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The international dimensions of the Argentine default: the case of the sovereign debt restructuring mechanism.

Abstract. Aside from representing the biggest default of its kind in history, the Argentine default in December 2001 triggered several important, albeit largely neglected, debates on how best to manage future sovereign bankruptcies. These debates centre on the key policy to emerge from the International Monetary Fund (IMF), the so-called Sovereign Debt Restructuring Mechanism (SDRM). Despite the significance of the debates around this mechanism, particularly with respect to understanding Washington's position vis-a-vis providing new financing for Argentina, the literature on the SDRM continues to be dominated by economic analyses. As such, the SDRM has been discussed without consideration of either power relations or contradictions in the global political economy. By situating the key debates on the SDRM in this wider context, I suggest that the debates on the SDRM do little to promote economic stability and social justice in emerging market economies, like Argentina, but instead by reproducing the imperative of capital account liberalization, the SDRM increases the power of transnational capital over sovereign states.

Resume. En plus de representer la plus importante banqueroute de son histoire, la suspension de paiement de la dette par l'Argentine en decembre 2001 declencha d'importants debats sur la facon de gerer de futures faillites nationales. Ces debats se concentrent sur la politique qui emergera du Fond Monetaire International (FMI) : le Mecanisme de Restructuration de la Dette Souveraine (MRDS). En depit de l'envergure des debats au sujet de ce mecanisme, en particulier en ce qui a trait a la position de Washington quant a la possibilite de pourvoir l'Argentine avec du nouveau financement, la litterature sur le MRDS continue d'etre dominee par des analyses economiques. C'est pourquoi, le MRDS a ete discute sans prendre en consideration les relations de pouvoir ou les contradictions emanant de l'economie politique mondiale. En situant les debats cles sur le MRDS dans ce contexte plus ample, cet essai suggere que ces debats contribuent tres peu a promouvoir la stabilite economique et la justice sociale au sein des economies emergeantes, telle que l'Argentine. Au contraire, en reproduisant l'imperatif de liberaliser le compte capital, le MRDS accroit le pouvoir du capital transnational sur celui des Etats souverains.

Introduction

Despite an excess of high-level discussions and agreements dedicated to strengthening international financial architecture, neither governments nor markets are nearer to solving the problems of transnational debt. This refers to "all the forms of debt across frontiers: all the liabilities incurred, and claims established, between institutions or individuals under one political jurisdiction" (Strange 1998a, 91-92). Up to now, transnational debt has been managed by the world's lender of last resort (LOLR), the International Monetary Fund (IMF). It should be underlined that the IMF has continued to govern over this increasingly complex phenomenon despite the lack of changes to its legal mandate or an international consensus on how transnational debt should be managed. The debate surrounding the creation of a competing institution--the Asian Monetary Fund--in the wake of the Asian crash of 1997 evidenced the competing views that exist on how crises should be addressed. The position of the US government has been that if complemented with proper institutions and best practices in the South, the Fund's role as LOLR is sufficient to deal with crises. This stance was thrown into question, however, when the Argentine government defaulted in December 2001 on most of its $141 billion debt, thereby creating the biggest sovereign default in history.

In November 2001, in response to the mounting economic problems in Argentina, and its apparently imminent default, the IMF's First Deputy Managing Director, Anne Krueger, put forward a new approach to dealing with sovereign debt, the Sovereign Debt Restructuring Mechanism (SDRM) (Eichengreen 2002a). The motivation behind this plan was to provide better incentives for debtors and creditors to agree on prompt, orderly, and predictable restructuring of unsustainable debt (International Monetary Fund 2003a). Specifically, the SDRM "would allow a country to come to the Fund and request a temporary standstill on the repayment of its debts, during which time it would negotiate a rescheduling or restructuring with its creditors" (given the Fund's consent) (International Monetary Fund 2001). It should be noted that since Krueger introduced the SDRM proposal, the restructuring framework has come under considerable attack from a diverse set of interests, including international creditors, non-governmental organizations, and the US Treasury Secretary. Not surprisingly, the new bankruptcy procedure for insolvent governments was not supported by the IMF's International Monetary and Financial Committee (IMFC)--a body that is responsible for advising, and reporting to, the Board of Governors--at the Annual Meeting of the World Bank and IMF in April 2003.

However, the lack of support for the SDRM does not mean that this policy is not worthy of critical reflection. There are at least three reasons why it is useful to understand the SDRM from a wider conceptual lens than has been used up to now. First, an analysis of the issues and problems involved in managing transnational debt thus far aids in our understanding of why the IMF and the US government have been balking regarding the financing of debt restructuring vis-a-vis Argentina. With such an understanding, the existing scholarship on the causes and consequences of the Argentine crisis could be complemented by a critical discussion of the underlying contradictions involved in managing transnational debt from an international political economy perspective. (1) Second, the debates surrounding the SDRM, most notably between the IMF and the US Treasury Department, significantly shape future policy directions of managing transnational debt since they reflect the more discriminating and conservative approach to multilateral assistance of the Bush administration (2001-present) under which aid would be provided only to countries with solid fundamentals and the size of aid packages would be limited (Eichengreen 2002b). Third, while the SDRM was struck down, the IMFC did nonetheless support a set of reforms restricting the Fund's rescue lending to crisis-hit countries and encouraging a more active role for the majority of creditors caught in a situation of sovereign bankruptcy.

