Although the world economy had absorbed the initial blow of the debt crisis by 1984, the storm had by no means passed. That year, the IMF was still employing concerted lending as a way to prevent commercial banks from turning their backs on the indebted countries. A byproduct of that strategy was the continued slothfulness of IMF lending and the need for bridge loans. Although Treasury did not go on record as assisting Argentina in 1983, it did so the following year. The loan caused a political uproar in the United States. The 1984 Argentine bailout, comprising two separate ESF credits, was the first foreign rescue by Treasury to generate serious political controversy. The ESF’s credit to Argentina was tainted by the perception that US authorities were intervening not on behalf of the national interest but rather on behalf of big New York banks. The controversy culminated in congressional hearings on Treasury’s potential abuse of power and waste of taxpayers’ dollars.
In December 1983, following years of military rule, Raul Alfonsin was sworn in as Argentina’s first democratically elected president in nearly a decade. Despite regime change, Argentina was still on the hook for nearly $50 billion in external debts. The Alfonsin government was determined to deal with its inherited debt problem; however, it was equally determined to press for better terms than its predecessors in the ruling military junta. The government restarted negotiations with commercial banks and the IMF. It also decided to suspend interest payments until a better deal could be reached. As negotiations dragged on, the country’s interest arrears to commercial banks were accumulating. This became problematic for US banks when interest payments reached nearly 90 days in arrears because of a peculiarity in US financial regulatory standards. In all other industrial economies at that time, banks could report interest arrears as income for up to one year. However, in the United States, the window was much shorter. US banks were required to publish their balance sheets on a quarterly—rather than annual—basis. Once interest went unpaid for 90 days, financial institutions could no longer report unpaid interest as income in their profit reports. Moreover, all unpaid interest that had previously been reported from their income or bank reserves would have to be deducted from their balance sheets. This problem, unique to the US banking sector, was coming to a head at the end of March 1984, just prior to when first-quarter reports would be published. It was in this context that the Treasury authorized a $300 billion loan to the Alfonsin government on March 30, one day before bank balance sheets would go public.
The timing of the Treasury’s response raised suspicions in Congress. Both houses held hearings on the matter later that spring. Treasury and Fed policymakers were hauled to Capitol Hill for testimony and questioning. In his opening statement, Senator Mack Mattingly of Georgia asked the question on the minds of many other members: "Was it Argentina’s democracy or Citibank’s profits that were most at risk at the end of March?” Treasury officials vehemently denied the move was designed to protect bank profits. Treasury’s Assistant Secretary for International Affairs, David C. Mulford, summed up his department’s explanation for the loan in his Senate testimony as follows: "We were motivated by our desire to support the new democratic government of Argentina and to help ensure continued and effective functioning of the international monetary system, not to help U.S. banks avoid reporting earning losses for the first quarter of 1984.”
The strongest statement pointing to a real systemic threat came from Treasury Secretary Don Regan. Regan rejected the notion the rescue was intended to protect bank profits. Instead, he painted a rather dramatic picture of what would happen if Argentina failed to make its payments: "If you want to look over the cliff and see the chasm down below, that is the sort of thing that might happen.” However, during his Senate testimony, Anthony Solomon, now president of the FRBNY, sought to downplay the systemic threat posed by Argentina stating,
I do not think that failure to arrange the Argentine package, with resulting nonpayment of interest, would, by itself, have had a significant adverse impact on the safety and soundness of the U.S. banking system . . . . The soundness of the U.S. banking system was not endangered.
Similarly, a technical briefing paper by Congress from the Director for Congressional Liaison, commissioned for the hearings, noted that the overall "direct effect on U.S. banks’ earnings would have been nominal.” FOMC meeting transcripts reveal a similar understanding. At one point Solomon notes, "I looked at the hit that the New York banks would take if the loans become nonperforming on March 31. It doesn’t add up to a lot. [Bank name redacted] is the most vulnerable but the numbers still are not terribly large yet, although it has a definite impact.” So it seems unlikely that policymakers felt Argentina’s failure to get itself out of arrears would have brought down the US banking system on its own. However, while policymakers downplayed the direct threat posed by Argentina, they raised the specter of contagion. Without the bridge loan, more dominos would surely fall. Allowing Argentina to effectively default on its loans could undo 18 months of careful debt management deals. Once again, US financial stability could be called into question.
