ARGENTINA: Last-Minute IMF Agreement Averts Default

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Mar 9 2004 (IPS) - Argentina and the International Monetary Fund reached an accord Tuesday on steps for negotiating the country’s debt with private creditors, which had become the crux of the difficult talks under way with the institution, even though the country had comfortably met the agreed fiscal goals.

On the verge of another default, this time on its debt to the multilateral institution, the Néstor Kirchner government decided to make a 3.1-billion-dollar payment to the IMF on capital and interest that came due Tuesday.

In exchange, the IMF promised to announce Wednesday the approval of a second progress review of the goals established in the agreement signed with Argentina in September 2003, which likely would lead to another loan.

A default on a loan from the multilateral agency would have put a halt to any further loans and Argentina would likely have found itself isolated from the global financial markets.

The understanding was reached during a telephone conversation shortly after midday Tuesday in Argentina between Kirchner and the IMF interim managing director, Anne Krueger.

The markets responded immediately, apparently relieved, with a slight improvement of the Argentine peso, from 2.96 to 2.94 pesos per dollar, and a five percent stock market jump as trading closed on the Buenos Aires Exchange.

In contrast, some members of the political opposition protested. "With the prescriptions of the IMF we are not going to be able to pull the country out of the hole," said Mario Cafiero, legislative deputy with the centre-left Party for a Republic of Equals.

Away from the microphones, government sources confirmed that crisis was averted, but stressed that it would not be official until Wednesday, when the IMF formally announces that Argentina has passed the goals set out in the September agreement.

Only then will the conditions for the debt negotiations with private debt holders – in default since December 2001 – be made public. Sources close to the talks told IPS that the IMF had backed off some of its demands on Argentina.

The country met the IMF’s macroeconomic requirements for the review. In January and February, Argentina’s fiscal surplus was 130 percent more than what the institution had demanded for the quarter.

Furthermore, Argentina has met the goal of sustained economic growth since 2002, as stipulated by the multilateral agency. After a four-year recession, Argentina’s gross domestic product (GDP) grew 8.4 percent in 2003, and is forecast to reach five percent this year.

Efforts by Kirchner and his economy minister, Roberto Lavagna, also made progress in recuperating the so-called "quasi currencies" – debt titles issued by the provincial governments – and in winning legislative approval of compensation for the banks hit by the financial crisis in 2001 and 2002.

However, in recent weeks the IMF conditioned its approval of these achievements on the flexibilisation of the Argentine proposal for paying off the debt to the private titleholders, worth more than 80 billion dollars.

Faced with this new demand, which was not included in the September agreement, the Kirchner government threatened not to pay the 3.1 billion dollars that came due Tuesday, maintaining its refusal until the last minute.

The IMF pushed Buenos Aires to establish a threshold of agreements with 80 percent of the creditors in order for the negotiations to be considered successful, and to accept the Global Committee of Argentine Bondholders – one of the groups most aggressive in seeking repayment from Argentina – as the main interlocutor.

Alejandro Vanoli, international economics professor at the University of Buenos Aires, told IPS that the "new requirements" set forth by the IMF were "reason for concern."

"The IMF is supposed to be on watch so that there aren’t asymmetries between the parties, but here it has definitely taken the side of the creditors," he said.

In Vanoli’s opinion, it was the IMF that headed towards non-compliance by extending the discussion to the debt owed to private creditors once the quantitative goals – like the fiscal surplus – had been achieved. He attributed this move to the political interests of the Group of 7 (G7).

This group (comprising Britain, Canada, France, Germany, Italy, Japan and United States), which on other occasions backed Argentina, this time gave in to pressure from the bondholders, in some cases as a consequence of upcoming elections in those countries, said the economist.

On Monday, the G7 representatives on the IMF board coincided in condemning the inflexibility of the Argentine government, for not making concessions and coming up with a better offer for the private creditors.

Italy’s Prime Minister Silvio Berlusconi said Tuesday that the Argentine proposal was "unacceptable". Drafted in October, it is based on a 75-percent cut in the nominal value of the titles, or a postponement of the maturities, with a reduced interest rate..

Argentina’s public foreign debt surpasses 145 billion dollars, of which more than 80 billion is owed to private bondholders, not counting the interest accumulated since the 2001 default – and not included in the calculations for Kirchner’s proposal.

The IMF began to put pressure on Argentina in the last few weeks to postpone until September the launch of negotiations with the bondholders, so that they coincide with work on a new accord with the institution, in which the two sides are to set – expand, says the IMF – the country’s fiscal surplus goal for 2005.

That promises to be another game of brinksmanship.