Argentina is the third most populous nation in South America. It historically has among the highest standards of living in that Continent. Over the last decade, Argentina has received substantial foreign financial assistance. Total external debt now stands at $128.5 billion. This includes $23 billion in loans from U.S. financial institutions, and $14.5 billion in direct foreign investment from U.S.-owned companies.
The International Monetary Fund has provided $22 billion in assistance during the last several years. And the World Bank has provided $8.6 billion of assistance in the last several years. So the external financial support has been significant in recent years.
Yet, today Argentina is in a precarious state. Its economy is at a virtual standstill. It has defaulted on its external debt. Its currency value has been cut virtually in half, and political turmoil and social unrest are pervasive.
Many have suggested that this crisis was precipitated by several factors. Among other things, chronic prolifigate government spending at both the state and local levels; a fiscal relationship between the central government and the states which encourages unsustainable fiscal policies by the latter, with consequences disastrous for the former; an inefficient tax collections system --- it is my understanding that roughly one-half of taxes owed are actually paid in Argentina –; a formerly overvalued currency; and unsustainable borrowing to cover deficits which created crushing interest payments with consequences that are now obvious.
If possible, some of the recent attempts to address the situation have given cause for even greater pessimism. Decisions undermining the sanctity of Argentine contracts, the rule of law, and the fairness of the bankruptcy provisions make new foreign direct investment or private sector loans highly problematic.
A recent surge in the money supply suggests attempts to monetize the debt, and a possible return to hyper-inflation. Past pledges of reform have been announced, but not implemented and therefore have been of little consequence, except to undermine the credibility of future pronouncements. For example, the Fiscal Responsibility Act of September 1999, and the Zero Deficit law of July 2001, are examples of such past pronouncements of promised restructuring of the relationship between the Central Government and the States addressing the fiscal situation of both that were announced and yet not implemented to any significant degree.
I want to emphasize that no one likes this situation. No one benefits from the misery and impoverishment of a great nation.
It has been suggested by some, that unless we find a way to usher in and implement - - and I want to underline "implement" - - true sustainable reform, that virulent anti-Americanism, protectionism, and threats to Argentina’s democracy, may be in store.
Obviously, we do not want that. It is not in America’s interest, Latin America’s interest, or anyone’s interest. But it raises the question, and in some ways the conundrum of "what can be done?"
I am personally inclined toward engagement. I have always favored something that Larry Sommers once said about the forward defense of America’s economic interests through proactive policies. And indeed, America and the multilateral institutions that we support, have played a constructive role in the past and stand ready to do so again.
But given the past record of Argentina’s failure to reform, substantial skepticism is warranted. Reforms must be sustainable, and implemented, not just announced. Otherwise, further assistance will merely perpetuate the disastrous policies which have lead us to this crisis and, in so doing, postpone the day of genuine recovery for the Argentine people and others with an interest in that great country.
I look forward to hearing from my colleagues, Senator Hagel, and from our witnesses, as we explore what the ramifications of this situation are and what can be done to improve the current state of affairs.
Having said that, Senator Hagel, I would like to welcome you. I said before you arrived, I have appreciated our close personal friendship and good working relationship on this Subcommittee, and I want to thank you again today for your interest in this subject and helping us put the hearing together and would welcome an opening statement.