Up till now, the literature on the SDRM has been dominated by heavily economistic and mainstream analyses (Eichengreen 2002a, 2002b; Akyuz 2002; Cooper 2002). The upshot of this has been that more critical questions, such as who benefits and why, have not been addressed. (2) This essay seeks to fill this void by casting more light on a largely neglected dimension of the SDRM debates, namely, the detrimental effects of constructing an imperative of capital account liberalization in the international economy and, relatedly, the growing reliance of emerging market economies, like Argentina, on private, short-term capital inflows to feed public debt. The main goal of this essay is to analyze the international discussion triggered by the Argentine case regarding the means to deal with the problem of sovereign default. As such, the focus of the discussion is not on Argentina per se, but on the significance of the SDRM vis-a-vis the assumption that open capital accounts are vital to achieving economic growth in the South, a central tenet of the neoliberal-led Washington consensus. This form of transnational debt management seems to aggravate at least two problems facing emerging markets. First, the increased dependence on capital account liberalization increases the vulnerability of middle-income countries--which receive the largest share of volatile, short-term capital flows--to external shocks or volatility in international markets. Second, in pursuing the IMF-led policy of capital account liberalization, these countries' governments--in order to attract and retain short-term capital flows--become more accountable to the demands of transnational financial capitals than to those whom they govern.

To set the stage for the central role of capital account liberalization in the IMF's policies and the inherent contradictions they pose for policy formation in the South, I will begin my discussion with an overview of the Washington consensus and the changing nature of capital flows vis-a-vis emerging market economies.

The Washington Consensus and the Growing Significance of Capital Account Liberalization

The fall of the Bretton Woods system in 1971 ushered in a new policy and ideological orientation in the United States known as neoliberalism. Neoliberalism is premised on the steadfast belief that political and social problems should be solved primarily through market-based mechanisms as opposed to state intervention. Neoliberalism quickly became the dominant policy of international financial institutions such as the IMF and World Bank, congealing into what many authors have referred to as the "Washington consensus." As former Senior Vice President and Chief Economist of the World Bank, Joseph Stiglitz, notes, the success of the consensus rests on its simplicity:
 [I]ts policy recommendations could be administered by economists
 using little more than simple accounting frameworks. A
 few economic indicators--inflation, money supply growth,
 interest rates, as well as budget and trade deficits--could serve
 as the basis for a set of policy recommendations. Indeed, in
 some cases economists would fly into a country, look at and
 attempt to verify these data, and make macroeconomic recommendations
 for policy reforms all in the space of a couple
 of weeks. (Stiglitz 1998)


Through their insistence that debtor nations adopt export-led strategies (including a faster rate of production increase), minimize any restrictions on the activities of private market participants, and ensure tight fiscal discipline (draconian slash-and-burn policies vis-a-vis social spending), Structural Adjustment Policies (SAPs) helped bring about huge and continual resource transfers from debtor countries to the developed world. The emphasis on privatization and deregulation also attracted foreign capital investment to developing countries. According to a report by the Joint Economic Committee of the US Congress in the mid-1980s, while bank profits grew steadily during the debt crisis, the developing countries exposed to SAPs moved further into debt (Bienefeld 1993). For example, despite the widely believed "success" of Argentina's "Convertibility Plan," which effectively tied the peso to the US dollar, the country's foreign debt grew at record rates from $65 billion in 1991 to $160.2 billion in 2001 (Pettifor et al. 2001, 3). As I will show below, SAPs also assisted in creating a greater, not a lesser, dependency of Third World governments on global capital markets (as opposed to less volatile forms of debt: bilateral and multilateral aid), not to mention higher poverty rates than those registered before the debt crises of the early 1980s.

Capital account liberalization was a key element of the Washington consensus right from the early stages of SAPs. However, as the structure of capital inflows to certain countries in the global South (i.e., "the emerging market economies") underwent significant changes, so, too, did the emphasis placed on open capital accounts. (3) During the 1980s, for instance, financial flows consisted predominantly of longer-term foreign direct investment, usually in the form of takeovers of newly-privatized companies. By the mid-1980s, more powerful and less vulnerable financial players, such as mutual and pension funds, began to supplant traditional bank lending activities in both the private and public sectors. However, it was not until the early 1990s that the nature of capital flows began to change for emerging markets, including Argentina.

Financial flows have undergone at least three structural changes since the early 1990s (Griffith-Jones 1996). The first distinguishing feature was the sheer size of the capital flows. Between 1992 and 1993, for example, capital inflows reached an annual average of around $62 billion in Latin America, compared with the 1983-1990 period in which net capital inflows averaged only $10 billion a year. Second, official development finance, especially its largest component, bilateral aid, has lagged behind private flows (Ocampo 2001). Due to this lag, governments of emerging markets have grown more dependent on international financial players to fill their public and private coffers. For instance, by 1993, 74% of private foreign investment in Mexico, Brazil, Chile, Argentina, and Sri Lanka came from mutual funds and pension funds (Dillon 1997, 70). Put differently, in the 1980-85 period 66% of Latin American debt was to official creditors while the private creditors were represented by fewer than 20 banks. In contrast, by the late 1990s, private creditors accounted for approximately two-thirds of outstanding Latin American debt (International Monetary Fund 2002). According to the Executive Secretary of the UN Economic Commission for Latin America and the Caribbean, Jose Antonio Ocampo, the majority of capital flows to the middle-income countries are not only more short-term (one year or less) than they were in the 1980s, but these countries also receive the highest concentration of the most volatile flows (Ocampo 2000). The increased disembedding of (highly esoteric) financial instruments from the real economy through technological innovation and liberalization processes constitutes the third change in financial flows. Although not divorced from the productive sphere, the steady intensification of financialization has meant that growth rates of turnover of financial assets are many times higher than the growth of any indicator of "real" activity (Altvater 2002). In other words, finance is no longer a means of facilitating the exchange of goods and services but has become an end in itself, largely feeding the yawning gap left by the trade and budget deficits. It should be noted that due to a mixture of crises in the South, along with the global economic slowdown, net debt flows have been negative for the past three years. However, a recent World Bank publication has stated that net debt flows are projected to be positive in 2003: "Gross capital market flows to developing countries are expected to rise to $155 billion in 2003 from $137 billion in 2002. By 2005, gross flows of bank lending and portfolio securities together are expected to rise to around $165 billion" (World Bank 2003, 45).

