REPORT #479 March 2002

Produced by the Belize Development Trust

(The Foreign National Debt Interest payments did Argentina in, not overspending.)

by Ray Auxillou

There is a brand new study out, on the economic collapse in Argentina. It concludes that interest payments on the Foreign National Debt caused the economic collapse of Argentina.

The study by the Center for Economic and Policy Research, a think tank in Washington, copied somewhat on our think tank on Belize; the Belize Development Issues, has researched and shown that in the last seven years of Argentina, the primary government spending-funding for salaries, government programs and operations was essentially FLAT, but interest payments on the government debt rose threefold.

Interest rate hikes in the USA started about 1994 and the continual shocks from devaluations, in Mexico in 1994, in Asia in 1997, in Russia in 1998 and Brazil in 1999, drove Argentina's debt service from $2.9 Billion in 1993 to $9.7 Billion in the year 2000.

The study was done by economist Mark Weisbrot, and economist Dean Baker. These two claim in the Miami Herald article today March 24th., 2002 that therefore Argentina was not responsible for what happened to their economy.

This study is one of many trying to explain why Latin America's highest per capita income, which was continuously applauded for its economic management by Washington and Wall Street, ended up a basket case. The article was written by Jane Bussey.

I think it is interesting that they identified the interest payment spiral as being the straw that broke the camels back. But to claim, world wide shocks, in Mexico, Brazil, Asia and Russia created the conditions for the economic collapse from the interest payment spiral is rather nave and ludicrous. If one upholds this typical politicians rhetoric, coming from lousy economists, then there is no ultimate personal responsibility in the world? Nor does the argument hold water with me, as Switzerlands debt and interest payments caused them no equivalent problems during the same period, for comparison. Indeed, for most of that same period, Belize also was back then, in good economic shape, at the time. The world situation and Belizean International Foreign Debt was manageable.

These think tank economists can claim it was world conditions and they can claim it was interest rates spiraling upward. An Argentinian government that borrowed and did not plan, or allow for such contingencies were plain stupid, in my opinion. When you borrow and you accept fluctuating interest rates, you need to plan for a reversal in interest rate direction.

Definitely it was the DEBT TRAP, that busted Argentina! On that I will agree! But the claim that government ovespending did not cause the problem is a bit nonsensical. If you don't overborrow, you cannot overspend. If you don't overborrow, you do not have an interest rate fluctuation problem. This was plain and simple in my view, poor fiscal management and poor economic political policies.

Is there a lesson for Belize here? Sure is! Manage our economy frugally and put legislative restrictions on how much, ANY future Belizean Government can borrow.

I personally prefer New York Stock Exchange proven successful company debt load ratios. In the case of Belize with an average revenue income of $360 million, that would be a steady 12% or outstanding Foreign Debt of $43,200,000 is the benchmark for average Belizean International Loan Debt and 20% should be the maximum legal legislated ability of any Belizean future government can borrow up to. In this year's case, a maximum of $72 million Belize currency, or $36 million USA foreign currency.

Since we currently owe between $1 billion and $2 billion Belizean currency, a mandatory FREEZE by legislation should go on all FOREIGN BORROWING, until the Belizean Foreign Debt gets back to 12 % of the 5 year average of government annual revenues. THAT is sensible successfully proven PRUDENT fiscal management!

I think the lesson from Argentina is; that legislation has to be in place to FREEZE international borrowing by ratios, or percentage formulas. No matter which political party is in power. You can't trust human nature to do the sensible thing.

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