrupted. 
Power outages. Natural gas deliveries will be stopped. All of 
which I think will disrupt the economic recovery.
    There will be a substantial effect on the U.S. economy as 
well. Shareholders will lose their equity. Banks will lose 
money on the debt that comprises $6 billion in energy 
investments. Insurers that back those banks and investors will 
lose money. U.S. exporters will lose money. The contracts for 
the provision of spare parts of the execution of maintenance 
services agreements are unfilled.
    U.S. taxpayers will lose money as OPEC and Ex-Im loans go 
into default, and as their guarantees are called in. A form of 
investment or a contagion will begin to spread as prospective 
investors and other emerging economies shy away, having seen 
this model program fall and fail.
    The United States and international financial institutions 
have a vital role to play in ensuring that this situation gets 
reversed and that there is protection against further economic 
and social turmoil. The international community must work with 
Argentina to provide a credible yet sustainable plan that 
enables the Energy Project to return to solvency and to restore 
the terms and basic economic equation of their contracts.
    In order to hold the Argentine government accountable, 
there must be strict, enforceable conditions and performance 
requirements to this effect in whatever lending and support the 
IMF, the World Bank, the Inter-American Development, and other 
institutions provide. Without these, any financial support 
would be meaningless, since the recovery will be only 
sustainable to the extent it attracts private investment.
    I think I can summarize this very clearly. I think energy 
is one of the keys to any economic recovery. The current 
government's policies are detrimental to the United States and 
foreign investors, and over the long haul will be harmful to 
Argentine people.
    We do not need a simple bailout. Prior to international 
aid, we do need strict conditions and performance requirements 
and international loans to ensure investors that they will be 
treated fairly. These conditions must support long-term, 
sustainable economic growth, and you must ensure the 
reinstatement of prior contracts and rules that allowed us the 
ability to collect our revenues in dollar equivalence.
    We are not the bad guy. I think we are just the opposite.
    Thank you.
    Senator Bayh. Thank you very much, Mr. Haener.
    I have some questions, and I will continue because the 
clock says 6 minutes, Zell, and then I will turn it over to 
you. Then if I have a couple more, I will go back for a second 
    Mr. Mussa, starting with you. Over the last 2 or 3 years 
the International Monetary Fund has advanced $22 billion to 
Argentina. Do we have any idea where that went? What it was 
used for? How about the proceeds from the privatization sales? 
Mr. Haener mentioned one, what was it, three hundred and----
    Mr. Haener. Three hundred forty-two million.
    Senator Bayh. --Three hundred forty-two million. What 
happened to this money? What did they spend it on? First the 
IMF, and then the proceeds from the privatization. If we are 
being asked to advance further sums, there should be some 
accountability for past expenditures.
    Mr. Mussa. Well, they certainly spent it. I mean since 
money is fungible, it is impossible to know whether the 
privatization money was spent to make in the end transfers to 
the provinces, or was spent on Federal Government level wages 
and so forth. But it was spent. That is clear.
    The IMF money is a somewhat different issue. For one thing, 
most of the IMF money came just in the last couple of years. 
For a long time, aside from the Tequila crisis where they had a 
foreign exchange crisis and so forth and we supported their 
reserves with IMF lending, the program was largely 
precautionary until 1999-2000, and then the big disbursements 
came recently.
    Much of the money that was disbursed recently was 
effectively used to pay off the debt that was maturing over 
that period of time, or to pay the interest on it. Because 
Argentina lost access to international capital markets after 
the first few days of January of this year. They had in 2001 
about $22 billion of interest and principal payments on the 
debt that they needed to make.
    Senator Bayh. Interest and principal payments owed by the 
Federal Government, the States, or both?
    Mr. Mussa. This was at the Federal level. I think it is a 
somewhat larger amount if you add in the States.
    Senator Bayh. And this is owed to multinational 
organizations, multilateral organizations, and private lenders 
as well?
    Mr. Mussa. No, I think this is primarily the private sector 
debt of the Argentine Sovereign: $21-$22 billion. Now part of 
that was refinanced domestically by selling it to the domestic 
pension funds, domestic banks, and so forth. But they needed 
$10 or $12 billion of financing externally, which was not 
available privately. And the international money helped to fill 
in that gap.
    The Argentine government also ran--and this is at all 
levels--a very substantial budget deficit, and some of the Fund 
money that was advanced by the Fund, by the World Bank, and so 
forth, no doubt since money is fungible, wound up financing 
    Senator Bayh. Money you do not use to repay interest and 
principal is thereby freed up to spend on other things, money 
being fungible as you were saying.
    Mr. Mussa. Yes. That principal is probably more important 
going forward than it has been--than it was last year, because 
last year the interest and principal was being paid. But now 
they are in actual default on at least the external component 
of their Sovereign debt. So no interest or principal payments 
are being made.
    Now that helps the budget in the sense that they are not 
needing to make provision for that, and I think that is one of 
the reasons why any international support that is provided at 
this stage should be provided in much more modest amounts than 
one was thinking about earlier, because they are in fact 
getting extraordinary financing by simply not paying their 
debts, and I think that it is not a realistic prospect either 
this year or next year that there is going to be any 
significant amount of either interest or principal payments to 
the external creditors of the Argentine government. But I do 
not think the Fund should be stepping in at this stage to 
provide money to make those interest and principal payments.
    Senator Bayh. Let me ask you about the tax system. Mr. 
Hakim, you might have an observation on this as well. I 
commented that the statistics that have been shown to me 
indicate that about 50 percent of the taxes that are owed in 
Argentina are actually paid. To be a devil's advocate here for 
a moment, why should foreign lending substitute for domestic 
tax collection?
    In other words, should not one of the emphases of the 
Argentine government be on not raising taxes but actually 
collecting what they are already owed domestically? Would that 
not go a fair part of the way toward solving their problem?
    Mr. Mussa. This has been a continuing issue of discussion 
with the Argentine authorities, because the tax rates are not 
low in Argentina. Tax revenue is relatively low. But that is 
because of this problem that there are a lot of people that do 
not pay their taxes. And on top of that, the Argentine 
government has a number of tax rebate schemes and so forth 
which lose a significant amount of revenue. There are also 
large-scale transfers of revenue from the central government to 
the provinces. Well over half of the budget of the provinces is 
financed by revenue that is transferred from the central level.
    Now that is not entirely inappropriate, but I would say----
    Senator Bayh. It has been a fixed amount, and apparently 
the agreement that was announced yesterday is going to make it 
    Mr. Mussa. There was a fixed amount, a minimum amount, and 
then there were additional amounts on top of that in most 
years. And now they are going to get a percentage of the 
    What is not clear to me from the press reports was whether 
the deal said that that is going to be for this year, or that 
is going to be for all time looking forward. Because what the 
Federal Government agreed to do, on the other hand, was to take 
over the debts of the provinces.
    That is something that has happened several times in the 
past 50 years in Argentina. The provinces have never paid their 
debts. When they get to be too big, they pass them off onto the 
central government. And when that happens again and again and 
again, it subsidizes imprudent fiscal policy at the provincial 
    Unlike the United States, I mean Orange County has a 
problem and they default on their debt, that is Orange County's 
problem. The Federal Government does not necessarily step in to 
bail them or the creditors out. But in Argentina, there has 
been this long history of a central government stepping in. And 
Argentina is by no means the only country. In Brazil, and many 
developing countries if not most of them, this has been a 
    Senator Bayh. My time has expired, so I am going to turn it 
over to Senator Miller.
    I would just say your comment reminds me of something they 
say in the private sector, Mr. Mussa, that if someone owes you 
a modest amount of money they are a debtor. If they owe you a 
large amount of money, they are your partner.
    It sounds as if that is the arrangement between the 
provinces and the central government in the past from time to 
time when the debts have gotten to be so large.
    Senator Miller.
    Senator Miller. First of all, I want to thank all three of 
you for bringing some reality to this hearing. I had begun to 
wonder if we were going to really get down to the dire 
situation that we face right now.
    I particularly appreciate what you had to say, Mr. Hakim. I 
wish I had heard you earlier. I might have gone on that trip 
with you.
    Mr. Hakim. It is still open.
    Senator Miller. I want to ask you this first. You talked 
about the economic and political contagion. You know, of 
course, that Colombia and Brazil are going to be holding 
presidential elections later this year. Do you see the 
potential for more radical anticapitalist parties to increase 
in power as a result of what has happened in Argentina?
    Mr. Hakim. No, this is really one of the most encouraging 
developments in Latin America. I mean I have been hearing this 
for the past 15 years every time there was a downturn. There 
have been a lot of downturns and crises, that this was going to 
be the forerunner of a new populist regime in Latin America, 
and that just has not happened.
    There is no indication at all that there is a turn away 
from free markets, really. What I think the problem is is less 
a problem of kind of an ideological change than a broad 
demoralization that is occurring in Latin America.
    There is a lost confidence in institutions and leaders 
generally. That is particularly clear in the case of Argentina 
where there is no institution that any ordinary citizen--this 
gentleman, I forget your name--suggests they abrogated 
contracts with the energy companies. They abrogated contracts 
with depositors, pensioners, they guaranteed there would be one 
dollar for one peso. That in itself is terribly demoralizing to 
Argentina. And then other countries look at Argentina and say 
this was a middle-class, wealthy country. This is a problem for 
U.S. policy. It makes U.S. policy harder.
    Senator Miller. Let me follow up with this. You probably 
saw that editorial some time ago in The New York Times that was 
written by Paul Kreugman called ``Crying With Argentina.''
    Mr. Hakim. Right. I did.
    Senator Miller. He made the statement that Argentina, more 
than any other developing country, bought into the promises of 
U.S.-promoted neoliberalism were slashed.
    Mr. Hakim. I think that is a bit exaggerated.
    Senator Miller. You know what I am talking about?
    Mr. Hakim. Yes, I know precisely. I read that article.
    Senator Miller. You do not think there is a backlash 
against market-oriented reforms?
    Mr. Hakim. It is hard to find any evidence of it. In other 
words, if you look at recent elections in Latin America, there 
have been two elections in Central America, for example, this 
year. In both elections, the more conservative--both of them 
were businessmen--won the election.
    A classic populist Daniel Ortega, you may remember, lost 
the election quite handily. In Brazil, there is a populist 
candidate who is running for his fourth try at the presidency. 
He is declining in the polls over the past couple of months 
since the Argentine--there is just no concrete evidence of 
    The problem I think, like I said, is a broad demoralization 
and discouragement. The results in Latin America of free 
markets, of even democratic change, have not lived up to 
expectations. There is not any good ideas of how you begin to 
make them work better.
    Senator Miller. Mr. Haener, do you have investments or 
business in Chile?
    Mr. Haener. Yes, I do.
    Senator Miller. Would you mind talking to us a little bit 
about the difference of doing business in Chile and in 
    Mr. Haener. It is significant right now. Certainly Chile 
has had a history of living up to their commitments. They have 
solid economic policy. And I will say that they have always 
stood up to the agreements and, frankly, I would continue to 
invest in there.
    Senator Miller. You would.
    Mr. Haener. If you asked me if I would invest in Argentina, 
I would tell you that if I went to our chairman of the board, 
it would take them only one nanosecond to tell me to seek 
    Senator Miller. I should have asked you the question that I 
asked Secretary Taylor awhile ago about what do I tell my 
Georgia computer and electronics companies back in Georgia.
    Thank you.
    I have another question, but you go ahead, Mr. Chairman.
    Senator Bayh. No, go ahead.
    Senator Miller. This is a question that I asked Secretary 
Taylor awhile ago, and you have talked about it a little more. 
What is the relationship that the national government has with 
those provinces? It is almost as if they have an incentive--you 
more or less confirmed that--to go ahead and just spend all you 
want and go into debt, because sooner or later mama's gonna 
come along and pay for you. Do these Duhalde reforms, in your 
opinion, really address that?
    Mr. Mussa. I think that is far from clear. Indeed, the fact 
that they are going to go in and take over the debts one more 
time as part of the present deal is yet another instance of 
that system working.
    So it is cross my heart and hope to die I won't do it 
again. Well, Argentina has a long history of it. Indeed, when 
Duhalde was the Governor of Buenos Aires Province, the largest 
province, and one of the most fiscally profligate provinces in 
the country, there was another mechanism of this kind. 
Sometimes they would borrow from their local/state provincial 
bank, and then either the government or the central bank had to 
step in and bail the bank out.
    This is yet another instance of what we have seen. The 
details are not the same each time around, but it is more or 
less the same business. Well, I think that is a source of 
    I would say if they are going to do a deal like that, then 
there should be some type of agreement on a constitutional 
change which is going to limit in some way the liability. Of 
course, you can always change the constitution. So that is not 
an absolute guarantee.
    Senator Bayh. Or the supreme court.
    Mr. Mussa. Yes, the supreme court in Argentina is not the 
Supreme Court of the United States, and they have also been 
part of the problem as well. In past occasions when the central 
government has tried to impose some discipline on either state 
spending and borrowing, or excessive pension payments, or 
whatever it is, the supreme court has often overruled those 
decisions. And indeed, a not negligible amount of the borrowing 
has been the borrowing to finance the fiscal consequences of 
those adverse decisions.
    Senator Miller. Did you want to add to that, Mr. Hakim?
    Mr. Hakim. International markets also play a role in this. 
If a country has a province that is not paying its debts 
internationally at least, or to international companies located 
