E-Letter To Rep. Julia Carson, Rep. Barbara Lee, Rep. Mel Watt and Rep. Maxine Waters Re: Questioning The Bush Administration About Argentina, The IMF, and The BCRA's "Enron" problem

In light of your collective responsibility as members of the House Banking Committee's Subcommittee on International Monetary Policy and Trade, which yesterday held hearings on the Argentina economic meltdown that included the testimony of the Treasury Department's Under Secretary for International Affairs John B. Taylor, I am writing to you all in the hopes that you will consider looking into a striking peculiarity that I believe is near the root of Argentina's economic problems.

The problem reads much like the Enron fiasco, where balance sheet data is being interpreted in a variety of ways in order to serve narrow special interests. At the core of the controversy are the Argentine Central Bank, Banco Central de la Republica Argentina (BCRA), and the International Monetary Fund (IMF). Our analysis of the BCRA's balance sheet leads us to believe that the Argentine authorities have a sufficient amount of assets to allow them to solve their monetary woes in a variety of ways - certainly more than the IMF-endorsed devaluation and dual exchange rate regime that Argentina embraced with IMF approval.

The problem revolves around the fact that by all indications, the IMF appears to be obfuscating a clear view and interpretation of the BCRA's balance sheet, an exercise that is harmful to the people of Argentina as well as the domestic and international business community. The IMF's actions also obstruct Argentina's embrace of sound monetary policies.

And, to compound matters, the Bush administration appears to be unwilling to do anything about the IMF's mischief-making even though its stated policy preferences for Argentina are not in harmony with the IMF's, nor is the Bush administration's view of the BCRA's balance sheet the same as that which the IMF currently adheres to.

All of this came to light as a result of an inquiry made directly to the IMF by members of the American and Argentine press regarding U.S. economist Steve Hanke's assertion that technically-speaking, Argentina has enough foreign reserves to dollarize its economy, if it desired to do so.

While I know that most of you are against dollarization, the advocacy of that particular form of a monetary regime is not the essential point of the matter, except to note that the arguments that the IMF is using against Argentina's dollarization, if successful because they are not challenged, can be used to prevent any form of monetary regime that it does not like - a regional monetary union, gold standard or currency board.

That the IMF outright asserted that Argentina does not have enough such reserves when the BCRA's balance sheet clearly indicates otherwise is the main point. And, that in front of your subcommittee, Mr. Taylor testified that he personally prefers dollarization in the case of Argentina raises an even bigger issue that should interest you: that being why the Bush administration, while holding to a view of the BCRA's balance sheet that disagrees with the IMF, still defers to the IMF's handling of the country's economy. For all intents and purposes, the Bush administration has been missing in action, quietly "reviewing" the devastating effects that the economic collapse has had on the Argentine population, the local and regional business community, as well as some American banks and corporations that have operations in some of your districts.

When Rep. Barney Frank, during questioning, pressured Treasury's Undersecretary for International Affairs, Mr. Taylor, at yesterday's hearing, and Mr. Taylor acknowledged that dollarization was preferable in his opinion for Argentina, he was placing himself in direct opposition to the IMF. This was the most visible sign to date of intellectual disagreement between members of the Bush administration and the Fund. Yet, for some reason these differences of opinion have not translated into different policy approaches between the Fund and the U.S. government.

For Mr. Taylor to take the position that he has is not an accident. He and other members of the Treasury department know the Argentine balance sheet frontward and backward and know that what has most recently been presented in the assets and liabilities categories was and is sufficient for Argentina to move out of its IMF-backed dual exchange rate arrangement, which, combined with other measures instituted by the Argentine government represents one of the most massive episodes of wealth transfer and financial capital destruction in recent memory. To compound matters throughout this entire episode the IMF has imposed fiscal austerity measures on the Argentine economy that reduce resources for badly needed social programs and which stifle innovation and entrepreneurial risk-taking among the Argentine population. Our sources have told us that privately, Argentine officials have conceded that the conditionality that they are being asked to impose on their country's economy will ensure their own personal political demise.

