In my view the issue got even worse when Minister (Domingo) Cavallo explicitly said on various occasions that the Central Bank should be a tool to recover the economy. Against this backdrop, Pedro Pou (Chairman of the Central Bank of the Argentine Republic) was dismissed, other mechanisms were created such as the currency basket, that led investors to think that a monetary crash was now inescapable in Argentina, that currency board would be abandoned and when that happened the economic situation would get seriously worse due to, as is well known, the fact that the Argentine economy is widely dollarized, people have debts in dollars and that would lead a country’s widespread collapse, which unfortunately is what we are experiencing right now. So, in short, I believe it was a recovery attempt with policies that did not work and ended up destroying currency board with the consequences we are seeing now.

No clear path has yet been taken. I do not know which will be the road to take. So far, they have opted for a plan that will not work and that is why it will have to be changed. They opted for dollarizing deposits, pesifying an important part of bank loans, creating a hole in their balance, a dual exchange rate, where one is fixed and the other is free and they still have not said anything of how the ‘corralito’ will be dismantled.

So we are in a situation where there is total lack of clarity, where inconsistency abounds, because let us assume that the peso devalues strongly (which is possible as right now the parallel dollar stands at 1.85 pesos). That is why I want to make it clear, though I wouldn’t like it to sound as a criticism, that due to the complex transition we still do not know where Argentina is heading for.

You foresaw the so-called ‘tequila’. How does the Argentine crisis resemble to the Mexican tequila of 1995?

It resembles quite a lot. Both the Mexican and Argentine systems collapse because the Central Bank increases credit, reserves are lost and then when a monetary crisis occurs a series of other difficulties arise. In the Argentine case this is worse because the system is widely dollarized. Mexico was not as dollarized as Argentina. Then, when devaluing, if we do not pesify everything –we are pesifying just a part since all the people who have obligations in dollars will be able to pay in pesos at least for some time so everything will have to be renegotiated- a sizable legal problem adds in relation to validation and renegotiation of agreements. In the years ahead, people will be too busy with lawsuits and nobody will have enough time to produce. So unfortunately, this is likely to prompt a deeper internal crisis.

Besides, when the ‘tequila’ occurred, Mexico was not so highly indebted as Argentina is today. Neither had it received any considerable support from the international community and so it had some room for aid. Argentina has been granted many aid packages –I can no longer remember how many packages have been granted- to the extent that today it has a 14 billion dollar debt with the IMF and has reached the limit of what the Fund can grant it. Argentina is in a position where internal problems triggered by a devaluation are more serious and on the other hand it has already exhausted the patience of the international financial community.

The Argentine crisis is compared to those of Mexico, Brazil and Ecuador. In regional terms, what do you think its impact on Latin America will be?

So far it has exerted no impact at all. A few hours ago I spoke to the IDB representatives in Mexico and there the exchange rate has not moved, the peso is very strong. The same in Brazil and Chile. For the moment, there is no impact but what may happen in the mid-term and this derives from a non-economic speculation that should Argentina adopt a populist model that was successful, perhaps that could spread to other countries and make them take populist measures as well. But I repeat, in the short-term no impact is visible.

It is clear that so far the Argentine government has adopted a set of loose measures but has not announced a concrete plan yet. How does this situation influence international organizations?

If someone comes to speak with institutions representing Argentina, the first to speak to will be the International Monetary Fund (IMF) which will request a plan explaining what the country will do with its monetary policy, with the corralito and the fiscal policy. So we are far from that and under the present conditions there is no point in an Argentine delegate traveling for there are no bases for the Fund to create a program. As every bank, the IMF has its bureaucrats who analyze the issue from the technical perspective and then they must submit it before the board and explain them what is it they are doing. If the country fails to present a clear plan, the issue is unlikely to reach the board and in case it reached the board, possibilities for its approval are remote.

As from this crisis, the role of the IMF and multilateral credit agencies has been strongly questioned. Can the Argentine default represent a landmark in the history of multilateral financial organizations and the IMF?

Yes. It depends on how things unfold. If now Argentina experienced a deep crisis and the other countries were not affected, then the international community will wonder: Do we really need a Monetary Fund? The Fund’s idea is to a large extent avert contagion. If by doing things clearly as the way they are done now and letting countries with problems solve them does not cause an impact on the other countries, there will be less interest in having an institution such as the Fund.

Adding the fact that –as Professor Mercer from Carnegie Mellon University said just as many important commentators- the Fund has not only not helped but also by giving money to the countries it has postponed the ‘D day’, then if we buy the view that today it is quite popular in the Washington media, especially in the US Treasury, it is another reason why the Fund should be closed because it not only unnecessary for contagion matters but also it only grants funds to governments that make financial mismanagements.

The foreign policy of the United States Treasury is also questioned. Both the IMF as well as US government authorities have already refused to grant aid to Argentina even when they have given moral support. Could the Argentine crisis mean a before and after in the US Treasury foreign policy toward Latin America?

There is a change of attitude, there is no doubt about it. But we must wait. This is the republican administration, which bears the concept that all the crises unfolding worldwide derive from the aid granted to the countries. That is why I believe that if Washington no longer helps Argentina and for instance and if the financial crises of the other countries disappear, we will see the empirical evidence that I was right. Right now I believe that the attitude is quite different to that of the Clinton Administration.

The idea is to let countries –not only Latin America but all- manage by themselves. But that attitude will strengthen if crises truly disappear and will change if we begin to see contagion everywhere. There, they will realize that the theory that inspired them was wrong. So we will have to wait and see but of course there may be a before and after.