in the province, that country will often find its credit 
ratings deteriorating. We have seen this in Brazil where one 
    Mr. Mussa. Governor Franco, yes.
    Mr. Hakim. In other words, it is not simply a 
constitutional measure. These countries have to perform very, 
very well fiscally and they have to take control over the 
provincial finances basically when they break down. In other 
words, it is not a question you can build into law. You have to 
have some capacity of the central government to really almost 
    Mr. Mussa. And it is a political problem, as well. Can the 
central government really face down the provinces and say, this 
time you are going to take the consequences of your fiscal 
excesses. And that has proved to be very difficult to do in 
Argentina, and Brazil, and a number of other countries.
    Senator Miller. I have found it such with my children.
    Thank you, Mr. Chairman.
    Senator Bayh. Mr. Hakim, I have a question for you 
following up on Senator Miller's last question. You recommended 
in your testimony outlining specific steps that need to be 
taken to, in the International Monetary Fund's opinion and the 
opinion of the U.S. Treasury, constitutes sustainable economic 
and financial policies.
    My question to you would be: If we were to do that, would 
that not appear that the difficult consequences of those steps 
were being imposed from abroad, thereby generating a political 
backlash within Argentina which would make these steps that we 
were proposing politically unsustainable? In other words, it is 
a Catch 22. Is there really any substitute for a domestic 
political consensus about what to do, not appearing to be 
imposed from without?
    Mr. Hakim. There is no good path here. In other words----
    Senator Bayh. You can understand----
    Mr. Hakim. I know exactly where you are ----
    Senator Bayh. Can I just say one final thing? You can 
understand how the politician or some political figures in 
Argentina might play it as it is the bad old United States 
coming in and telling us what we have--all these adverse 
consequences you do not like, that is being imposed on us from 
    Mr. Hakim. But at the same time, the fact is the Argentine 
political politicians cannot come together on a plan. There is 
simply not enough political capital in the system. The Duhalde 
government does not have the authority or the capacity or the 
will, whatever, to make this work.
    He needs external support. I think the United States is the 
only country that has the leadership, the international 
authority that can put its weight behind it. Because if the 
United States does put its weight behind it, the Europeans are 
likely to be able to be willing to support this.
    It is also important the fact--and this is what I think 
very strongly--that the other Latin American countries, 
Argentina's neighbors, Brazil, and Chile, would support this 
kind of initiative from the United States.
    Senator Bayh. I am sure ----
    Mr. Hakim. I have talked to many representatives of these 
countries precisely about this idea. They cannot say publicly 
they want the United States to essentially give Argentina a 
plan, but I think if this were put together right and presented 
to them right, we could get public international backing 
support for this from Brazil, from Mexico, from Chile, and the 
other countries in Latin America who realize how dangerous----
    Senator Bayh. I am sure they would support it, but they do 
not bear any of the adverse domestic consequences.
    I hear what you say. Just from my own perspective, I am 
very skeptical that all the good advice from abroad can do much 
good if there is not that domestic political----
    Mr. Hakim. Well, in the end----
    Senator Bayh. --and I can see this being demogogued to 
death by some political figures.
    Mr. Hakim. What I am saying is how you create the domestic 
support for something like this. In other words, I think at 
times it takes somebody from outside to say this is the right 
way to proceed. If you proceed this way, there will be 
resources available, and the other friends in the region are 
saying this is the right way to proceed, you might get a good 
result. The risk is there. You send the firemen into a burning 
building. There is a risk. There is no question.
    Senator Bayh. So, Mr. Mussa, this gets back to my point I 
think previously, which was in some ways this seems to be as 
much of a political challenge as an economic or financial one. 
Clearly, some formal guidance needs to be offered, but overt 
public, basically laying down of conditions, it seems to me, 
would run the risk of political demagoguery domestically----
    Mr. Hakim. I have been as much opposed to that 
intervention. I think this is a particular case that these 
problems all have to be solved. As we have seen in the 1980's 
and 1990's, on a case by case basis, and in this case it is the 
first case I have ever done this, 
advocated a very heavy-handed intervention.
    Senator Bayh. Mr. Mussa, you wanted to comment?
    Mr. Mussa. I think one needs to recognize, first, how 
clearly terrible this situation is. Probably over the past 3 
months, real GDP in Argentina has fallen something like 25 
percent. That is what happened in the United States between 
1929 and 1933. I mean, this is really an economic collapse that 
is virtually unprecedented, far worse than we have seen in the 
other emerging market crises of the 1990's. And it is still 
going on. One of the things that means is that if you can step 
in and bring some sense of stabilization, even if the program 
is not perfect, that there is a long way to go back up.
    So the risks that one takes when the economy is really 
enormously depressed in going in and trying to assist with a 
stabilization, the risk that it will be a failure, is reduced 
because you have already had the big failure.
    Everybody recognizes in Argentina that it is the big 
failure, and the chance is to turn things around.
    You do not want to step in at the top. If we had stepped in 
in December with this type of program, then the international 
community, the United States and the Fund, would have been 
    Senator Bayh. Would you agree with my observation--I think 
you spoke to it a little bit when you said the funds could be 
released in the tranches over a period of time--that the 
assistance provided should be for demonstrated performance as 
opposed to just pronouncements?
    Mr. Mussa. That is the idea, that they are committed to 
perform. And if they do not live up to that performance, and 
there is not a good reason why they fail--I mean sometimes 
things, you know, the economy continues to sink and the tax 
revenues sink along with it--but if it is failing because they 
are failing to deliver on their policy promises, then you have 
to pull their chain.
    That is the way in which the system works. As I say, 
because they are not paying any debt service at present, I do 
not think that the amount of money that is needed, aside from 
postponing the payback of the money to the Fund and others that 
is due this year and next year, the net new amount of money 
that would be needed to support them is not in my judgment that 
large. It is not $22, $23 billion of net new money. That is 
relevant in this circumstance.
    It is primarily a political problem, not I think an 
economic problem. What needs to be done is I think reasonably 
clear. It is getting it done that is the problem.
    Mr. Hakim. Could I just add one thing? When the United 
States went to Mexico and helped with their economic crisis in 
1995, I understand we placed in the treasury--and Michael can 
talk to this perhaps better than I can--something like 17 or 18 
staff people working with the Mexicans to help them oversee. A 
plan was already in place, to oversee the implementation of 
their economic program. In other words, that was also a very 
heavy engagement.
    I think we have to be more involved, and what Taylor 
suggested then as merely a shareholder of the IMF, I mean that 
is just totally inadequate for a country like the United 
    Senator Bayh. It should be at the invitation of the 
Argentines, shouldn't it?
    Mr. Hakim. That would be helpful.
    Senator Bayh. As opposed to being imposed from without. I 
am just worried about the political ramifications. In order for 
this to work, you have to have--there is no substitute for the 
Argentines running their own country. So, you have to have a 
political consensus develop there eventually.
    Mr. Hakim. And believe me, I have actually talked to a lot 
of the Argentines that are asking for somebody from outside 
that can impose--impose is a strong word--but at least present 
a rational way to proceed, and to strengthen those people that 
want to proceed in Argentina in a rational, intelligent, 
technically sound way.
    Senator Bayh. I have one more brief comment.
    Zell, do you have anything else? I have two questions for 
Mr. Haener. I have not forgotten you. As a matter of fact, I 
have great empathy for the situation you are in here today. You 
are on the front line of all this.
    Senator Miller. No, go ahead with Mr. Haener.
    Senator Bayh. My one observation, Mr. Hakim, for you, and 
then two questions for Mr. Haener. I have heard this from other 
individuals, too, about the perception in some quarters in 
South America about American indifference to the plight of the 
Continent, and so forth and so on.
    I can understand that in part, but I just recount the 
statistics. Our banks are on the line here for $23 billion. We 
have direct foreign investment of $14.5 billion. A great chunk 
of that is worthless now. The IMF, which you know we fund in 
great part, has $22 billion on the line here. There is a good 
question about whether that will ever be repaid.
    This does not sound like indifference to me. We have been 
major contributors to the country, to our great loss at this 
    Mr. Hakim. Let me say that all of those companies went to 
Argentina. They may be doing great for the Argentine economy, 
and I support them very, very much. They also went there for a 
profit. They went there because Argentina represented a place 
where they could earn money. In other words, this was not 
    Senator Bayh. Regardless of their intentions, however, they 
have suffered great losses, and that does not strike me as 
    Mr. Hakim. I mean the Argentine people have suffered 
losses, as well. All that I am saying is that there is a crisis 
now in a country that we considered a close ally, a country 
that we want to make a partner in free trade, that we want to 
be part of a hemispheric free trade area, that we meet 
regularly in summit meetings. The question is how the United 
States should respond now to that.
    Senator Bayh. I do not disagree with any of that. All I am 
saying is it seems as if there ought to be some recognition in 
some quarters of the constructive role that both----
    Mr. Hakim. Oh, I think the fact that so many people are 
asking for the United States to become more involved suggests 
they know that the U.S. involvement is a good thing. The 
President of Brazil is not asking for the United States to 
become more involved in Argentina because he thinks U.S. 
involvement is bad. On the contrary, they believe the U.S. 
involvement is good and want more of it now.
    Senator Bayh. I am saying that the perception of 
indifference is not only inaccurate but also unfair.
    Mr. Hakim. That is a conversation we could have. I think 
that promises have been made and have not been fully kept.
    Senator Bayh. By whom?
    Mr. Hakim. By the U.S. Government.
    Senator Bayh. Well, what about the promises of the 
Argentine government?
    Mr. Hakim. That, too. They have not been kept. I agree with 
that. That is the first thing I said today.
    Senator Bayh. Perhaps we will have that conversation later.
    Mr. Hakim. Okay.
    Senator Bayh. I would look forward to it.
    Mr. Haener, I think that you answered this in response to 
Senator Miller's question. It sounds to me as if your opinion 
is that the confiscatory policies that have recently been 
implemented by the Argentine government, in your opinion would 
essentially mean no further direct foreign investment certainly 
from where you sit?
    Mr. Haener. Certainly from the private sector I think it 
would be very difficult for anyone to justify putting money in 
there now.
    Senator Bayh. I had a major banker tell me that yesterday. 
Their company has been in Argentina for 60, 70 years and they 
are considering pulling out entirely because of the complete 
lack of credibility they now feel exists with regard to the 
rule of law, sanctity of contracts, bankruptcy procedures, the 
list goes on and on.
    Mr. Haener. It is incredible, to my way of thinking. 
Frankly, I am surprised that the people have put up with it.
    I think that there is a recognition in Argentina within the 
populace of the benefits of stable economic policy. I will give 
you an 
example. The first time I went to Argentina was after the 
market reforms and after the days of the hyperinflation. I was 
riding in a cab, talking to the cab driver, and I said: Well, 
what do you think about the new economic policies of the free 
market? He said, I am from the days of hyperinflation. I am 
working harder now than I ever have before. But I never want to 
go back. I said, why is that? He said, now I own my own cab. I 
never could before.
    So something was working. And I think there is a will 
within the country, if we give them some leadership.
    Senator Bayh. My last question is for you, Mr. Haener. It 
seems that some of the policies have disproportionately singled 
out the energy industry that you represent and some of the 
financial institutions to help address the crisis. Is that your 
perception, or no?
    Mr. Haener. Absolutely.
    Senator Bayh. Well, why do you think that is? Do you have 
an opinion?
    Mr. Haener. I think it is politically easy to point the 
finger outside the country. I think it is that simple.
    Senator Bayh. Um-hmm.
    Mr. Haener. Let somebody else shoulder the burden.
    Senator Bayh. Very good. Well, thank you, Mr. Haener. 
Again, I have empathy for your situation.
    Mr. Hakim, I appreciate your input today. Mr. Mussa, thank 
you. It has been very enlightening. Again, just to make my own 
viewpoint clear, I hope we can play a constructive role here. 
It is in the best interests of everyone that we try and resolve 
this in a positive way. It does require a certain suspension of 
disbelief, I guess, or a greater degree of optimism, but that 
is also a strain in the American character that has stood us in 
good stead, and I do hope it turns out well.
    The last thing I would say, Mr. Mussa and Mr. Hakim, to 
both of you, if we can get policies that seem to make sense and 
get some demonstrable performance on those policies, then by 
all means I think we should try and lend a hand here.
    Thank you all, very much.
    Mr. Mussa. Thank you.
    Mr. Hakim. Thank you.
    Mr. Haener. Thank you.
    [Whereupon, at 4:10 p.m., the hearing was adjourned.]
    [Prepared statements, response to written question, and 
additional material supplied for the record follow:]
    Thank you, Chairman Bayh, for holding this hearing.
    I also want to thank our witnesses for talking to us about our 
concerns regarding Argentina. It is a very important economic partner.
    One concern is that, during this insecure financial time, Argentina 
may take some actions that will not help in the long run and will, at 
the same time, cause harm to United States businesses.
    I am sure that the appropriate United States agencies are working 
with their counterparts in Argentina and providing all the advice 
necessary. I hope that some of the issues covered include urging 
Argentina to preserve its freely convertible currency and avoiding the 
expropriation or confiscation of private sector assets. I am also 
interested in hearing the panel's views on President Duhalde's current 
theory that he can bring Argentina out of this crisis by blocking 
    The implications on trade, the IMF, the U.S. business and regional 
contagion are significant. This timely and important hearing will help 
guide us in policymaking decisions that will hopefully aid our friend 
and ally, Argentina.
               Under Secretary for International Affairs
                    U.S. Department of the Treasury
                           February 28, 2002