Mr. Taylor told the subcommittee, "Dollarization would have been good for Argentina" but stressed that the U.S. government played the low road, deciding to allow Argentina to make its own economic decisions. Why didn't the Bush administration, if it felt the way it did, pressure the IMF to give Argentina the proper advice? And why doesn't the Bush administration do the same today? Furthermore, if the Bush administration disagrees with the IMF's view of the BCRA's balance sheet why won't it make such a view public? We have learned that the Treasury department does have serious reservations about both the BCRA and IMF interpretations of the central bank's assets and liabilities but is keeping the disagreement private. To us it looks on Argentina, the Bush administration has the same attitude on disclosure and transparency as it does in reference to the energy commission established by the Vice-President. We ask like the GAO is asking Mr. Cheney, what does the Bush administration have to hide? We think that you are in the best position to present that question to the Bush administration and Treasury Secretary Paul O'Neill.

The Bush administration's silence on the matter is especially stunning when one considers the lofty pronouncements that President Bush has made regarding the rule of law and respect for property rights. The President most prominently expressed this view during last week's State of The Union Address. But ironically, while he was speaking, his administration had allowed the Argentine peso to be devalued, billions of U.S. currency reserves to be confiscated, and bank accounts to be frozen, without a major speech being given to highlight the problems before they continued to escalate. And while the administration held a view of the BCRA's balance sheet that caused it to favor a policy option that was at variance with the advice that the IMF was giving to Argentina. If the President's words in reference to the rule of law and respect for property rights were carried into practice, and if Mr. Taylor's position had been conveyed to the IMF and Argentina, not only would the peso have not been devalued, but the Argentina government would have been frightened away from its confiscation of the wealth of its citizens and that of U.S. companies. Anyone who doubts this should read the U.S. Code, Title 22 section 283r; 284j; subsection (e) of section 2370; and subsections (a) and (b) of section 2370a that give the U.S. the power, under law, to cut off all aid to countries that nullify existing contracts with U.S. companies and corporations. Argentina would have never devalued, frozen bank accounts of poor and middle-class members of the Argentine population and broken existing contracts if it knew the U.S. was serious about the "rule of law." Instead of using the carrot and stick appropriately, the U.S. watched while the IMF either persuaded or enabled the Argentine government to transfer and destroy capital out of the hands of its lawful owners. And in keeping with the age-old practice of writing a cover story for a crime committed, the IMF appears to have embraced a fraudulent interpretation of the BCRA's balance sheet that justifies the robbery that has taken place. Something just does not add up and the Bush administration has some tough questions, hopefully asked by you, to answer, as to why it is so deferential to the IMF where Argentina is concerned, even though it publicly disagrees with the Fund's view of things.

Below is the three-part Financial Times letters to the editor exchange between economist Steve Hanke and the IMF's Director of External Relations, Thomas Dawson, which frames the accounting aspect of this problem quite well.

I think that you will agree that the IMF's policies do not add up to what is on the BCRA's balance sheet. Furthermore, I hope that you may agree with us that if an "Enron"-like undertaking is permitted to occur with the balance sheet of an important economically developing country like Argentina, where the United States has obvious economic interests, then there is little hope that the same won't take place in countries throughout the Western Hemisphere and in Africa that can least afford the economic disaster that accounting tricks can wreak. As a result of that implication, and if the United States is to be viewed as an economic, political and even moral leader, if in fact the IMF is behind an "Enron" type accounting problem in Argentina, then the Bush administration is duty-bound to confront the multilateral institution. We have seen the IMF do enough damage, unaccounted for.

I hope that you will consider this matter worthy of your attention.


Cedric Muhammad

LETTERS TO THE EDITOR: Questions the IMF is obliged to answer
Financial Times; Jan 17, 2002

From Prof Steve H. Hanke.

Sir, On January 10, the FT published two items in which the authors advocated dollarisation for Argentina: "Duhalde's wrong turn", by Jeffrey Sachs, and "Argentina could learn from the example of El Salvador" (Letters) by Manuel Hinds. These were followed by an editorial, "Argentina's bind" (January 14), which concluded: "Given Argentina's terrible record of monetary management, policy credibility may be easier to achieve through the (dollarisation) route."

