By Marcela Valente
BUENOS AIRES, Nov 20 2001 (IPS)

Argentina, the most difficult case the International Monetary Fund (IMF) is currently facing, began restructuring its debt Monday, with no certainty of meeting its fiscal targets this year.

The IMF’s director for Western Hemisphere Affairs, Claudio Loser, made it clear over the weekend that Argentina was the IMF’s biggest headache. “We already gave them a large amount of aid…if that is not major support, I frankly don’t know what is,” said the official.

In a paid ad published in local newspapers Sunday, associations of local banks and other businesses called on the government to “urgently” agree to a pact that could pull the country out of its “extremely grave” situation – as if they were preparing people for an inevitable collapse.

Their suggestions did not differ much from the austerity measures the government has been applying to no avail: keeping the peso pegged to the dollar, cutting spending, making the administration of social funding more efficient, adopting measures aimed at re-starting the economy, and reaching a consensus on renegotiating the public debt.

Argentina’s 42-month crisis has been reflected by a downturn in production, unemployment standing above 15 percent, social unrest and demands by the unemployed and the poor, a lack of credit and investor confidence, rising interest rates and withdrawals of bank deposits.

The “jobless movement” threw up roadblocks across important highways across the country Monday, threatening to man them until the government ensured that it would maintain its public works programmes, which provide a tiny monthly stipend, next year.

The central trade unions, meanwhile, announced street demonstrations in the capital Tuesday.

The lack of confidence in the austerity measures adopted by the government of Fernando de la Rúa in the past six months was still obvious Monday, the first day of a voluntary debt swap arrangement with local creditors aimed at exchanging up to 60 billion dollars in local debt and reducing next year’s debt servicing payments by at least four billion dollars.

Argentina’s public debt amounts to more than 132 billion dollars, nearly half of the country’s Gross Domestic Product (GDP). However, the greatest uncertainty is not caused by the debt- to-GDP ratio, which is higher in other economies that have not had any problems.

The vulnerability of the Argentine economy, Latin America’s third-largest, is due to the fact that 90 percent of its debt titles are in dollars, and to the country’s 42-month recession – a situation that has led to a drop in tax collection and inflow of foreign exchange, while driving up interest rates as well as the cost of credit.

Thus, the government is unable to meet its debt payments.

The country risk rating, which measures the premium over US treasury bonds that Argentina must pay investors, rose to record levels at over 2,900 basis points Monday. In other words, if the government were to take out a new loan, it would have to pay nearly 30 percentage points above the US treasury bonds.

That means Argentina is seen as the riskiest investment on the J.P. Morgan’s Emerging Markets Benchmark Plus index, which places it on the verge of a collapse in payments. Some analysts and investors argue that a de facto default has already occurred, presented in the form of a voluntary debt swap.

The country’s economic woes have only gotten worse in the past few months. The president named Domingo Cavallo – the architect of Argentina’s currency board system – economy minister in March and put in his hands an initial debt exchange that postponed maturities, but at a high cost.

However, that debt swap failed to restore confidence in Argentina. Shortly afterwards, the government announced a “zero deficit” policy consisting of refraining from contracting new debt and of spending only what is collected in taxes each month, which led to cuts in public sector wages, pensions, and budgets.

The zero-deficit policy also failed to bring the hoped-for results. In the past month, De la Rúa and Cavallo faced the dilemma of whether to further cut public sector wages and spending and postpone debt servicing payments, or to resort to a voluntary restructuring of public debt titles. The latter option won out in the end.

But even before the start of the debt swap – in which lenders were asked to exchange bonds paying interest rates of 12 percent or more for new securities yielding seven percent or less – the financial markets lacked confidence in Argentina’s chances of pulling out of crisis and staving off a debt default.

The political support De la Rúa received in New York from US President George W. Bush a little over a week ago had a limited effect, similar to that generated Monday by Cavallo’s meeting with IMF Managing Director Horst Koehler in the Canadian city of Ottawa.

Investors and bond-holders have concluded that the backing is mainly moral or political, and that it is being translated less and less into speeding up disbursements under an existing IMF aid package. For many, that confirms that the United States and the IMF see a suspension of payments as inevitable.

The US Treasury Department said last week that it would merely transmit to the IMF its recognition of the efforts made by the De la Rúa administration to maintain its zero deficit policy and to restructure its foreign debt in apparent agreement with local creditors.

The president avoided asking for direct financial assistance from Bush last week, because several US officials had already declared that there would be no new disbursements of financial aid as guarantees to back the debt swap.

Cavallo met with Koehler and the IMF’s First Deputy Managing Director Anne Krueger at the annual assembly of the IMF and World Bank in Canada over the weekend. Although the minister described the meeting as “excellent,” he admitted that he had received no concrete response to the urgency of Argentina’s needs.

The economy minister reportedly asked for an acceleration of a disbursement of more than 1.2 billion dollars to cover part of November debt maturities of 1.6 billion.

Krueger said that prior to the disbursement, an IMF mission would have to visit Argentina and assess the progress it was making towards meeting its fiscal targets.

The last quarter offered poor results in terms of fiscal balance, despite the efforts by the government and society at large. A steady fall in tax revenues drove the fiscal deficit up to 7.3 billion dollars by October, compared to a year-end target of 6.5 billion.

The financial market and other sectors will indicate whether the debt swap that began Monday will indeed resolve Argentina’s economic troubles.

Some analysts believe that just as the government hopes, the debt exchange will be successful and will lead to a reduction in interest rates. However, others say the restructuring might have arrived too late, or will fall short of bringing about the desperately hoped-for reactivation of the economy.

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