The upshot of these changes has been the creation of a highly complex and incredibly volatile form of transnational debt, including a plethora of private and public creditors and debtors, spanning across national boundaries. As Susan Strange notes, this form of debt includes
 assets claimed by foreign shareholders in enterprises in another
 country, interbank loans across frontiers, bonds issued
 to non-nationals both by governments and other institutions
 and firms, as well as credits or guarantees extended by states
 or multilateral organizations like the IMF and World Bank or
 the regional development banks in Asia, the western hemisphere
 or Africa. (Strange 1998a, 91-92)


For example, Argentina's total debt in 1999 comprised the following sources: IMF credit (3%), multilateral credit (10%), bilateral (4%), short-term debt (21%), private creditors (62%) (e.g., US institutional investors, European and Japanese retail investors) (Pettifor et al. 2001, 19).

Despite the intricacy of transnational debt in the post-Bretton Woods era, the IMF, acting as the world's lender of last resort (LOLR), was the only institutional mechanism in place. Given the steady rise of private capital flows to the South as a key source of developing financing, why didn't international policymakers create an institutional framework to deal adequately with these changes? The answer to this question must be located in existing power structures in the global political economy. As Susan Strange reminds us, while the phenomenon of borrowing--getting money today in exchange for money tomorrow--is economic, the management of such transactions is political (Strange 1998a, 92).

Governing Transnational Debt: The Role of the IMF

Corresponding to the changes in capital flows and the increase in power of transnational creditors in the South, institutions tied to the Washington consensus, such as the IMF, began to emphasize--in the form of conditionalities--the need for debtor countries to commit to capital account liberalization in order to achieve "economic progress." It should be highlighted that the new focus of free capital mobility did not replace other features of the SAPs. Instead, the push for capital account liberalization was to complement the existing market-led prescriptions of the Washington consensus, such as trade liberalization, fiscal austerity, deregulation of labour markets, privatization of public enterprises, and so on. Joseph Stiglitz describes the IMF's new mandate in the following manner:
 [W]hile [the new directive] may have been quiet, it was hardly
 subtle: from serving global economic interests to serving the
 interests of global finance. Capital market liberalization may
 not have contributed to global economic stability, but it did
 open up vast new markets for Wall Street. (Stiglitz 2002, 207)


For instance, prior to the Asian crisis of 1997, the Interim Committee of the IMF (now the International Monetary and Finance Committee) attempted to revise the Fund's charter to impose upon its members a legal obligation to open capital accounts (International Monetary Fund 1997, 8).

Against this backdrop, we can observe a shift in the IMF's main role from promoting the restoration and expansion of trade flows during the Bretton Woods era (1944-1971) to explicitly advancing the cause of enduring capital market integration. The role of the Fund has shifted from overseeing exchange rate stability in the dollar-gold pegged rate regime to a financial intermediary in which it facilitates stability around the world by acting as a bridge between net lenders and borrowers. Creditors, on the one hand, rely on the judgement calls of the IMF, whether through its transparency exercise entailed in the Fund's Dissemination Standards Bulletin Board, or through its Public Information Notices, which are published following the so-called "Article IV Consultations," i.e., the IMF Executive Board's assessment of countries' macroeconomic and financial situations. It should be noted that this assessment is based on a neoliberal benchmark, or, in other words, that these assessments evaluate to what extent the debtor countries have implemented the principles of the Washington consensus. However, governments of debtor countries aspire to high marks on these reporting exercises since a favorable report card from the IMF acts as an important "seal of approval" to obtain new loans, or simply to rollover existing loans, from the international financial markets.

It must be kept in mind that the IMF remains without a firm legal mandate in the post-Bretton Woods era (Pauly 1999). Seen in this light, the claim by the IMF that it should play the role of lender of last resort must be critically evaluated, particularly in view of our discussion of the SDRM (Pauly 1999). Before embarking on this discussion, it is important to ask some questions about underlying power relations. Which member state is promoting such a role? Why? It is not difficult to trace structural power within the IMF to the government department that makes the largest financial contribution, i.e., the US Treasury Secretary.4 The Fund's rule of global lender of last resort is not new, however. In 1962, with the creation of the General Arrangement to Borrow (GAB), ground rules were established regarding when, and on what terms, the Fund could lend to member states. As Susan Strange highlights, the word "agreement" is conspicuous in its absence from the GAB, signaling that its design was the creation of the US and France, with Holland and Belgium acting as supporters to the Arrangement (Strange 1998b, 165). Over the years, the GAB has been revised several times in order to increase the limit available for bailing out countries in need, particularly subsequent to the 1980 debt crises in the South. In the aftermath of the Mexican peso crisis, and the problems the Clinton administration experienced in responding to it, the 1995 Halifax Summit called on the G10 and other wealthy countries to help double the existing amount of financial arrangements available to the IMF under the GAB. In November 1998, the New Arrangement to Borrow (NAB) was established, in the words of the IMF,
 to forestall or cope with an impairment of the international
 monetary system or to deal with an exceptional threat to the
 stability of that system.... The total amount of resources available
 to the IMF under the NAB and GAB combined is about
 $45 billion, double the amount available under the GAB alone.
 (International Monetary Fund 2002)


The latter sum seems to pale in comparison with public debt burdens of countries like Argentina that were hovering well over four times this amount.

