Next week, President Kirchner of Argentina will be meeting with President Lula to develop a “common front” in dealing with the International Monetary Fund. On the surface, the prospect of joining forces with Argentina against the IMF has considerable appeal to Brazil on the grounds of deepening Latin American solidarity. However, given the fundamental differences between Argentina and Brazil’s interests towards the IMF, this project represents a dangerous trap for Brazil that President Lula would do well to avoid. Rather, President Lula’s might better spend his time with President Kirchner in understanding how Argentina got into its present mess with the IMF. He might also want to learn from President Kirchner how Brazil might avoid Argentina’s desperate fate should the favorable external conditions Brazil is presently enjoying fail to last.

Unlike Brazil, which presently has little difficulty in raising money in the global capital markets, Argentina’s standing in these markets could not be worse. Indeed, since December 2001, when Argentina defaulted on U.S. $88 billion in private sector debt, which represented the largest sovereign debt default in history, Argentina has been totally cut off from the international capital markets.

Argentina is likely to remain shut out from the international capital market for a very long time partly because Argentina’s present very difficult economic and political situation prevents Argentina from making an offer to reschedule that debt that might be acceptable to its creditors. In addition, the very fact that Argentina placed bonds in many different currencies and in many different jurisdictions, with as many as 150 separate issues, highly complicates Argentina’s task in finding common ground amongst its creditors.

For its part, Brazil can seemingly approach the international capital market at will. This is in part reflected by the fact that Brazilian C-bonds presently trade at around 550 basis points over U.S. Treasuries, or at their lowest spread since before the Russian debt crisis in mid-1998. It is also reflected by the ease with which Brazil raised around U.S. $1 ½ billion earlier this year when that placement was around three times oversubscribed.

Brazil’s relations with the IMF are similarly incomparably better than those of Argentina. In particular, President Lula’s macro-economic policies now receive lavish praise from the IMF, which makes the IMF only too willing to provide Brazil with its seal of good housekeeping.. In addition, there can be little doubt that the IMF would come to Brazil’s rescue with further substantial lending in case of balance of payment need. The value of an IMF safety net for Brazil can hardly be overstated given Brazil’s still considerable external vulnerability.

By contrast, Argentina’s relationship with the IMF could not be more antagonistic. This poor relationship is perhaps best epitomized by as many as eight IMF Executive Directors, including those of Italy, Japan, and the United Kingdom, all abstaining from the last IMF decision in January 2004 to release money to Argentina on the grounds that Argentina was failing to negotiate with its private creditors in good faith.  It is also exemplified by the fact that after having lent Argentina U.S. $14 billion to support Argentina’s Convertibility program through 2001, the IMF now only lends Argentina those amounts of money that are just sufficient to ensure that Argentina is able to repay the IMF on its past loans.

If President Kirchner were to be honest in his meeting with President Lula, he would acknowledge that Argentina got into its present untenable debt predicament through policy mistakes of its own making rather than through the acts of too tough an IMF. In particular, he would recognize that Argentina made the huge policy error of staying too long with the straightjacket of the Convertibility Plan, even when the January 1999 Brazilian devaluation should have made it clear that the Convertibility Plan had long outlived its usefulness. President Kirchner would also need to own up to the fact that Argentine policymakers were far too complacent in the mid-1990s when they failed to take advantage of Argentina’s favorable external environment to build up its public finances for the rainy days that lay ahead.

If, in any event, President Kirchner wanted to blame the IMF for Argentina’s present woes, it would have to be that the IMF was far too generous in its lending to Argentina rather than that it was too tough. Specifically, he would be right in criticizing the IMF for having been too eager to lend to Argentina exceptionally large amounts of money, especially in 2001, in support of a currency regime that was doomed to fail. By so doing, the IMF saddled Argentina with a very large amount of external debt that Argentina cannot be rescheduled and that future generations of Argentines will now struggle to repay.

An important lesson that President Lula might draw from his meeting with President Kirchner is that favorable external conditions generally do not last forever and that policy complacency in the good times has its costs. He might also want to reflect upon the fact that when the external going gets tough, he is going to need all the support that he can get from the IMF in helping Brazil to ride out the international storm.

To join forces now with a deadbeat Argentina in its self-inflicted struggle with the IMF and its international creditors would seem to offer Brazil little upside but potentially large downside risks. Indeed, making common cause with Argentina now is almost certain to send both the IMF and the international capital markets the clear message that maybe President Lula is not quite as committed to orthodox macro-economic policy as they had thought. One has to hope that President Lula has the sense not to rise to President Kirchner’s populist bait

Desmond Lachman is a resident fellow at AEI.