    Thank you very much, Chairman Bayh, Ranking Member Hagel, and 
Members of the Subcommittee for inviting me to participate in this 
hearing on the current economic situation in Argentina.
    \1\ This is an update to the testimony submitted on February 6, 
2002, before the Subcommittee on International Monetary Policy and 
Trade of the House Financial Services Committee.
    The people of Argentina are facing extremely trying times. 
Throughout this difficult period, President Bush has made it clear that 
Argentina is an important friend and ally of the United States of 
America. We want our allies to be strong leaders of free democracies 
and free markets. Argentina should be an engine of economic growth in 
our hemisphere. It is important that Argentina succeeds.
    In order to understand the current situation in Argentina, I think 
it is helpful to begin by reviewing some of the key economic 
developments in Argentina during the last decade.

The Economy of Argentina in the 1990's
    In the early 1990's, the government of Argentina undertook a series 
of important reforms in economic policy, including monetary policy, 
fiscal policy, structural policy, and international trade policy. 
Perhaps most dramatic and immediately noticeable was the change in 
monetary policy. A highly inflationary monetary policy was replaced by 
a new ``convertibility law,'' which pegged the peso one-to-one with the 
dollar and largely prevented the central bank from financing the 
government's budget deficit by printing money. Fiscal policy was also 
brought into better control and there was a decline in deficits. On the 
structural side, a comprehensive privatization program was implemented 
through which a number of inefficient state-owned enterprises were 
privatized. Moreover, barriers to international trade and investment 
were reduced and Argentina's financial sector was opened to foreign 
    These market-oriented reforms produced very impressive results. 
Hyperinflation--which had risen to over 3,000 percent--was brought to a 
quick end by the convertibility law. Economic growth turned around 
sharply: After falling during the 1980's, real GDP began growing at 
over 4 percent per year. Investment and exports grew particularly 
rapidly. The sharp increase in economic growth was even more remarkable 
given the very rapid disinflation that was occurring at the same time.
    However, starting in the late 1990's there were a number of policy 
setbacks and external shocks which sharply reduced economic growth in 
Argentina and ultimately led to the financial crises in 2000 -2001 and 
the current halt to economic activity.
    First, government budget deficits began to increase and fiscal 
discipline began to wane. Government spending at the Federal and 
provincial level increased faster than tax revenues. These deficits 
could not be financed by money creation because of the convertibility 
law. Instead, they were financed by borrowing in both the 
domestic and the international capital markets; however, as the 
government's debt began to rise and raise questions about 
sustainability of the debt, risk premia rose and increased interest 
rates. Eventually the higher interest rates put additional pressure on 
the budget deficit and held back economic growth.
    Second, the low inflation of the early-to-mid 1990's turned into 
persistent deflation, which also had negative effects on economic 
growth. In addition, the currencies of Argentina's major trading 
partners in Europe and Brazil depreciated relative to the dollar, and 
therefore relative to the Argentine peso. This effective appreciation 
of the peso led to deterioration in Argentina's competitiveness, which, 
along with the higher interest rates, further held back economic 
    Third, persistent expectations of depreciation of the peso caused 
interest rates on peso loans to be higher than dollar interest rates. 
Whenever policy actions were taken that raised questions about central 
bank independence or about the convertibility law, market expectations 
of depreciation increased causing domestic interest rates to rise 
    As low economic growth persisted into 2000, concerns began to grow 
that a vicious cycle of low tax revenues and continued government 
spending increases would lead to rising interest rates, which would 
further slow the economy. Following the political turmoil in October 
2000 when Vice President Alvarez resigned, Argentina's 
borrowing costs soared and rolling over government debt became more and 
difficult. Renewed plans to reduce the budget deficit brought interest 
rates down 
temporarily, but by February 2001 it was clear that further actions 
needed to take place. The Argentine government introduced a number of 
policy changes and finally decided to create a rule--the zero deficit 
law--in the summer of 2001 to try to provide confidence about the 
government's seriousness in getting its fiscal house in order.
    Eventually, however, it became clear that these changes to the 
budget were not working. Many market participants considered the 
government's economic plan to be unsustainable, and interest rates on 
government debt began to increase sharply. By November, it was apparent 
that the government's debt would have to be restructured and, indeed, 
President de la Rua took the step of announcing that such a 
restructuring would take place.
    As the restructuring effort was underway, the uncertainty about its 
impact on the banking system led to increasingly large deposit 
withdrawals from banks and international reserves began to fall. In 
order to stop the withdrawals and the decline in reserves, the 
government imposed severe restrictions on such withdrawals in December. 
Soon after the restrictions were imposed, social and political protests 
turned violent, leading to the resignation of President de la Rua and 
his Ministers.
    Economic circumstances in Argentina deteriorated after the 
imposition of the restrictions on deposit withdrawals. The lack of a 
functioning payments system led to a virtual halt of much economic 
activity. The shortage of liquidity is hindering economic growth and 
underlies much of the social frustration. The Duhalde government, which 
took over in January, is in the process of gradually removing these 
restrictions and at the same time moving to a flexible exchange rate 
    It is of course up to the government of Argentina to work out the 
details of a set of economic policies that will increase economic 
growth in a sustainable way. Secretary O'Neill met with Argentina's 
Minister of Economy on February 12. I met with the Minister the 
following day. Argentine officials understand that the decisions they 
must make will be difficult, but I was impressed with the Minister's 
sincerity and commitment. We have maintained our dialogue and will seek 
to build upon the initial progress we have made.
    In addition to meeting with Argentine officials, we have also held 
meetings in recent weeks with U.S. corporate officials operating in 
Argentina. We apprised these officials of developments taking place on 
our end, and have listened to their concerns about difficulties that 
they are facing. In conversations other U.S. Government officials and I 
have had with Argentine officials, we have repeatedly emphasized the 
importance of all investors being treated fairly. Foreign investors can 
play a critical role in Argentina's future.