At a deeper level, the NAB reveals an attempt by the US government to maintain control over crisis management in the South. As I will show later in the discussion, this same impulse is evident in the debates surrounding the SDRM. First, the NAB, like its counterpart the GAB, is based on a putative interstate consensus. Hence the lack of a legal mandate attached to the NAB and the choice of the word "Arrangement," not "New Agreement to Borrow," seemed to replicate US structural power in the global political economy. Second, and relatedly, if the IMF was looking to expand its financial resources, why not consider Japan's proposal in September 1997 to set up an Asian Monetary Fund (AMF)? As C. Fred Bergsten notes, an AMF would have not only eased the financial burden of the IMF but also, given that Asian policymakers would have treated it as "their own institution," an AMF would have acted more efficiently in terms of crisis response (Bergsten 1998). Some authors have argued that, because evidence suggests that contagion is a regional phenomenon, a regional monetary fund that was more sensitive to the institutional and legal particularities of East Asia would have been far more effective in terms of surveillance than a more globally oriented IMF (Rajan 2000). Moreover, according to the Asian Development Bank, the estimated potential financial mobilization of the AMF would have been about $100 billion--over twice the amount the IMF raised through the NAB (Rajan 2000). Regardless of these arguments, the conception of the AMF was immediately struck down by the US (along with China) largely due to the threat an Asian lender of last resort would have had on American structural power in the region (Wade and Veneroso 1998a, 1998b; cf. Soederberg 2002).

The above discussion draws attention not only to the political decisions involved in the existing institutional arrangement for crisis management, but also to the dominant neoliberal assumption underpinning the management of transnational debt: open capital accounts. The US government's refusal to allow for a competing institution that could respond to debt crisis in the East Asian region was largely rooted in the potential damage of the AMF vis-a-vis the imperative of capital account liberalization. The East Asian region has historically favoured state intervention to deal with market imbalances, as opposed to the central tenets of the Washington consensus. Moreover, key countries in the region (Malaysia, Taiwan, China, Hong Kong, Singapore) have at one time or another implemented the use of capital controls, some believe successfully, to protect their economies from the whims of short-term financial flows. More recently, the US government's strong aversion to capital controls has expressed itself in the US-Chile and US-Singapore free trade agreements, in which the US government has imposed severe restrictions on the use of capital controls as a precondition for signing the agreements (US House of Representatives Committee on Financial Services 2003). For the US government, previous use by the Chilean and Singaporean governments of capital restrictions is "bad financial policy, bad trade policy, and bad foreign policy" (Bhagwati and Tarullo 2003).

There are issues of power involved as well in the political decisions to maintain the status quo. Jagdish Bhagwati, an influential trade economist at MIT, coined the term the Wall Street-Treasury Complex to highlight the growing power of the US. For Bhagwati,
 Wall Street has become a very powerful influence in terms of
 seeking markets everywhere.... Just like the old days there
 was this "military-industrial-complex", nowadays there is a
 "Wall Street-Treasury complex." ... Wall Street views are very
 dominant in terms of the kind of world you want to see. They
 want the ability to take capital in and out freely. So the IMF
 finally gets a role for itself, which is underpinned by maintaining
 complete freedom on the capital account. (Bhagwati,
 in Wade and Veneroso 1998a, 18-19)


Yet, as I will discuss below, the Wall Street-Treasury Complex rests on fragile foundations. The assumption that financial liberalization will lead to prosperity and economic stability for the global South has been seriously discredited, not only by recent debacles, but also by rising poverty and indigence rates in the IMF's pin-up economies, most recently Argentina and Turkey (Soederberg 2002; Akyuz 2002). Moreover, as the Argentine crisis has most strongly revealed, the self-imposed role of the IMF as the world's LOLR has done little to address the institutional weakness involved in managing transnational debt. Instead, this stance ensures the central role of the IMF in promoting open capital accounts in the South (Fischer 1999). Before turning to this discussion, however, it is useful to grasp the logic guiding the Fund's push for complete freedom on the capital account.

The core logic surrounding Washington's push for capital account liberalization rests on the basic assumption that international financial markets are not only inherently rational in nature, but also lead to mutual gain. Liberalized capital flows, for instance, are thought to create greater welfare benefits because foreign savings supplement the domestic resource base. As a result, this leads to a larger capital stock and places the economy on a potentially higher growth path. Free trade in capital, through international borrowing and lending, actually helps lower the costs of the inter-temporal misalignments that periodically arise between the patterns of production and consumption. Put plainly, capital inflows permit national economies to pay for imports in the present with exports in the future.

Another benefit from financial liberalization is believed to be that the sharing and diversification of risks that otherwise would not be possible become feasible (Guitan 1997, 22; Felix 2002). Critically, since capital markets are inherently rational, they will enter those countries that demonstrate sound regulatory practices such as balanced budgets, low inflation, market liberalization, and stable exchange rates. According to this line of reasoning, markets act as a disciplinary force, which can punish profligate governments through investment strikes and capital flight (Gill and Law 1993). It is interesting to note that the inherent rationality of financial participants lies at the base of the SDRM, particularly in its concern of avoiding any moral hazard in future IMF bailouts. Is this conventional wisdom correct or just convenient? Does the liberalization of cross-border transactions in capital markets lead to greater prosperity? Or has financialization merely led to a situation whereby hot money can freely flow into emerging markets to exploit interest rate differentials or other speculative ventures, while the productive sectors of these countries go through further forms of de-industrialization?