For instance, Mulford noted that without ESF involvement, the bank syndicate (a consortium of banks that were involved in the debt negotiations) might have collapsed altogether. He explained that the banks were already resigned to an earnings hit; however, "the effect [of no ESF credit] would have been that some of the banks would have entirely withdrawn from the business with Argentina and therefore there would have been less credit available.” He added that small banks were the most likely to pull out, leaving the big banks "stuck” with increased exposures. The ultimate goal, according to Mulford, had been to "keep the syndicate functioning, keep all the banks participating and increasing ... their exposure.” Echoing this statement, a paper commissioned by the Congressional Liaison noted that although the direct effects may have been negligible, the "indirect effect of Argentina not paying interest ... might have been systemically significant,” adding that it could have resulted in "sharp contractions in credit and capital flows within the U.S. and internationally. There is no precise way of estimating these psychological market reactions.”
The combination of the substantial risks lurking in the system and the uncertainty about how markets would react to major US banks subtracting millions of dollars from their current and past earnings reports appears to be what ultimately led the Treasury to act. In that same FOMC meeting prior to the ESF credit’s approval, Chairman Volcker also cited fears about uncertainty. He worried that the "psychological reaction it will have on the banks’ attitudes or on the market, and indeed on Argentina, remains to be seen.” Similarly, Argentina’s Latin American neighbors were equally concerned about how banks would respond to the situation. In fact, it was a group of Latin American economies that first approached
Treasury about providing a loan. Mexican officials approached counterparts in Argentina, Brazil, Colombia, and Venezuela about the possibility of the group collectively lending money to Buenos Aires in a good-faith effort to convince the United States to make its own contribution. The motivation for this was fear among Argentina’s neighbors—fear that Buenos Aires’ failure to make its interest payments might, again, turn the banks against them or result in credit downgrades for all heavily indebted Latin American economies. In the end, the group contributed an additional $300 million alongside the same commitment by the United States.
The congressional hearings allowed legislators to air their grievances with Treasury, but ultimately no actions were taken to constrain Treasury’s ability to use the ESF. In fact, later that same year, the United States provided a second, larger ($500 million) credit to the Alfonsin government and another the following year. The 1984 bailout of Argentina is a useful case for this study. On one hand, it fits a "typical” case based on my argument: US bank exposure was substantial and systemic risk was elevated. Yet charges made by some in Congress that the loan was designed to protect bank balance sheets rather than protect the broader US financial system reveal how entangled the "private” and "public” financial interest pathways are. Indeed, on the surface, they are observationally equivalent. Based on the case-study evidence, the direct threat posed by Argentina was not sufficient to bring down the US financial system. However, the potential for contagion raised the specter of systemic risk from foreign financial shocks once again. Although the IMF was in negotiations with Argentina when US financing was released, the executive board did not approve Argentina’s loan request until late December 1984. Once again, the United States stepped in as an ILLR to bridge this gap and prevent the situation from spiraling out of control. In 1982, Treasury acted to minimize the consequences of an unfolding crisis. In 1984, its actions appear consistent with one recent study’s contention that it is most desirable for an ILLR to provide "timely, immediate disbursements to prevent crises rather than cure their consequences.”
-  US Senate 1984, p. 18.
-  Ibid., p. 2.
-  Ibid., p. 11. This statement marks the only time the country’s new democratic credentials were cited as a factor in Treasury’s decision. Although regime change in Argentina mayhave played a part in Treasury’s decision, neither Treasury nor the Fed had a problem assisting Brazil and Mexico fewer than two years prior. In 1982, neither country had impressivedemocratic credentials.
-  Kilborn 1984a.
-  US Senate 1984, p. 22.
-  US House 1984, p. 14.
-  FOMC 1984, p. 27.
-  US Senate 1984, p. 112.
-  Ibid., p. 113.
-  US House 1984, p. 14. Emphasis added.
-  FOMC 1984, p. 25.
-  Kilborn 1984b.
-  Fernandez-Arias and Levy-Yeyati 2010, p. 15. Emphasis added.