Lessons from Argentina and Brazil

Spring/Summer 2003

Lessons from Argentina and Brazil
By Charles W. Calomiris

Introduction

What have we learned from the sovereign debt crises in Argentina and Brazil, and what can the United States and the International Monetary Fund do, if anything, to repair the damage, and to avoid similar problems elsewhere?

I would emphasize five policy lessons:

First, in emerging market countries (EMs), monetary policy— or, what amounts to the same thing, exchange rate policy—is often constrained by the need to finance government spending, which underlies the eventual collapse of the exchange rate.
Second, even well-regulated banking systems are highly vulnerable to the risks of fiscal imbalance.
Third, the IMF needs to stop intervening to prevent sovereign defaults when they are necessary.
Fourth, EM debt capacity cannot be captured adequately by the ratio of sovereign debt to GDP. Export growth, and hence the need to follow through on trade reform, is just as important a fundamental determinant of debt repayment as discipline over government spending.
Fifth, "contagion" among sovereign debtors is selective.

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