Policy Paradoxes in the Era of Financialization

It is worth mentioning at the outset that the assumption that market actors are inherently rational is not an uncontested view. David Felix suggests that this position does not have
 general backing from more basic theorizing about the stability
 of competitive market economies. Rather, the theorizing
 indicates that liberated financial markets are inherently prone
 to destabilizing dynamics that can also destabilize aggregate
 production, trade, and employment in such economies. (Felix
 2002) (5)


Mary Ann Haley's work echoes Felix's conclusions when she argues that neither the assumption that an adequate number of investors create the most favorable conditions for competition nor that in a "fair and efficient market investors have access to roughly the same information and react similarly and 'rationally' within the confines of profit-maximization reflect the present reality of investment in emerging markets" (Haley 1999, 76). It is necessary to take a closer look at the political effects of the adherence to open capital accounts in the South.

The Herculean task of signaling creditworthiness to global financial players by adhering to the conventional wisdom of the Washington consensus and placating domestic social strife has proved to be increasingly difficult for governments of middle-income countries. In particular, the tension between the principle of national self-determination and the neoliberal principle of capital account liberalization--as part and parcel of the neoliberal package of reforms--has contributed to a legitimacy crisis in many emerging markets. The changing nature of capital flows to emerging market economies has had important political ramifications for governments of debtor countries, or what I refer to as a policy paradox. Ilene Grabel identifies at least two negative and mutually reinforcing effects that financial flows have on national policy formation in the emerging markets: (1) the imposition of constraints on policy autonomy; and (2) the creation of greater vulnerability to the economy to risk, financial volatility, and crisis (Grabel 1996).

First, as governments of emerging markets embrace foreign portfolio investment (stock and bond purchases) as a source of financing, their exposure to the risks of capital flight increases. As mentioned above, the Asian crisis has clearly demonstrated that even sound economic fundamentals (e.g., low inflation, high savings rates, falling unemployment numbers) are no guarantee that highly mobile capital will not choose to flee en masse in adverse circumstances. Despite the robust macroeconomic equilibria and high rate of domestic savings, for instance, these 'miracle economies' buckled under the quick exit of foreign funds. Indeed, the changing nature of financial flows to emerging markets has made it increasingly difficult to protect the domestic economy against the devastating effects of contagion and capital flight. Chakravarthi notes that a
 shift of 1% in equity holdings by an institutional investor in
 one of the G-7 countries away from domestic equity would be
 slightly more than a 1% share of total market capitalization,
 but would constitute the equivalent of 27% of market capitalization
 in emerging Asian economies, and over 66% of Latin
 American equity markets. (Chakravarthi 1998)


Regarding the second point, to continually attract creditors, most of which stem from highly mobile sources of foreign capital, governments of emerging markets must send positive signals to investors about their credibility and market-friendliness, such as degrees of capital mobility, labour and production costs, and political stability (Maxfield 1996). Thus the need to continuously signal creditworthiness to global financial markets has not only limited the scope of policy autonomy of states in emerging markets, but has generated stark tension between the accountability of policymakers to the needs of transnational capitals as opposed to those people it governs (Gill and Law 1993). In this way, in order to attract this crucial source of public financing, governments are pressured to enter into a "pact with the devil" whereby market credibility assumes a central position in policymaking in such areas as exchange and interest rates as well as through tight fiscal policies. The latter can begin to conflict or even take precedence over other domestic concerns, especially the needs of subordinate segments of the population, such as the working class, urban and rural poor. Despite the attempts by the Argentine government to adhere to market-led restructuring demanded by the IMF, poverty rates increased dramatically since the 1990s. In fact, according to official figures, 57.5% of Argentines now live on or below the poverty line.

The corollary of the above is the growing structural power of transnational financial capitals, such as institutional investors (hedge, pension, and mutual funds), vis-a-vis the states in the South. Indeed, Geoffrey Underhill astutely notes that the growth in capital volatility and mobility acts to constrain the policy-making autonomy of elected governments, particularly with regard to exchange rate and monetary policy, but also with fiscal (taxation) and social policies. For Underhill, these tensions have resulted in a substantial "legitimacy deficit," further exacerbated by the need to adjust to a constant "global restructuring" (Underhill 1997, 19).

The tension described by Underhill takes a distinct form of expression in the South, particularly in countries like Argentina. For example, in her extensive study of investment behaviour of money managers, Mary Ann Haley suggests that investors, attracted to those countries that rapidly implement and maintain intense economic reforms while simultaneously controlling political opposition to these measures, may continue to find liberal democracy not only unnecessary, but also perhaps even contrary to their interests (Haley 1999). Above all, and especially during times of crisis, governments are required to maintain political stability. These conditions can readily lead to increased forms of coercion and other expressions of authoritarianism aimed at quelling overt manifestations of class conflict so as to attract and maintain capital inflows. The limits placed on policy autonomy and the growing priority given to transnational finance in terms of neoliberal policies can increasingly constrain political space for the articulation of subordinate voices. To illustrate, over the past year and a half, a number of factories ("fabricas ocupadas") across Argentina have been taken over and run by their workers. Eager to protect the virtues of private property and reinforce the perception that Argentina possesses a disciplined and inexpensive workforce, the state has responded to this and other forms of popular organization with increasing violence and repression (Klein 2003; Dinerstein 2003a, 2003b; Rock 2002). (6) While this strategy may temporarily soothe the jittery nerves of Argentina's international creditors, the upshot of growing state-led oppression will only be to increase, as opposed to mitigate, the ongoing legitimacy crisis of the state vis-avis civil society organizations.

