ECONOMY-ARGENTINA: IMF-Led Loan Package ‘A New Beginning’

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Dec 19 2000 (IPS) - Argentine President Fernando de la Rúa attempted to paint a 39.7-billion dollar loan package led by the International Monetary Fund (IMF) as a platform for a new stage of growth – “a new beginning” – rather than a bail-out.

De la Rúa, who took office a year ago, said Monday that the international community’s “significant support” for Argentina, as expressed by the credit package, would eliminate uncertainty and allow Argentina to move from a period of fiscal adjustments to a stage of steady growth of the economy and employment.

Economy Minister José Luis Machinea explained that the package consisted of 13.5 billion dollars from the IMF, 2.5 billion from the Inter-American Development Bank (IDB), 2.5 billion from the World Bank, and one billion dollars from the Spanish government. (Spain is the leading foreign investor in Argentina).

The rest will come from the private sector: 10 billion dollars from banks, three billion from investors operating in Argentina, and seven billion in bond switches and reinvestment.

The aid package will enable Argentina to meet the 21.5 billion dollars in internal and external payments on its public debt that fall due next year.

The government maintains that the bulky aid package will not lead to an increase in annual payments on a foreign debt that amounts to 200 billion dollars, if what is owed by the national and provincial governments, as well as private companies with debt in foreign currencies, is taken into account.

The so-called “financial shield” designed to keep the government from defaulting on its loans, will reduce the interest rates of future credits, which means annual servicing payments will not grow, according to the Economy Ministry.

That assumption is based on the fact that the cost of the credits comprising the loan package are in some cases half of the cost of Argentina’s latest bond issues. “The vigorousness of the support eliminates any uncertainty regarding the continuity of the course we have marked out,” said the minister.

The loan package will help Argentina meet payments that cannot be avoided, said Machinea. He underlined that it is the first of its kind, because unlike the bail-outs extended to Mexico in 1995 or Russia in 1998, it is “preventative” in nature and “banishes the spectre of crisis from the horizon.”

Previous IMF-led bail-outs benefited Mexico in 1995, Indonesia and South Korea in 1997, Russia and Brazil in 1998 and Turkey earlier this year.

The loan package began to be negotiated a little over a month ago when the interest rates on loans extended to the Argentine state rose by nearly four percentage points, a sign of declining private market confidence in Argentina’s ability to meet its debt payments.

Over the coming year, Argentina will face a fiscal deficit of 6.5 billion dollars, as well as 15 billion dollars in foreign debt that will fall due – eight billion dollars in the first quarter of the year alone.

Given that outlook, as well as the growing cost of credit and the tense local climate caused by a recession that has dragged on for two years, analysts had begun to warn of a default that would have a severe impact on the economies of Latin America, especially those of Argentina’s partners in the Southern Common Market (Mercosur) trade bloc – Brazil, Uruguay and Paraguay.

Simply the announcement of the credit package would help dispel doubts with respect to Argentina’s ability to pay off its debt, said private sector observers, who agreed, nonetheless, that the bail-out would not guarantee the hoped-for growth of the economy.

Argentine economist Guillermo Calvo, who predicted the late 1994 crash of the Mexican peso and subsequent tequila crisis that sent shockwaves throughout the region, was cautious regarding the future performance of the Argentine economy. “It is good news, but we must not build up false hopes,” he said. The loan package “merely staved off a collapse.”

Economist Martín Redrado, with Fundación Capital, a local think- tank, agreed that the bail-out warded off the risk of a default. He warned, however, that the ratio between the foreign debt and gross domestic product (GDP) was still deteriorating.

GDP is projected to grow 2.5 percent next year, and perhaps even more than that if the loan package is successful in restoring investor confidence in Argentina. However, some economists are less optimistic, or are not ready just yet to rule out the possibility that the strategy will fail.

That could happen if, despite the bail-out, high interest rates continued to stand in the way of access to financing, and if the recession drags on due to a lack of confidence among businesses, investors and consumers in a government that so far has been unable to reactivate the economy.

Ruling coalition and opposition legislators, as well as former vice-president Carlos Alvarez, who remains a political ally of De la Rúa despite his resignation in early October, saw the loan package as “a new opportunity” for the government to regain credibility after a year in office in which it seems to have squandered nearly all of its political capital.

The government’s performance has been given a low mark by more than 70 percent of those surveyed in opinion polls carried out over the past two months, largely due to the widespread opposition triggered this year by stringent fiscal adjustment measures that have included tax hikes, pension reforms, wage cuts and a controversial reform of the labour code.

None of the measures have been successful in revitalising the economy and lowering unemployment from its high 15 percent level. On the contrary, GDP, which shrank 3.1 percent last year, is expected to grow by as little as 0.2 percent this year.

De la Rúa recognised that the growth for which the government would now have to toil hard “cannot be attained by decree or by fiscal measures, but by stimulating investment” – which journalists present at Monday’s press conference in the presidential residence interpreted as acknowledgement of the errors committed over the past year.

The president said Argentina was leaving behind a tough year, in which a “fiscal mess” inherited from his predecessor Carlos Menem (1989-1999) and unfavourable international conditions, with rising interest rates and plunging commodity prices, combined to make things very difficult.

“This new stage does not imply a shift in course, but a deeper commitment to a route that will take us towards sustained growth,” said De la Rúa, who added that there would be “no surprises” for consumers, businesses or investors. “Neither tax hikes nor changes in the rules of the game.”

Economy Minister Machinea added that the announcement of the credit package did not mean the government was expecting “miracles”. But he did say he was confident that the loans would help banish the factors standing in the way of economic growth.

With respect to the international scenario, Machinea said he was confident that the prices of Argentina’s main export commodities would recover over the next year, that international interest rates would drop, and that the euro would continue to appreciate against the dollar.