Summary of IMF Programs
    During the period of time discussed above, the government of 
Argentina had several programs with the International Monetary Fund 
(IMF). In March 2000, Argentina obtained a $7.4 billion IMF program. 
The Argentine government treated the program as ``precautionary,'' 
meaning that the government did not intend to draw upon it. However, 
starting in the summer of 2000, the growing concern in financial 
markets was that the persistent Argentine recession was setting up the 
potential for a financial crisis.
    In December 2000, Argentina drew on $2 billion from its IMF 
program, and the next month the IMF approved an additional $6.3 billion 
for Argentina's program, bringing the total program size to $13.7 
billion. As a condition for the January package, the Argentine 
government agreed to a series of structural measures in the area of 
fiscal, pension, and health care reforms to help develop a sustainable 
fiscal position in the medium term and to build investor confidence.
    In August 2001, the IMF provided Argentina with a further 
augmentation of $8 billion. Of this amount, $5 billion was to bolster 
reserves in the central bank to counter a substantial fall in deposits 
during the summer. The remaining $3 billion could be used to support a 
voluntary, market-based debt operation and thereby begin to address 
Argentina's debt sustainability problem. However, when tax revenues 
continued to fall short and the government failed to reach an agreement 
on transfers to the provinces, it became increasingly clear that the 
government was not going to be able to meet its fiscal targets and had 
no other sources of financing. This fueled concerns about the 
government's ability to service its debt, particularly to domestic 
banks, and eventually prompted an accelerated run on the banking 
    In December, the IMF's staff determined that Argentina was not 
going to make its fiscal targets for the fourth quarter that were 
agreed upon in August and that its program was no longer sustainable. 
Thus, the IMF could not complete its review and consequently did not 
disburse a loan tranche in December 2001.
    Earlier this month, a team from the finance ministry of Argentina 
visited the IMF. I understand the meetings with the IMF were 
productive. As President Bush has said, once Argentina has designed a 
sustainable economic program, the United States is prepared to support 
it through the international financial institutions.

U.S. Policy
    Our engagement with the International Monetary Fund and the 
government of Argentina during the last year should be viewed in the 
context of our overall approach to emerging markets. During the last 4 
years the flows of capital to the emerging markets have declined 
sharply, and it has been the intent of the Bush Administration to 
reverse this trend by reducing the frequency of financial crises of the 
kind that we have seen in Argentina.
    Of course, the ideal would be to prevent crises such as the one in 
Argentina from occurring. This requires not only early detection of 
policies or of external shocks that could cause crises, but also the 
resolve to take actions to reverse such policies or to counter such 
shocks. The Bush Administration has encouraged the IMF to strengthen 
its capacity to detect potential troubles on the horizon, and to be 
willing to warn countries that are heading down a dangerous path to 
take appropriate 
action. Effective communication with markets is also key. And the IMF 
can be more effective and credible in undertaking these tasks if it 
focuses on issues that are central to its expertise--notably 
strengthening monetary, fiscal, exchange rate, financial sector, and 
debt management policies. In the last decade, the IMF became too 
involved in matters outside of these core areas.
    I hope the emerging market asset class grows much more in the 
future as the rates of economic growth in developing and emerging 
market countries rise. But we have to recognize that official sector 
resources cannot possibly grow at such a high rate that we can continue 
with very large official finance packages to deal with emerging market 
debt crises as in recent years. There will inevitably be limitations on 
the use of official sector resources. Moreover, in order to reduce 
bailouts of private investors it is necessary to limit the use of 
official resources, especially in cases where debt sustainability is in 
question. We must, therefore, gradually move in the direction of less 
reliance on large official finance packages.
    An important change has been occurring in emerging markets and we 
have encouraged this change as part of our approach to emerging 
markets. Investors are increasingly differentiating between countries 
and markets based on fundamental economic assessments--judgments that 
are facilitated by better information. This differentiation is reducing 
contagion from one country to another, as exemplified most recently by 
the relative stability in other emerging markets over the past few 
months despite the crisis in Argentina. Emphasis on the risk of 
contagion by the official sector in the past led to the expectation on 
the part of investors and emerging market governments that the official 
sector would bail them out. That encouraged excessive risk-taking and 
gave rise to the very conditions that made financial crises more 
likely. Changing this mindset has been an important priority, and, I 
think, an area where we have made some progress.
    One important challenge that remains is to explore options to 
promote more 
orderly sovereign debt restructurings. The official sector should not 
encourage countries to default on their debts, but we recognize that 
restructuring can and will happen in certain cases. At the moment, 
there is a great deal of uncertainty about the process involved in such 
restructurings. It is important to find a way such that when a 
sovereign debt restructuring occurs, it does so in a more orderly 
manner that treats debtors and creditors fairly and reduces the scope 
for arbitrary, unpredictable official action.
    Thank you again for this opportunity to speak with you. I look 
forward to hearing your views and answering your questions.