Seen from the above angle, the limitations placed on policy leeway through the adherence to capital account liberalization drastically narrow attempts by ruling classes to deal adequately with the mounting social discontent that threatens the reproduction of neoliberal rule in the South. In response, many governments in emerging market countries have begun to make explicit their discontent with the neoliberal paradigm (i.e., the Washington consensus) so as to reproduce their position of power. Indeed, as Sader rightfully observes, the sickness of the economies in Latin America is not only accompanied with the deterioration of the social fabric, but also with a growing dissatisfaction with US-led economic growth paradigms.
 [President] Clinton left his successor with a situation very
 different from the one he had inherited. George W. Bush faces a
 Latin America in its worst crisis since the 1930s. In states
 with fragile economies, social structures are fragmented, with
 many people deprived of basic human rights. In Argentina,
 Haiti, Uruguay, Nicaragua, Peru, Paraguay, Venezuela, Bolivia,
 Colombia, Ecuador: actual or potential crises are increasing.
 (Sader 2003)


Interestingly, the SDRM does not consider mitigating the power of capital account liberalization. Increased policy autonomy, for example, is important to help these countries overcome what Jose Antonio Ocampo refers to as the state's legitimacy crisis (Ocampo 2002). Increased autonomy is only obtainable, however, if the key source constraining domestic policy-making--i.e., capital account liberalization--is either removed or substantially hindered. In more concrete terms, Ocampo is arguing that developing countries should maintain national autonomy in at least two critical areas: the management of capital account and the choice of exchange rate regime (Ocampo 2000).

The SDRM stands in contrast to Ocampo's position, however. As I will argue below, because both the IMF and the US Treasury Secretary view the problems facing emerging markets--and, in particular, bankrupt states such as Argentina--as caused by bad government policy as opposed to destabilizing capital inflows, their solution is in part to be found in disciplining governments with more, as opposed to less, neoliberal restructuring. In the words of Joseph Stiglitz:
 The US Treasury had during the early 1990s heralded the global
 triumph of capitalism. Together with the IMF, it had told
 countries that followed the 'right policies'--the Washington
 Consensus policies--they would be assured of growth. The
 East Asia crisis cast doubt on this new world-view unless it
 could be shown that the problem was not with capitalism, but
 with the Asian countries and their bad policies. The IMF and
 the US Treasury had to argue that the problem was not with
 the reforms--implementing liberalization of capital markets
 ... but with the fact that the reforms had not been carried out
 far enough. (Stiglitz 2002, 213, emphasis in the original)


Let us now turn to the two key debates surrounding the implications of the SDRM to deal with the issue of transnational debt.

Emerging Solutions to the Transnational Debt Problem: The Sovereign Debt Restructuring Mechanism (SDRM)
 "The debtors and how best to deal with them is surely one of
 the continuing but unresolved issues for the international financial
 system." Susan Strange (1998a, 91)


At first glance, the US government and the IMF may appear to have acted inconsistently regarding the countries, circumstances, and conditions in which to effect bailouts. In 2000, a year before the Argentine meltdown, the Treasury department was quick to sign over a $16-billion bailout package when Turkey defaulted, after only 14 months of currency peg. In August 2001, just a few months prior to Argentina's default, the US government supported a large stand-by loan package to the country. More recently, and after the Argentine meltdown, in August 2002, the IMF came to the rescue of Argentina's larger neighbour, offering Brazil $30 billion to calm the country's roiled markets. According to Brazil's central bank, its debt-to-GDP (Gross Domestic Product) ratio was 61.9% by the end of July 2002 (Weisbrot and Baker 2002). It should be recalled that prior to the Brazilian debt crisis of 1982, its debt service ratio was 63.3% in 1979 (Kapstein 1994, 72). Yet the IMF did not rush to rescue the largest-ever sovereign default in dollar terms that occurred in December 2001. White House and Treasury officials say that by letting Argentina suffer the consequences of its own mismanagement, the US government wishes to send out a clear signal that it "would be a reluctant financial firefighter and that the markets should not bet on a bailout" (International Herald Tribune 2002). Why the discrepancy? A substantial part of the answer to this question lies in self-interest on the part of the US. As Susan Strange observed over two decades ago,
 [w]ithout its ever being stated in so many words, the Fund's
 operational decisions made its resources available neither to
 those in greatest need nor to those with the best record of good
 behaviour in keeping to the rules, but paradoxically to those
 members whose financial difficulties were most likely to jeopardise
 the stability of the international monetary system. (Susan
 Strange as quoted in Pauly 1997, 115)


Given the growing levels of indebtedness of developing countries, as well as the fact that the key players in this debt load are institutional investors in the private sector, guaranteeing the stability of the international monetary system today no longer implies bail-outs, but rather arrangements for market participants to have more direct control over policy formation in the global South. Strange observes that after the 1980 debt crisis the ruling classes of many developing countries decided to neither trade nor borrow from the global economy, thereby "doing their best to be self-sufficient, autonomous and, as some argued, free" (Strange 1994, 112). She goes on to note that
 [a]nxiety to keep the debtors inside the financial structure
 despite their difficulties was all the greater if the debtor
 country was large, was a substantial importer of Western goods, and
 was host to a large number of Western transnational
 corporations--none of whom were anxious to cope with a decoupled
 debtor country. (ibid.)


For the US, this has also implied more direct American control over the IMF. During the spring 2002 meetings of the IMF and World Bank in Washington, DC, the G-7 finance ministers and the IMF's monetary and finance committee endorsed a twin-track approach to improving procedures for dealing with sovereign bankruptcies. It is important to highlight that what the G-7 ministers received, however, was a watered-down version of what was originally proposed by the IMF's Deputy Managing Director, Anne Krueger, in November 2001.

