What do these shifts imply both for the countries involved, and for emerging market securities generally?

Good cop, bad cop

There's precedent on all different sides. On the one hand, Chile weaned itself free from most of its IMF obligation during the rein of Augusto Pinochet, and enjoyed a bull market for much of the period. The Philippines, meanwhile, relied on IMF loans heavily under Ferdinand Marcos and to this day has never fully participated in the Asian miracle. Both cases suggest the virtues of independence from IMF strictures.

Then again, when the Fund helped Argentina establish currency stability in the early 1990s, the Merval index more than tripled in less than two years. Throughout the 1980s, a series of IMF-sponsored tax reforms, combined with democratization, contributed to a solid Latin prosperity.

And the fact of an IMF debt payoff is more a reflection, as in the case of South Korea in the 1990s, of past economic strength than (necessarily) a promise of future growth.

The IMF's seemingly good-cop, bad-cop tendencies were well illustrated by events after the 9/11 terror attacks on the United States.

Both Argentina and Turkey went deeper into debt with emergency loans and crash programs to restore growth. Argentina collapsed, defied the Fund, and devalued its currency, but has since recovered nicely, despite its 12-figure taking in the form of a massive debt default. Turkey stuck with its IMF program, stayed afloat in 2002, and has enjoyed a solid and sustained recovery ever since.

Bottom Line

As this review suggests, the fact of an IMF payoff is less important than the facts that make it possible, and the course of policy in its aftermath.

Argentina remains a solid short, Nestor Kirchner viewing his successful defiance of the country's creditors and the Fund, now buttressed by his party's surge in last fall's legislative elections, as a sign he should plow ahead. The creeping regulation, and perhaps someday nationalization, of energy and telecom utilities, is flashing a bright red warning sign.

"Argentina won't go as far as Venezuela," a close observer comments. Granted, it probably won't. But it doesn't have to undermine the climate for stocks.

Brazil is a muddled case, highly dependent on political events in this, an election year for incumbent Lula Inacio da Silva. Brazil has bought back debt in a much less confrontational way than Argentina, and, of course, done so without a massive default.

Still, Brazil risk is Latin American risk, and Latin America is a continent that will face into the winds this year. Metals prices, still key for such economies as Peru, Bolivia, and Chile, have probably peaked. The surge away from growth policies is less pronounced in, say, Chile and Brazil, than in Bolivia and Venezuela, but it's there.

Russia is likely to be a good short later this year, but only after energy prices reach their peak. Hold on to Russian exposure now, though, if only because of its bullish beta to oil.

The next IMF crisis

One important impact will be on the IMF itself. With declining income and a weakening portfolio of remaining loans, the Fund may be unable to meet the next crisis for emerging markets. Perhaps there won't be one. Perhaps such volatile countries as China, India, Indonesia, Pakistan, and Iran will all sail smoothly into a post-IMF Age of Aquarius.

Don't count on it, though. In the late 1980s and into the 1990s, economic pundits widely proclaimed that the IMF "didn't matter" any more due to the rising portion of (presumably superior) private credits, not to mention global trade liberalization.

Then came Mexico's stealth devaluation in 1994. And in 1997-98, many of those private sector loans turned out to be month thrown into a black whole of Enron-like over-leveraging, opacity, and corruption in Thailand, South Korea, and Indonesia. The IMF, it turned out, mattered with a vengeance.

All the more reason, as if more were needed, to avoid emerging market exposure generally in a year of global turmoil, a peak in the global business cycle, and the early months of an untested new chairman at the U.S. Federal Reserve.

Gregory Fossedal, [email protected], is an advisor to international investors on global markets and ideopolitical risk. Fossedal's opinions are entirely his own, and are not necessarily those of his clients, AdTI or UPI.

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