          Senior Fellow, Institute for International Economics
                           February 28, 2002

    Thank you, Mr. Chairman. I am a Senior Fellow at the Institute for 
International Economics here in Washington, DC. As you may know, for 10 
years before I joined the Institute last October, I worked on the staff 
of the International Monetary Fund, serving from September 1991 through 
June 2001 as its Economic Counsellor and 
Director of its Research Department.
    It is a pleasure to be able to testify today on the important and 
timely subject of the economic tragedy now gripping Argentina--on how 
it got into this mess, and on how, with the assistance of the 
international community, it might get out of it.
    The economic performance of Argentina during the past decade has 
encompassed a remarkable transition: From hyperinflation, financial 
chaos, and deep recession at the end of the 1980's, through a 
spectacularly successful period of stabilization, reform, and economic 
growth extending generally from 1991 through 1998, then into a 
deepening recession and deflation from 1999 through most of last year, 
and finally into a catastrophic financial and economic collapse that 
began with the effective closure of the Argentine banking last December 
and the subsequent sovereign default and termination of Argentina's 
Convertibility Plan linking the peso rigidly to the United States 
    What was responsible for the tragic collapse of Argentina's 
initially successful efforts at economic stabilization and reform. 
Clearly, a variety of important factors played significant roles; and I 
will not attempt to detail all of them and weigh their relative 
significance in these brief remarks. However, it is important to 
emphasize that the tragedy was due primarily to Argentina's economic 
policies, either directly or in their failure to respond adequately to 
other adverse developments.
    Argentina's key policy failure was the inability and unwillingness 
of government at all levels to run a sustainable fiscal policy. Even 
when the Argentine economy was turning in by far its best performance 
in many decades, as it was from 1991 to 1998, the ratio of total public 
debt to GDP was rising. In fact, after the Brady bond deal that help 
cut the debt ratio in early 1993 to 29 percent of GDP, total public 
debt rose to 41 percent of GDP by 1998. And, this was in a period when 
Argentine government was receiving substantial nonrecurring revenues 
from privatization. With the onset of recession and deflation in 
Argentina after the collapse of Brazil's exchange rate peg in early 
1999, Argentina's fiscal difficulties became more pressing, and public 
debt rose to 50 percent of GDP by late 2000. When efforts to reign in 
the fiscal deficit during 2001 repeatedly proved inadequate, financial 
markets completely lost confidence and sovereign default became 
    Argentina's Convertibility Plan, which rigidly linked the peso to 
the dollar and tightly constrained monetary policy, also played a 
critical role in the transformation from success to tragedy. Early in 
the 1990's, the Convertibility Plan helped enormously to bring 
financial stability and economic recovery after decades of financial 
chaos. However, it was a rigid framework that made it more difficult 
for the Argentine economy to adjust successfully to adverse shocks in 
the late 1990's; and this did not make the problems for fiscal policy 
any easier. However, in the end, I would say that fiscal imprudence 
killed the Convertibility Plan, rather than the other way around; and 
both together killed the Argentine economy.
    What was the role of the International Monetary Fund in all of 
this? The Fund was deeply involved with Argentina throughout the past 
decade, as Argentina operated under the close scrutiny of a series of 
Fund-supported programs. And the Fund generally praised most of 
Argentina's policies and pointed to them as a model for other emerging 
market economies. Thus, the Fund must take some responsibility for 
Argentina's tragedy. To be fair, however, it is important to emphasize 
that the policies that led to the tragedy were well and truly owned by 
the Argentine authorities; Argentina was not pushed into bad or 
inadequate policies by the Fund. Rather, the failures of the Fund were 
sins of omission, not sins of commission.
    I would emphasize two such failures. First, when the Argentine 
economy was generally performing very well, the Fund did not press the 
Argentine authorities as hard as it could have or should have to run a 
more responsible fiscal policy. This was a serious failure of the Fund 
to do the job that it is expected to do for a program country like 
Argentina that had a long history of fiscal imprudence. Second, I 
believe that the Fund was right to organize a large international 
support package in December 2000 to help give Argentina one last chance 
to avoid disaster. However, by the middle of last year, it was clear 
that the Argentine authorities could not implement the policies 
required to take advantage of this one last chance. At that time, the 
Fund made another serious error in significantly augmenting its 
financial support for Argentina. Money that might be far more useful in 
aiding Argentina now was wasted in a futile effort to sustain the 
unsustainable. And the Argentine authorities were not given a forceful 
message of the need to change fundamentally their policies at a time 
when the inevitable turmoil from such a change might have been better 
controlled than it has actually proved to be.
    Looking to the future, no one should underestimate the immense 
difficulties faced by the present Argentine authorities in their 
efforts to stabilize a rapidly deteriorating situation and then to 
initiate a sustainable recovery. The Duhalde administration has taken 
several important steps--painful but necessary steps--in the right 
direction. However, my understanding is that they are still somewhat 
short of the consistent and comprehensive set of implementable policies 
that the Fund (and others) rightly insist are needed to provide 
assurance of a successful stabilization effort.
    In the extremely difficult economic and political environment of 
today's Argentina, I think that one must recognize that the Duhalde 
administration may not be put together and implement as credible a 
program as we would all like to see. The effort may fail, and 
stabilization and recovery may only come after Argentina has gone 
through a more prolonged period of economic and financial chaos and 
political and social upheaval.
    However, I believe that it would be unwise to surrender to this 
prospect because the policy program that might avoid it is somewhat 
less than fully credible. At some point, perhaps sooner rather than 
later, it makes sense to take some risk by extending international 
support to the best policy program the Argentine authorities are 
capable of proposing, even if this program has some significant 
weaknesses. For the Fund and the international community, the risk 
inherent in supporting such a program can be contained within 
reasonable limits: By insisting on a reasonable (but not perfect) set 
of policies that have some chance of successful implementation; by 
keeping the amount of net new financial support within reasonable 
limits (such as 100 percent of quota for additional annual support from 
the Fund); and by tranching the disbursement of this support in 
relatively small (monthly) packages so that if the program goes 
seriously off track remedies may be expeditiously sought.
    The international community cannot simply abandon Argentina in its 
present desperate circumstances. While recognizing that success is not 
assured, it must seek a reasonable and a realistic basis for aiding 
Argentina's efforts to end the present tragedy.