Broadly, Krueger's original proposal suggests a "sovereign debt restructuring mechanism" (SDRM-1) that would entail a new international legal framework based on the features of domestic bankruptcy proceedings in the private sector. This was essentially aimed at creating a binding set of laws through which crisis-stricken countries could halt panics and keep investors from pulling their money out of the nation--buying time for political leaders to work out debts in an orderly fashion--much like Chapter 11 of US bankruptcy law. Under the proposed SDRM-1, the IMF would play a central role by determining which countries would be eligible to participate in the SDRM and by ensuring that member countries adhere to the procedures laid out by the SDRM framework. The SDRM-1 described a process in which countries in crisis would call a halt to debt payments as they negotiated with private sector lenders, under the jurisdiction of a new international judicial panel. During these negotiations, the IMF effectively protects the debtor country from litigation. The conditions of repayment after a country declared bankruptcy would be negotiated among the creditors by supermajority. Supermajority refers to a situation in which 60-75% of the creditors agree to the terms of restructuring, which would then be binding for the rest of the creditors and, of course, the debtor country. The proposed role of the IMF would be to oversee voting and adjudicate disputes in this process. As Krueger noted, "the Fund's role would be essential to the success of such a system" (Miller 2002, 4). For the SDRM-1 to be realized, however, the IMF's Articles of Agreement (i.e., its constitution) would have had to be subject to reform. As noted earlier, for any such change to occur, the US, which wields veto power, has to agree with these changes.

However, the US government did not agree with the conditions set out in the SDRM-1. After heavy criticism from the Treasury Undersecretary, Krueger revised her proposal (SDRM-2) so as to enhance the role and power of creditors. Essentially, the SDRM-2 was more in line with Taylor's insistence on a decentralized, market-based approach that was based on a broader use of "collective action clauses" (CACs) in bonds issued by sovereign governments' provisions. CACs entail provisions that allow a supermajority of bondholders to approve a process which is believed to make it easier to restructure debt by allowing a majority of creditors to impose a deal. A supermajority of creditors is deemed important as it overcomes the problem of "collection action," which occurs when individual creditors
 consider that their interests are best served by preventing what
 is termed a 'grab race,' in which creditors try to get the best
 deal possible from the debtor government so as to enforce
 their claim as quickly as possible. This grab race is believed
 to hinder other creditors and thus may lead them in capturing
 the limited assets available. (Boorman 2002)


It is this feature of the SDRM-2 that was touted during the recent World Bank IMF Annual Meetings in April 2003, at which the IMFC welcomed the inclusion of CACs by several countries, most recently Mexico, in international sovereign bond issues. The IMFC also welcomed the announcement that, by June 2003, those European Union countries issuing bonds under foreign jurisdictions will include CACs. In fact, the IMFC goes on to state that it looks forward to the inclusion of CACs in international bond issues becoming standard market practice, and calls on the IMF to promote the voluntary inclusion of CACs in the context of its surveillance practices. Obviously this would ensure that countries adhere to neoliberal policies laid out in the Washington consensus (International Monetary Fund 2003b).

Krueger's modified SDRM-2 effectively reduced the amount of control the IMF had over how the standstill (a temporary suspension of payments) would work, or even how debts would be restructured. A caveat is in order here. Despite the fact that the role of the IMF is downplayed, it should be recalled that the ability of the Fund to provide a "seal of approval," and thereby signal the creditworthiness of a debtor nation to its international creditors, makes the Fund an integral and coercive feature in not only the negotiation of debt but also the reproduction of the status of private financial markets. Moreover, embracing the notion that a near-default on sovereign debt may be worked out through legal frameworks and an IMF-centred international agreement plays an important role in both normalizing and disciplining the power of transnational capital over sovereign states (International Monetary Fund 2003c). In doing so, the Fund also serves to put forward a particular version of reality that stands in contrast with contesting views, most notably the many voices who have been calling for debt cancellation over the past few decades. (7)

It should be underlined that the SDRM-2 was neither transparent nor inclusive. The only ostensibly independent forum attached to the SDRM-2 process was the proposed Sovereign Debt Dispute Resolution Forum (SDDRF). According to Krueger, the SDDRF was to be set up as "a legal body whose functions would be to register claims and resolve disputes [and] would be independent of the Fund and its Executive Board, in parallel with approaches used in other organizations" (International Monetary Fund 2003c). Nevertheless, it should be noted that the powers of the SDDRF were limited in two ways. First, although the IMF had stated that the SDDRF should be independent of the Fund, it had also highlighted that it would retain a veto over SDDRF decisions. Second, the SDRM-2 did not include citizen participation in the resolution processes of financial crises. On the one hand, the SDRM-2 preferred a laissez-faire approach, allowing market participants more power in the default procedures. This approach was clearly designed to increase the coercive power of transnational capital over debtor countries. Private financial institutions, led by their association, the Institute of International Finance, played a tactical game of supporting collective action clauses in the apparent hope of killing the plan for a judicial mechanism that would in effect reduce their power (Financial Times, 2002a). On the other hand, as is clear from its response to the Meltzer Commission mentioned earlier, the Treasury did not want the IMF to assume a life of its own, (8) nor does it want to see the creation of a new and truly global financial institution that could oversee such processes, as this could entail the threat of moving toward a multilateral as opposed to a unilateral form of norm-creating and decision-making processes.