Emerging markets will feel a sort of helplessness since should the hypothesis materialize, then they will not be able to request aid from multilateral credit agencies or the US Treasury….

Right. Countries will be asked to make the necessary adjustments on their own. This does not mean they have not been aided because they receive aid for other reasons. For instance, Turkey has been aided a lot because that country plays a major geopolitical role in this part of the world. I believe that aid could be granted for political reasons. But I can figure that if Argentine had a customs union with the United States, if there was greater foreign direct investments from the United States and a closer relationship then in the future the United States could be more willing to grant aid if it is in trouble. It is not the same with an institution such as the Fund, which while it has strong political influences, those are relatively lower and it is a basically technical institution.

Does this crisis affect underlying processes such as globalization and the FTAA?

Hard to know. Rumors have it that the impact will be quite negative indeed.

So it could be prevented someway at least indirectly for it could affect the region, couldn’t it?

Exactly, but it will not be so strong. It affects in the middle to long term but it is not like financial contagions which when there is a run in Argentina it also occurs in Mexico. That is worse and it is not happening right now.

What have economists learnt with the Argentine crisis?

I am about to finish a brief work to assess the Argentine situation and I found those similarities I was just mentioning to the Mexican situation of 1994-1995 with quite worrying aspects.

I think nothing has been learnt from the Argentine experience. Unfortunately, Cavallo held that theory and facts have proved him wrong. It is an internal crisis that becomes more complex due to what I described and has some political aspects: I think the Alliance never bought this model, which is Menem’s model and not a model of Peronism as a whole as we see it today. I think that when the Alliance took power, it took it as a burden and not as a appreciated inheritance. So, if it lacked political support and began to do things that were incompatible with the model adopted, a crisis was inescapable. So I did not learn anything new.

‘....as son as people have a coin in their pockets and do not know what to do with it,
they will buy dollars and in that case the dollar’s value will be staggering...
Bottom line: it will be a hard system to maintain’.

When we spoke in October in Montevideo, you told me that the formula for Argentina was a controlled devaluation, dollarization and a financial aid package (‘blindaje’). Do you still think the same?

I have my doubts that Argentina will be able to handle free exchange rate because people are quite dollarized and have lost respect for authorities of all kinds, especially the monetary authority. As was seen, they managed to remove the Central Bank Chairman accusing him of questions that have not been proved yet and replacing him with two figures that advocate the minister in duty, thus losing monetary independence. Besides, currency board has changed overnight when as a law it was thought to be hard to change. Pension funds have been touched and people still haven’t realized. Now, when people are told that now we are going to conduct a moderate monetary policy like the ones in Mexico or Chile, I bet that people will not believe in them and so as soon as they have a coin in their pockets and do not know what to do with it, they will buy dollars and in that case the dollar’s value will be staggeringly high and fluctuating a lot. Bottom line: it will be a hard system to maintain.

Now that devaluation has been declared I do not understand where is it they want to fix the exchange rate –a technical question- perhaps at 1.4 and I believe that dollarization is the only thing people would believe in if it is well implemented. Because they would think the monetary policy of Argentina would no longer be treated but the US monetary policy. I would make the Central Bank disappear as such and replace it for a banking oversight agency and the supervision would be in agreement with that of the United States as well. In other words, I would even import supervisors from the US because unfortunately, people no longer believe and so it is a luxury for Argentina to have an independent monetary policy right now. I say it with pain but I believe it is so.

I think we all agree that Argentina is like on the verge of anarchy and has experienced a strong social turmoil. What is the foreign perspective on this? Do they think Argentina will undergo a serious social outburst?

There is deep concern because we are in an intermediate, highly unstable situation in which announcements have not been completed with a dual exchange rate that will prompt serious problems. A few hours ago, I spoke with the IBD Brazilian delegate who told me that all wheat dispatch orders from Argentina to Brazil have been halted. Exporters do not believe that the 1.4 will last and so they are not sending wheat, which may cause a scarcity problem in Brazil –direct contagion could rise there. This gives an idea of the sizable problem for not having a well-structured system which has no credibility at all. The fact that all dispatch orders to Brazil are frozen is a clear inkling that exporters do not believe and under these circumstances even international trade is paralyzed.

The current concern is that what is being done now which I hope will quickly change may protract. So common people who do not know about these technical things will only find they are living in bad conditions and so an opportunist mat appears saying they live badly because (as has already been said) banks are stealing their money, Spanish firms are stealing their money and so on and so people may become confused and vote or nominate a figure that is totally the opposite to the person that is needed to make a market economy work. The problem would certainly be Herculean. But I think we may be far from that.

How is the figure of President Eduardo Duhalde perceived in terms of his ‘populist’ policy?

Duhalde is perceived as a politician. Also Menem at first in his first term rose with strongly populist hues but then he changed. That is not unusual in worldwide politics: that was the way in which socialists in Spain took power and made the most pro-market reforms. It is not a question that awakens deep concern. A populist language is being used because the situation is quite serious. But so far it is not known whether it is actually populist. For now, Washington is not a concern although it is so for companies directly involved.

And what is the image of Economy Minister Jorge Remes Lenicov for multilateral credit agencies?

Remes Lenicov is deemed as someone who knows about national accounts, who served as Duhalde’s minister –everyone knows he was minister during the period of spending expansion. He is thought to be someone who knows how to keep the accounts and not a friend of fiscal deficit. Therefore, he is a serious person. He is not a creative Cavallo and is less known than other Economy ministers of Latin America. Anyway, we do not need a genie but someone serious and reasonable enough right now.