                   President, Inter-American Dialogue
                           February 28, 2002

    There is a broad consensus that any solution to the Argentina's 
financial crisis will require substantial external economic support 
from the IMF and other sources. This is the view of Argentine and 
United States Government officials, staff and officials of the IMF and 
other international financial institutions, most corporate and 
financial leaders, and economic analysts of every political stripe.
    The United States Government and the IMF have made clear that no 
external resources will be made available to Argentina, unless the 
Argentine government comes up with a realistic and coherent program for 
sustainable economic recovery.
    After nearly 2 months in office, the government of President 
Duhalde is still struggling to develop a program that is convincing to 
the U.S. Treasury and the IMF. Now, a new consensus is forming--that 
the Duhalde government, operating under severe political constraints, 
will not, on its own, ever be able to put together and execute such a 
program. The government does not now have, and seems incapable of 
galvanizing, sufficient political support to take the extraordinarily 
difficult measures that will be required to restore order to the 
Argentine economy. Those measures will impose enormous economic losses 
on most Argentines.
    If this second consensus is correct, then either: (a) the U.S. 
government and the IMF have to reconsider their stated position (for 
example, that they cannot come to Argentina's aid unless the Argentine 
government first produces a suitable program; or (b) Argentina will 
face a far deeper, more prolonged, and more dangerous crisis. Under 
these circumstances, hyperinflation, which will leave the economy in 
total shambles, appears the most likely way that the necessary economic 
sacrifices will be forced on the Argentine population. And nobody quite 
knows where the country's politics will end up, but the country's 
democratic institutions will be at risk.
    A deepening crisis would not only be disastrous for Argentina, but 
also it could well produce serious reversals in many other Latin 
American countries and play havoc with United States objectives in the 
hemisphere. So far the consequences of the Argentine collapse seem to 
be largely contained, affecting in a serious way only its small 
neighbor, Uruguay. Yet there are already disturbing signs of a decline 
in investment flows to Latin America. Such a decline, if it occurs, 
would undercut the region's prospects for economic stability and 
    The more prolonged and deeper the Argentine crisis, the more impact 
it will have on United States relations with other Latin American 
countries. Already, the United States is seen by many Latin Americans 
as having turned its back on the country that was its strongest ally 
and supporter in the region (at the same time considerable aid was 
provided to Turkey, a country facing similar problems, but 
strategically more important). The United States response to Argentina 
is also widely seen as further evidence of the low priority that 
Washington has assigned to Latin America, particularly since September 
11. These are attitudes that will make the negotiation of hemispheric 
free trade more difficult and could result in less cooperation on other 
key fronts.
    There is no getting around it. In order for Argentina to recover 
its economic health, a technically sound economic program is essential. 
Nothing can be done without that. But that program can only succeed if 
two other conditions are met: The Argentine government must have the 
political capacity and will to implement it and external support must 
be available. The United States can and should help on all three 
    The United States, in tandem with the IMF, should now: (a) provide 
the Argentine government with a clear and precise statement of the 
crucial elements that must be included in a program for the Argentine 
economy that the United States could support; and (b) make plain what 
level of resources the United States is 
willing to help assemble in order to make the program work. If the 
Argentine government accepts this as the right basis to move forward, 
the United States, again together with the IMF, should quickly start to 
cooperate with the Argentine economic team to develop a full-fledged 
policy blueprint--and undertake efforts to secure necessary 
contributions from the international financial institutions, the G-7 
countries, and private investors. This set of initiatives would, I 
believe, gain the political backing of Argentina's neighbors and most 
other Latin American countries. They, of course, should be consulted 
from the outset.
    Only the United States can provide the kind of leadership that is 
necessary to make this effort succeed. Without the full weight of the 
United States behind it, the IMF cannot and will not take the forceful 
actions needed. And there is a good chance that an intensely engaged 
United States could end the political impasse in Argentina, and give 
the government the support and resolve it needs to take the economic 
and political decisions that are essential to address the crisis.
    All this still may not work, but without the intense involvement of 
the United States, the Argentine government will likely remain 
immobilized. The country's economy and politics will continue to 
deteriorate, doing terrible and lasting damage to Argentina and its 
people, possibly spreading the harm to many other countries of Latin 
America, and potentially undermining the United States policy 
objectives across the hemisphere.

                 President and Chief Executive Officer
                      CMS Gas Transmission Company
                           February 28, 2002

    Mr. Chairman, Members of the Subcommittee, I am William Haener, 
President and CEO of the CMS Gas Transmission Company, a subsidiary of 
the CMS Energy Corporation. I want to thank you for the opportunity to 
present my company's perspective on the current crisis and to emphasize 
the great concerns that we and other investors share.
    Argentina had previously--and justifiably--been held up as a model 
for an IMF-supported economic recovery based on sensible, transparent 
economic policies and free market principles that fostered sound 
investments. In recent weeks, however, both policy and principle have 
been reversed. The government's new economic regime represents a 
summary abrogation of Argentina's legal obligations and treaty 
commitments and contravenes the framework of that country's 
constitution. It signals an abandonment of Argentina's free market 
orientation and successful privatization program--which brought 
billions of dollars of foreign investments into the Argentine economy.
    Argentina did not come to its present economic condition because of 
foreign investors. In truth, neither investment nor credit could keep 
pace with the speed at which Argentina was incurring sovereign debt. It 
is Argentina's sovereign debt, which it accumulated by ignoring a giant 
fiscal imbalance for too long, that is the cause of Argentina's 
economic troubles. That is something that cannot be cured by forcing 
the adoption of an increasingly devalued currency or by mounting 
politically charged attacks on investors. Attacking sources of 
investment, whether they are 
domestic or international, will only worsen the plight of the Argentine 
people and will do nothing to foster a recovery.
    Our main concern with the new policy regime is not the devaluation 
of the peso. Rather, we are far more troubled by the government's 
cancellation of public and private contracts, its imposition of 
restrictions on the free transfer of funds and its elimination of 
adjustments for inflation and currency fluctuations. While in some 
respects it could be understandable that the government needed to 
adjust the value of and float its currency, these other measures are 
throttling the revenue stream of energy projects. Since there is no 
corresponding relief on the external debts and other obligations of 
these energy projects, the Argentine government is forcing many of them 
into a position of insolvency.
    Since the energy sector is fully privatized, from gas production 
through gas transportation, power generation, and electricity 
distribution, there is a cascading effect throughout the sector. In 
this type of policy environment, insolvent projects could go into 
bankruptcy, bankrupt projects could be renationalized, and service to 
Argentine citizens definitely will be less efficient, more expensive 
and subject to 
disruptions. Over the long term, a sustainable economy can be achieved 
only if there is access to reliable and affordable sources of energy to 
fuel the growth of the Gross National Product. But in the short term, 
Argentina could be exposed to power outages at any time. The energy 
sector is heading into a crisis that could have grave economic, social, 
and political implications.
    As recently as this week, President Duhalde announced that his 
government was contemplating a new ``emergency tax'' on utilities in 
response to what he termed ``the extraordinary'' profits that foreign 
investors have reaped in recent years. I want to be very clear about 
this issue. American and international investment in Argentina's 
electricity sector has been of extraordinary benefit to the Argentine 
government and people in terms of lower prices and increased 
reliability of service. 
According to the independent and highly regarded Cambridge Energy 
Research Associates, spot energy prices in 2001 were the lowest on 
average in Argentina since 1995. Monthly average prices did not rise 
above $14 per megawatt hour during the second half of the year. Only in 
the winter months of May and June did average prices rise above $16.50 
per megawatt hour. These compare to average prices in neighboring Chile 
of about $30, in Peru of about $30, and in the United States between 
$25 and $35 per megawatt hour. I should emphasize that the prices in 
Argentina were no accident--they were the outcome of a well designed 
and transparent privatization process.
    Similarly in the natural gas sector, prices to the typical 
residential customer in Buenos Aires rose only 20 percent between 
December 1992 and January 2001 while reliability of service rose 
significantly. The vast majority of the price increase was due to 
government taxes, which rose nearly 69 percent on gas in that period. 
Gas transmission and distribution costs were essentially flat, rising 
only 1.9 percent.
    At the same time, due to the robust level of competition in the 
Argentine marketplace, the returns to foreign investors who produced 
those low prices were thin--in many cases less than what could be made 
in the United States. On top of that, CMS Energy and other companies 
reinvested a large percentage of whatever returns were made in order to 
strengthen our operations, increase their efficiency, and make them 
more competitive in the tight market. For instance, CMS Energy and the 
other shareholders in one of our investments, the TGN Pipeline, have 
invested more than more than $1 billion since 1992--above and beyond 
the $392 million initially paid for the asset--to upgrade and improve 
that system. President Duhalde's comments notwithstanding, we have not 
repatriated huge dividends and profits but rather reinvested them to 
benefit the Argentine people.
    Let me be equally clear about something else. We are not 
complaining about the fact that we faced low prices or had low returns. 
We as investors are fully prepared to live with unexpectedly thin 
margins as long as our contracts are being honored and implemented. 
When our contracts are summarily abrogated, however, and when a 
government changes the rules and reregulates revenues in such a fashion 
as to place sound investments into a position of insolvency, it is 
fundamentally unfair, will result in further economic turmoil, and 
could lead to massive expropriations. Cheap and reliable energy 
supplies are critical to economic stability and growth but cannot be 
obtained under current circumstances in Argentina. There will be no 
recovery, no matter how much financial support is poured into that 
    Through its interference with public and private contracts, the 
Argentine government has moved well beyond a simple devaluation and is 
ensuring that the crisis will be far worse and longer lasting than in 
other recent cases such as Mexico and Brazil. Unless Argentina honors 
its contractual and treaty commitments, its actions will continue to 
undermine its competitiveness, threaten the viability of its energy 
infrastructure and virtually guarantee that there will be no additional 
foreign investment in the sector.
    I would also urge the Subcommittee to consider that events in 
Argentina will have an impact on the United States and other economies. 
American energy companies brought approximately $6 billion in equity 
and commercial and other loans into 
Argentina during the privatization process. Argentina as a whole 
brought in about $80 billion in capital and another $80 billion in 
credit, mostly in the form of debt. Unless the situation is corrected, 
there will be losses to those shareholders whose equity was invested. 
There will be losses to U.S. suppliers and service companies who 
provide spare parts or hold operations, maintenance, and service 
contracts. There will be losses to the U.S. banks that hold the debt, 
and to U.S. insurance companies that backstop the banks and the energy 
investments. There will be losses to the U.S. taxpayer, as the American 
government invested in and insured some of these projects through the 
Overseas Private Investment Corporation and the Export-Import Bank of 
the United States. And there will be a contagion effect on other 
emerging economies, as prospective investors and corporate boards look 
far more skeptically at future investments elsewhere. It is difficult 
to see how private investors will find their way to other markets in 
the region, much less to places like 
Afghanistan or Pakistan, if Argentina is allowed to fail.
    As a matter of utmost priority, a bailout is not the answer. CMS 
Energy urges the Congress, the United States Administration, and the 
international financial 
institutions to work with Argentina to produce a credible, sustainable 
economic plan. That plan must enable existing investors to succeed on 
the terms that were espoused in their contracts, and in order to 
achieve this outcome there must be an element of accountability 
introduced in the process. We would encourage the adoption of strict 
and enforceable conditions on any future lending to Argentina to ensure 
compliance with the original terms that were the basis for the initial 
investments. This means enabling payments to energy companies in 
dollars or in pesos indexed to the dollar so that prices will cover all 
costs, including depreciation and financial costs, in accordance with 
the original economic equation of our contracts. We must also have the 
ability to transfer funds freely as stipulated in the bilateral 
investment treaty. Only under these circumstances will energy projects 
remain solvent, will energy prices remain low and service reliable, and 
will Argentina's ability to recover stand a better chance.
    If you will permit me, Mr. Chairman, I will conclude on a more 
personal note. CMS Energy was one of the earliest United States 
participants in the privatization process and is now one of the largest 
United States investors in Argentina. We have developed deep and 
lasting ties to the country, have employed and trained hundreds of 
Argentine citizens, and have been pleased to help develop the country's 
infrastructure. It disappoints us greatly to see Argentina reverse 
course and head down the path to economic chaos. It worries us to see 
the instabilities emerging in Argentina's political system. It alarms 
us to see the periodic eruptions of social unrest, with perhaps greater 
turmoil in store. And it especially troubles us to see our Argentine 
employees and friends have their savings and hard-earned money denied 
to them and their futures thrown into doubt. As a friend to the 
Argentine people, we hope very much to be able to work constructively 
with the authorities there to turn the situation around.
    Thank you very much. I will be happy to respond to whatever 
questions you and the Subcommittee Members may have.