It should also be highlighted that the official debates on the SDRM have excluded developing countries. In fact, up until the Annual Meeting of the IMF and World Bank in early autumn 2002 (which included the G-7 finance ministers), official discussions surrounding sovereign debt default have taken place exclusively between the Fund and the US Treasury. Given the importance of this issue to industrialized countries, acting on behalf of the interests of transnational capitals who have supplied the credit to emerging markets, the SDRM was not raised for discussion at the United Nations Financing for Development Conference at Monterrey, Mexico, in March 2002, despite the so-called inclusionary and democratic nature of the innovative gathering, involving civil society organizations, the IMF, the World Bank, the World Trade Organization, the G-7 countries, and the developing world (Soederberg 2002). Indeed, a fair, independent, and transparent process for negotiating debt restructuring would prove fatal to the disciplinary effects involved in sovereign bankruptcy. Neither the debtor country nor its citizens should have a voice in the negotiations. An act of exclusion, as many Argentines know too well, is necessary to bring together "like-minded" groups and individuals to the table.

The SDRM is also reserved for what the IMF deems as "important" emerging market economies, and thus is not applied across the board to all classes of debtors, such as the Highly Indebted Poor Countries (Greenhill 2002). More importantly, the debates surrounding the SDRM seem to normalize sovereign debt default which is a reality for Argentina, and may equally become one for Uruguay, and perhaps Brazil, with countless more to follow. Indeed, the fact that international policymakers are seriously debating the issue portends that default is to be a regular occurrence in the world economy. Relatedly, another feature of the debate that is neglected is that sovereign debt default runs contrary to the neoliberal logic that unfettered market freedom leads to economic viability and prosperity for the South. Indeed, the very fact that sovereign debt default is even occurring doesn't seem to be problematized in the SDRM debates.

Conclusion

All in all, the debates on the SDRM do little to further the interests of stability and social justice in countries like Argentina, but instead seek to strengthen the power of international creditors vis-a-vis sovereign states. Indeed, despite their differences, there exists a significant concurrence between the IMF and US Treasury Secretary with regard to two overlapping areas of debt restructuring. First, there is a growing consensus within the Bush administration and the IMF that the way forward is through "selective bailouts." The latter reflects the Bush administration's position that crisis management needs to be complemented by crisis prevention (US Department of Treasury 2002). Second, and relatedly, the key to preventing crises is by removing the moral hazard problem. (9) For Krueger and Taylor, the existing system of crisis resolution relies too heavily on bailout loans, which in turn creates a moral hazard problem. Moral hazard stipulates that the awareness that the IMF will bail out countries in the event of a financial crisis makes the crisis more likely to occur for two reasons. On the one hand, creditors are more willing to lend to high-risk debtor nations. On the other hand, the presence of the IMF weakens pressure on governments to pursue policies--such as fiscal restraint and prudent financial supervision and regulation--that could help prevent crises (Lane and Philips 2001).

The difficulty with the solutions proposed by the SDRM debates is that continued adherence by the ruling classes in the South to neoliberal tenets have become increasingly difficult to pursue, especially given the narrowing social basis for the neoliberal project in the wake of ever-widening income inequality and less and less accountability of governments to civil society. Drawing on 2002 data from the United Nations Economic Commission on Latin America and the Caribbean (ECLAC), Emir Sader points out that the number of people living below the poverty threshold in Latin America increased from 120 million in 1980 to 214 million in 2001 (43% of the population), with 92.8 million (18.6%) in conditions of destitution (Sader 2003). It remains highly questionable whether the proposals put forward by the SDRM debates will impede this trend (World Bank 2000, 3).

In all, the SDRM debates seem to reflect the general characteristic of how crisis-hit countries have been dealt with by the IMF over the past two decades. Three features come to mind. First, and foremost, financial liberalization is posited as a desirable policy because, like trade liberalization, it leads to economic growth and stability. Second, bad policies pursued by debtor nations, not the actions of the IMF nor those of banks or speculators, are seen as the root of the crisis (Schuler 2002). Third, and related to this neoclassical assumption, it is believed that debtor countries should be exposed more directly to the exigencies of transnational finance so that they may be forced to undertake market-based solutions to their current economic and political problems. What the SDRM debates--and the subsequent refusal of the IMFC to implement the framework proposed by Krueger--highlight is that Susan Strange's prescient remark is still applicable. Strange noted a few years before the world's largest sovereign default in Argentina that while "the evolution of that system has changed the nature of the debt problem ... neither governments nor markets are any nearer a final solution to the question of how to manage transnational debt than they were in the 1980s" (Strange 1998a, 91).

Notes

(1.) See, for example, contributions in this volume as well as Dinerstein (2003a, 2003b), Rock (2002), Mussa (2002), Ollier (2003), Carerra and Cotarelo (2003).

(2.) This is not to say that there has not been work on the political facets of the Argentine financial debacle. There is, in fact, a large and important body of literature on this subject.

(3.) Capital account liberalization refers to the removal of capital controls or any policy instrument that impedes the freedom if exchange controls on capital transactions in the balance of payments. For a brief discussion on capital account liberalization see Damodaran (2000, 162-163).

(4.) According to the IMF data, "the largest member of the IMF is the United States, with a quota of SDR [special drawing right] 37,149.3 million, and the smallest member is Palau, with a quota of SDR 3.1 million." See <http:/ /www.imf.org/external/np/exr/facts/quotas.htm>.

(5.) See also Patomaki (2001).

(6.) See also contributions in this volume.

(7.) See, for example, organizations such as: Jubilee 2000, Debt Relief International, AFL-CIO, and the Mercy Foundation.

(8.) See, for example, Financial Times (2002b); Washington Post (2002); The Economist (2002, 67).

(9.) Moral hazard describes the risk that "the presence of a contract will affect on the behaviour of one or more parties. The classic example is in the insurance industry, where coverage against a loss might increase the risktaking behaviour of the insured." Available at: <www.investorwords.com/ cgi-bin/getword.cgi?3117&moral%20hazard>.

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SUSANNE SOEDERBERG

University of Alberta
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