By Paul Blustein
Washington Post Staff Writer

They shut their eyes, gritted their teeth and hoped for the best. That, in essence, is what the Bush administration and the International Monetary Fund did when
Argentina defaulted on its debts and devalued its currency a couple of weeks ago. The reasoning: Giving the Argentine government yet another international bailout
would only postpone its inevitable financial collapse.

Now Washington is confronted with a mess in Argentina, and it is far from clear that the policy wizards in the IMF and the U.S. government have a strategy that will
help keep the country's woes from deepening and spreading.

Mass demonstrations -- which drove two presidents from office over the past month -- continued this week in Argentina, with hundreds of marchers taking to the
streets daily in Buenos Aires and rock throwers attacking banks in major cities to protest a freeze on deposits. Confidence in the peso is evaporating, with the
currency sliding yesterday to 2.15 per dollar, less than half the value at which it was pegged for the past decade.

The government of President Eduardo Duhalde has made several moves that appall Washington's orthodox economic policymakers, notably its attempt to fix the
exchange rate at 1.4 pesos per dollar for certain transactions while letting the market set the rate for others (a recipe for corrupt finagling, in the IMF's view). Duhalde
has also blamed the U.S.-backed free-market approach for his nation's troubles and proclaimed it a "broken model," raising the specter that Latin America's
third-largest economy may turn away from globalization and spark a movement toward protectionism in a region where President Bush had hoped to forge a
hemisphere-wide free-trade zone.

The unease that all this is arousing in high Washington councils came through in a speech Bush delivered Wednesday, in which he exhorted Argentina and other Latin
American nations to "strengthen our commitment to market-based reform, not weaken it" and inveighed against "those who promise painless protectionism."

Bush dangled a carrot by promising to support new international loans for Argentina that could "speed the return of growth and prosperity." The price for doing so,
he admonished, would be a commitment by Buenos Aires to adopt a "sound and sustainable economic plan" aimed at restoring confidence in the nation's finances.
But therein lies a huge problem: Such a plan will by necessity impose fresh jolts of short-term pain, and long-suffering Argentines, who feel betrayed by the recent
plunge in their country's fortunes, have shown themselves ready to rise in revolt.

The IMF is insisting on several reforms, including that Argentina's profligate provincial governments cut spending, and that the government ensure the viability of the
banking system, which would mean making bank depositors absorb some of the losses arising from the peso's devaluation.

"If we had a vision of an easy road out of this, we'd be putting all our resources into pursuing it," said one senior IMF economist who spoke on condition of
anonymity. "But the situation is incredibly difficult. The country is smaller, in population terms, than Indonesia [which underwent a meltdown in 1998 and has never
fully recovered], but you could see this as a bigger problem. And we didn't have any magic solutions in Indonesia."

When speaking for the record, officials in Washington are less pessimistic. John Taylor, undersecretary of the Treasury for international affairs, said he has "every
belief that [Argentine officials] will be able to come up with some plan" that merits international aid and holds promise for turning Argentina's economy around.

Thomas Dawson, the IMF's chief spokesman, told reporters yesterday that "the quality and intensity of discussions have increased" between IMF economists and
Argentine officials, and he cited as particularly welcome the announcement yesterday that Mario Blejer, a former IMF economist, was named as the new governor of
the Argentine central bank. Blejer, who had been the central bank's vice president, replaced Roque Maccarone, who resigned.

In some respects, Argentina's crisis has been less damaging than some had feared when the IMF stood by and let the country declare in late December that it could
no longer afford to pay interest and principal on its $141 billion debt. Financial markets in neighboring countries have been little affected, at least so far, by the sort of
"contagion" that roiled markets worldwide after Russia defaulted on its debt and devalued its currency in August 1998.

That has been a source of comfort to the Treasury, where Taylor and his boss, Treasury Secretary Paul H. O'Neill, have made clear their determination to use the
United States' influence over the IMF to avoid large bailouts. They have not gone nearly so far as to adopt a no-bailout policy; the administration backed one for
Argentina in August, and two for Turkey over the past year.

But in the latest Argentine crisis, they bet -- apparently correctly -- that the markets would not be shocked to see that after more than three years of recession,
Buenos Aires no longer had a realistic prospect of servicing its debt or maintaining a high value for the peso, which hurt exports.

Now that a lesson has been taught that Washington won't always be ready with a bailout to save bondholders, however, it is clear that the lesson will be costly, at
least for Argentina. The sharp drop in the peso threatens bankruptcy for millions of Argentines who borrowed dollars to finance their mortgages and small business
loans, since the pesos they earn are no longer adequate to repay those debts.

The Duhalde government has declared that banks will be required to convert many of those loans to pesos, making them easier to repay, and at the same time it has
pledged that people who deposited dollars will get those deposits back in dollars. But those moves, while appeasing ordinary Argentines, would likely inflict such
massive losses on the banking system as to undermine its ability to function.

This is one of the reasons why the IMF and the administration are standing back from rushing to Argentina's assistance -- and why it looks so daunting to concoct a
workable plan that won't ignite more violence in Argentine streets.

"No one expects to be able to fix 10 years' worth of bad policy in 10 days," said Michele Davis, the chief Treasury spokeswoman. "These are just enormous steps
that have to be taken."

                                               © 2002