Q.1.  Argentina is a significant producer and exporter of beef 
cattle. In light of this fact and the current devaluation of 
the peso, could there be an adverse impact on international and 
U.S. domestic beef commodity prices. If there is an effect, how 
significant could this be?

A.1. This is not really my field of expertise. Nevertheless, I 
believe that the correct answer is probably that recent 
developments in Argentina, including the sharp devaluation of 
the peso, will have only a very small adverse impact on 
international beef prices and an even smaller adverse effect on 
United States domestic beef prices. The reason is the 
    Developments in Argentina will affect international beef 
prices only to the extent that they affect the volume of beef 
exported from Argentina. The devaluation of the peso will 
almost surely cause a substantial rise in the price of beef 
inside Argentina, measured in pesos, while the international 
price of beef (measured in dollars) is largely unaffected. 
Higher prices for beef producers in Argentina would normally be 
expected to induce an increase in production. However, for the 
next 2 years or so, beef production is largely determined by 
the size of the existing herd. Beyond this time frame, larger 
Argentine beef production seems likely if the peso remains 
sharply depreciated (after adjusting for inflation inside 
Argentina). But to reach this higher level of production on a 
sustainable basis, the size of the herd must be increased. This 
requires that slaughter rates be reduced for a time, with the 
effect of temporarily reducing the supply of beef. Thus, it 
would probably take at least 3 years before production of beef 
in Argentina would rise significantly and on a sustainable 
basis in response to a lower value of the peso.
    Experience in many financial crises indicates that the 
foreign exchange value of the Argentine peso, adjusted for 
inflation in Argentina, will depreciate much more in the short 
run than in the longer run. For example, after the Mexican 
devaluation in late 1994, the Mexican peso lost more than a 
third of its dollar value (adjusted for inflation) by mid-1995. 
But, 5 years later, the foreign exchange value of the Mexican 
peso (adjusted for inflation) was back near its predevaluation 
level. If the foreign exchange value of the Argentine peso 
follows a similar course, the long run effect on beef 
production in Argentina is likely to be modest.
    With respect to the U.S. domestic beef prices, it is 
essential to recognize that the market for domestic beef is far 
from completely integrated with the international market. (This 
very same principle applies with even greater force to domestic 
beef prices in more heavily protected markets such as those in 
Japan and Europe.) Accordingly, any effects of Argentine 
developments on international beef prices are likely to be more 
muted for United States domestic beef prices.
January 1, 2002

                         Crying With Argentina

                            By Paul Krugman
    Although images of the riots in Argentina have flickered across our 
television screens, hardly anyone in the United States cares. It is 
just another disaster in a small, faraway country of which we know 
nothing--a country as remote and unlikely to affect our lives as, say, 
    I do not make that comparison lightly. Most people here may think 
that this is just another run-of-the-mill Latin American crisis--hey, 
those people have them all the time, don't they?--but in the eyes of 
much of the world, Argentina's economic policies had ``made in 
Washington'' stamped all over them. The catastrophic failure of those 
policies is first and foremost a disaster for Argentines, but it is 
also a disaster for United States foreign policy.
    Here is how the story looks to Latin Americans: Argentina, more 
than any other developing country, bought into the promises of United 
States-promoted ``neoliberalism'' (that is liberal as in free markets, 
not as in Ted Kennedy). Tariffs were slashed, state enterprises were 
privatized, multinational corporations were welcomed, and the peso was 
pegged to the dollar. Wall Street cheered, and money poured in; for a 
while, free market economics seemed vindicated, and its advocates were 
not shy about claiming credit.
    Then things began to fall apart. It wasn't surprising that the 1997 
Asian financial crisis had repercussions in Latin America, and at first 
Argentina seemed less affected than its neighbors. But while Brazil 
bounced back, Argentina's recession just went on and on.
    I could explain at length the causes of Argentina's slump: It had 
more to do with monetary policy than with free markets. But Argentines, 
understandably, cannot be bothered with such fine distinctions-- 
especially because Wall Street and Washington told them that free 
markets and hard money were inseparable.
    Moreover, when the economy went sour, the International Monetary 
Fund--which much of the world, with considerable justification, views 
as a branch of the U.S. Treasury Department--was utterly unhelpful. IMF 
staffers have known for months, perhaps years, that the one-peso-one-
dollar policy could not be sustained. And the IMF could have offered 
Argentina guidance on how to escape from its monetary trap, as well as 
political cover for Argentina's leaders as they did what had to be 
done. Instead, however, IMF officials--like the medieval doctors who 
insisted on bleeding their patients, and repeated the procedure when 
the bleeding made them sicker--prescribed austerity and still more 
austerity, right to the end.
    Now, Argentina is in utter chaos--some observers are even likening 
it to the 
Weimar Republic. And Latin Americans do not regard the United States as 
an innocent bystander.
    I am not sure how many Americans, even among the policy elite, 
understand this. The people who encouraged Argentina in its disastrous 
policy course are now busily rewriting history, blaming the victims. 
Anyway, we are notoriously bad at seeing ourselves as others see us. A 
recent Pew survey of ``opinion leaders'' found that 52 percent of the 
Americans think that our country is liked because it ``does a lot of 
good;'' only 21 percent of foreigners, and 12 percent of Latin 
Americans, agreed.
    What happens next? The best hope for an Argentine turnaround was an 
orderly devaluation, in which the government reduced the dollar value 
of the peso and at the same time converted many dollar debts into 
pesos. But that now seems a remote prospect.
    Instead, Argentina's new government-- once it has one --will 
probably turn back the clock. It will impose exchange controls and 
import quotas, turning its back on world markets; do not be surprised 
if it also returns to old-fashioned anti-American rhetoric.
    And let me make a prediction: These retrograde policies will work, 
in the sense that they will produce a temporary improvement in the 
economic situation--just as similar policies did back in the 1930's. 
Turning your back on the world market is bad for long-run growth; 
Argentina's own history the best proof. But as John Maynard Keynes 
said, in the long run we are all dead.
    Back in April, George W. Bush touted the proposed Free Trade Area 
of the Americas as a major foreign policy goal, one that would ``build 
an age of prosperity in a hemisphere of liberty.'' If that goal really 
was important, we have just suffered a major setback. Don't cry for 
Argentina; cry with it.

                          Chronology of Events

                       Prepared by J.F. Hornbeck
             Specialist in International Trade and Finance
            Foreign Affairs, Defense and Trade Division, CRS
    Argentina suffers through an extended period of economic 
instability including the Latin American debt crisis and 
    Peronist candidate Carlos Menem is elected President of Argentina 
and appoints Domingo Cavallo as Minister of Economy. Together they 
enact a major structural adjustment program including tax reform, 
privatization, trade liberalization, deregulation, and adoption of a 
currency board.
April 1, 1991
    Argentina's Congress enacts the Convertibility Law, which legally 
adopts the currency board guaranteeing the convertibility of peso 
currency to dollars at a one-to-one fixed rate and limiting the 
printing of pesos only to an amount necessary to purchase dollars in 
the foreign exchange market. Effectively, each peso in circulation is 
backed by a U.S. dollar and monetary policy is forcibly constrained to 
uphold that promise.
    Argentina enjoys strong economic growth and the currency board is 
considered highly successful.
    Following Mexico's December 1994 peso devaluation, capitol flows 
out of emerging markets. Argentina's GDP declines by 2.8 percent.
May 1995
    President Menem is reelected President after convincing Congress to 
change electoral laws that prohibit a second term.
1995 -1999
    The U.S. dollar experiences a prolonged period of real 
appreciation, resulting in similar appreciation of the Argentine peso 
relative to its trading partners.
1996 -1997
    Renewed period of Argentine economic growth (5.5 percent in 1996, 
8.1 percent in 1997), but current account deficit and debt measures 
July 1997
    East Asian financial crisis begins.
    Financial crisis moves to Russia and then Brazil. Argentina enters 
prolonged recession in third quarter (still in effect) and unemployment 
begins to rise.