When asked about dollarisation for Argentina during a press briefing on January 11, Anne Krueger, first deputy managing director of the International Monetary Fund, threw cold water on the idea, however. Indeed, Dr Krueger said: "Well, my understanding at the moment is that (dollarisation) is technically unfeasible. So I don't think the authorities are thinking about it; I don't think we are thinking about it."

Dr Krueger's statement implies that the Banco Central de la Republica Argentina (BCRA) does not have enough foreign reserves to liquidate its peso monetary liabilities and dollarise the economy. According to the BCRA's balance sheet of January 10, this was not the case, however. The BCRA's peso monetary liabilities were 17.92bn pesos and "pure" foreign reserves in US dollars were Dollars 14.75bn. In addition, the BCRA had 14.96bn pesos of domestic assets valued at market prices that could be sold to acquire US dollars. Consequently, at the time Dr Krueger made her statement, it would have been feasible for Argentina to dollarise at an exchange rate of 1 peso to 1 US dollar, the rate in force under the Convertibility Law.

This, of course, leads to a number of questions: Is Dr. Krueger misinformed? Or does the IMF know something that the rest of us don't know? In short, does the BCRA have an "Enron problem"?

In accord with the IMF's executive board decision to enhance transparency (January 4, 2001), the IMF has an obligation to answer these questions and explain why dollarisation is not feasible at a one-to-one peso-dollar rate. Furthermore, if the BCRA does have an "Enron problem", at what exchange rate would dollarisation be feasible? After all, dollarisation is always feasible at some rate.

Steve H. Hanke, Chairman, Friedberg Mercantile Group, New York, NY 10005


LETTERS TO THE EDITOR: Dollarisation in Argentina cannot be counted on to succeed
Financial Times; Feb 1, 2002

From Mr Thomas C. Dawson.

Sir, Prof Steve Hanke (Letters, January 17) asks if Argentina's central bank has "an Enron problem". Only if it hires Prof Hanke as its accountant.

He asserts an improbable market value for some items on the bank's balance sheet to argue that Argentina could still dollarise its economy at one-to-one. The domestic assets of the central bank mainly consist of credits to weak banks and to a government shut-out of financial markets. Converting these assets into dollars cannot be assured. Nor is this a silver bullet: so long as Argentina's other economic problems are unresolved, dollarisation cannot be counted on to succeed where the currency board did not.

Thomas C. Dawson, Director, External Relations, International Monetary Fund, Washington, DC 20431, US

Copyright: The Financial Times Limited 1995-1998


LETTERS TO THE EDITOR: Questions remain unanswered
Financial Times; Feb 6, 2002

From Prof Steve H. Hanke.

Sir, The response of Mr Thomas Dawson of the International Monetary Fund (Letters, February 1) to my letter of January 17 fails to answer the specific questions I raised. The IMF public relations expert's response only demonstrates his ability to hurl a personal insult and run for cover.

My original letter contained data from the Banco Central de la Republica Argentina's balance sheet of January 10. These indicated that the BCRA's peso monetary liabilities were 17.92bn pesos and that "pure" foreign reserves in US dollars were Dollars 14.75bn. In addition, the BCRA reported other domestic assets that could be used to obtain US dollars.

As just one example, "overdrafts and rediscounts to banks" amounted to 3.93bn pesos. According to the BCRA's charter (Article 17), these were fully collateralised (section g) and, contrary to Mr Dawson's claim, that collateral consisted of "publicly traded securities, which shall be assessed according to their market value" (section h). Consequently, on January 10 the BCRA had more than enough assets to liquidate its peso liabilities and dollarise Argentina at an exchange rate of 1 peso to 1 US dollar.

Unless the BCRA had cooked the books and failed to comply with its charter, the January 11 assertion of Anne Krueger, the IMF's first deputy managing director, about the technical unfeasibility of dollarisation was, therefore, incorrect.

Steve H. Hanke, Chairman, Friedberg Mercantile Group, New York, NY 10005, US

Cedric Muhammad

Thursday, February 7, 2002