    Brazil facing its own financial crisis, devalues its currency, 
hurting Argentine 
exports, 30 percent of which were traded with Brazil.
    The Argentine Congress passes the Fiscal Responsibility Law, 
committing to large reductions in both Federal and provincial 
government spending.
October 24
    Fernando de la Rua of the Radical Civic Union (UCR), the opposition 
coalition candidate, running on a platform to end corruption (under 
Menem) and the recession defeats Peronist candidate Eduardo Duhalde for 
December 10
    De la Rua is inaugurated President of Argentina and shortly 
thereafter seeks 
assistance from the IMF.


March 10
    The IMF agrees to a 3 year $7.2 billion stand-by arrangement with 
Argentina conditioned on a strict fiscal adjustment and the assumption 
of 3.5 percent GDP growth in 2000 (actual growth was 0.8 percent).
May 29
    The government announces $1 billion in budget cuts in hopes that 
fiscal responsibility will bring renewed confidence to economy.
September 15
    The IMF concludes an Article IV Consultation, the required annual 
comprehensive review of member country economics.
October 6
    Vice President Carlos Alvarez resigns over de la Rua's decision not 
to replace two cabinet members linked to a recent Senate bribery 
December 18
    The de la Rua government announces a $40 billion multilateral 
assistance package organized by IMF (see below).


January 12
    Argentina's continued poor economic performance prompts the IMF to 
augment the March 10, 2000 agreement by $7.0 billion as a part of a $40 
billion assistance package involving the Inter-American Development 
Bank, the World Bank, Spain, and private lenders. The agreement assumes 
GDP will grow at a rate of 2.5 percent in 2001 (versus actual decline 
of 3.7 percent).
March 19
    Domingo Cavallo, Minister of Economy under Menem and architect of 
the currency board 10 years earlier, replaces Ricardo Lopez Murphy, who 
resigns as the 
Minister of Economy.
June 16 -17
    The de la Rua government announces a $29.5 billion voluntary debt 
restructuring in which short-term debt is exchanged for new debt with 
longer maturities and higher interest rates.
June 19
    The peso exchange rate adjusted to allow for effective 7 percent 
devaluation for foreign trade in hopes of improving Argentina's 
international competitiveness. Many raise concern over the effects on 
the credibility of the convertibility regime.
July 10
    Cavallo announces a plan to balance budget, but the markets react 
expressing lack of confidence.
July 19
    Unions call a nationwide strike to protest government austerity 
July 29
    The Argentine Congress passes ``Zero Deficit Law,'' requiring a 
balanced budget by the fourth quarter of 2001.
September 7
    Based on Argentina's commitment to implement the ``Zero Deficit 
Law'' immediately, the IMF augments its March 10, 2000 agreement for a 
second time, increasing lending commitment by another $7.2 billion.
    The use of provincial bonds as ``scrip'' to pay public salaries 
becomes more widespread as Federal revenue transfers decline.
October 14
    The opposition Peronist Party wins control of both Chambers of the 
Congress in 
mid-term elections.
November 6
    Argentina conducts a second debt swap, exchanging $60 billion of 
bonds with an average rate of 11-12 percent for extended maturity notes 
carrying only 7 percent interest rate. International bond rating 
agencies consider is an effective default.
November 30
    A run on the bank begins, with central bank reserves falling by $2 
billion in 1 day. President de la Rua imposes $1,000 per month 
limitation on personal bank withdrawals.
December 1
    Protests begin over bank withdrawal limitations.
December 5
    The IMF withholds $1.24 billion loan installment, citing 
Argentina's repeated 
inability to meet fiscal targets.
December 7
    Argentina announces it can no longer guarantee payment on foreign 
December 13
    The government announces that the unemployment rate reaches near 
record of 18 percent. Unions call nationwide strike.
December 14
    Supermarket looting begins.
December 19
    Rioting spreads to major cities over deep budget cuts. The 
government declares a state of siege. Minister of Economy Domingo 
Cavallo resigns.
December 20
    President de la Rua resigns in the wake of continued rioting, 
leaving 28 people dead.
December 21
    Congress accepts President de la Rua's resignation. Senate 
President Ramon Puerta is named Provisional President for 48 hours.
December 23
    Congress appoints San Luis Governor Adolfo Rodriguez Saa as Interim 
President until elections can be held in March 2002.
December 26
    The liquidity standards for banks are relaxed. Rodriguez Saa 
announces a new economic plan based on: (1) suspension of payments on 
public debt; (2) new jobs creation program; and (3) creation of new 
currency (the Argentino) to begin circulating in January 2002 and not 
to be convertible to the U.S. dollar.
December 30
    President Rodriguez Saa resigns after continued rioting and loss of 
party support. Senate leader Puerta resigns to avoid second appointment 
as Interim President. No immediate successor emerges to take over the 
December 31
    The Argentine Congress selects Peronist Senator Eduardo Duhalde to 
complete December 2003 Presidential term.
January 1
    Senator Duhalde sworn in as President. He blames Argentina's 
economic problems on the free market system and vows to change economic 
course. Except for the debt moratorium, new economic policies are 
January 6
    After the Argentine Congress passes necessary legislation, 
President Duhalde announces the end of the currency board and a plan to 
devalue the peso by 29 percent (to 1.4 to the dollar) for major foreign 
commercial transaction, with a floating rate for all other 
transactions. Other elements of economic plan include: Converting all 
debts up to $100,000 to pesos (passing on devaluation cost to 
creditors); capital and bank account controls; a new tax on oil to 
compensate creditors for the losses that will ensue; renegotiating 
public debt, and a balanced budget.
January 10
    Government announces it will ``guarantee'' dollar deposits, but to 
curtail bank runs, the $1,000 (1,500 peso) limit on monthly withdrawals 
is maintained and all checking and savings accounts with balances 
exceeding $10,000 and $3,000 respectively, will be converted to 
certificates of deposit and remain frozen for at least 1 year. Smaller 
deposits have the option of earlier withdrawal by moving to peso 
denominated accounts at the 1.4 exchange rate.
January 11
    The government extends the bank holiday two extra days, while the 
foreign currency market opens for first time in 3 weeks. The peso falls 
immediately to 1.7 per dollar.
January 15
    The peso fall as low as 2.05 to the dollar in active trading.
January 16
    The IMF approves request for 1 year extension on $936 million 
payment due 
January 17, keeping Argentina from falling into arrears.
January 17
    The government announces that dollar denominated loans exceeding 
$100,000 will be converted to pesos at 1.4 for fixed rate, deepening 
the balance sheet mismatch of banks.
January 19 -20
    Duhalde reverses his decision to guarantee dollar deposits, which 
will be converted to pesos at some undefined devalued exchange rate.
January 23
    The Argentine Senate passes bankruptcy law that would use capital 
controls to restrict payment of foreign private debt payments through 
December 2003.
January 28 -29
    Foreign Minister Carlos Ruckauf visits with Bush Cabinet members to 
appeal for political and financial support (including IMF assistance) 
as protests continue in 
January 30
    IMF team meets with Argentine officials, who declare intention to 
adopt a floating exchange rate in near future. Argentina's Chamber of 
Deputies passes controversial bankruptcy law, stripping it of the 
Senate provision prohibiting foreign debt payments, but other capital 
controls remain in effect. It retains language allowing 
conversion of dollar denominated debt below $100,000 to pesos at 1-to-1 
rate (benefiting debtors) and suspending creditor action on loan debt 
defaults for 180 days.
February 1
    Argentina Supreme Court rules that government restrictions on bank 
deposit withdrawals are unconstitutional.
February 3
    By decree, Duhalde eases the restrictions on bank withdrawals, but 
places a 6 month moratorium on enforcement of Supreme Court order. 
Congress moves to impeach all nine members of the Supreme Court. 
Government closes foreign exchange markets, declares an end to dual 
exchange rate system in favor of floating peso, and requires all 
deposits to be converted to inflation-indexed peso accounts at the 
previous official rate of 1.4 to the dollar. The dollar ends as an 
official circulating currency.
February 6
    Government announces new Federal budget with 15 percent cut in 
expenditures, including agreement with provincial governments to reduce 
the number of Chamber of Deputies and their staff by 25 percent.
February 11
    Foreign exchange market opens for first time with a free floating 
peso, which depreciates 20 percent to 2.5 to the dollar before 
rebounding to 1.9 to 2.2 by early afternoon.
February 13
    Government announces that 20 percent energy export tax will be used 
for general government expenditures rather than dedicated to bond 
repayments in support of banking system, as promised when unveiled 2 
days earlier.
February 14
    In meeting with IMF officials, Argentine representatives suggest 
that the country will need $22-$23 billion in assistance.
February 18
    Petroleum industry workers begin strike to protest energy export 
tax. Unemployment reaches 22 percent, general protests erupt into 
violent attacks on banks over continued restrictions on withdrawal.
February 22
    Social unrest continues and the peso trades at 2.15 to the dollar, 
a 54 percent 
depreciation since a unified floating exchange rate was adopted on 
February 11.