ECONOMY-ARGENTINA: Gov’t Anticipates IMF Bail-Out to Stave Off Bankruptcy

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Nov 27 2000 (IPS) - The final stage of talks between the International Monetary Fund (IMF) and the heavily indebted government of Fernando de la Rúa got underway in Argentina Monday with the aim of making 15 billion dollars available to help the government meet its debt servicing payments.

Next year Argentina will have to shell out 20 billion dollars in debt servicing — equivalent to seven percent of Gross Domestic Product (GDP) — against the backdrop of a more than two-year-old recession, fiscal adjustments, over 15 percent unemployment and a major slump in investor confidence.

Three days after a 36-hour general strike against De la Rúa’s austerity measures and economic reforms, which was accompanied by widespread protests and arrests, an advance IMF team headed by economist Tomás Raichman arrived in Buenos Aires Monday to monitor compliance with the measures announced by the president to tackle the crisis.

Last week’s strike was the longest and most massive since De la Rúa took office nearly a year ago.

The governors of Argentina’s provinces agreed last week to freeze spending levels for five years, the first condition set for the release of the IMF stand-by funds, which will be completed with another 15 billion from other sources.

De la Rúa is now hoping that in the next few days, Congress will approve two key initiatives that are essential for securing the IMF bail-out: social security reforms and next year’s budget.

The controversial pension reforms, which are even resisted by sectors of the ruling centre-left Alliance, would eliminate a basic 200-dollar monthly pension guaranteed by the state, while raising the retirement age for women from 60 to 65.

If Congress fails to reach agreement on the bill, which analysts say is a real possibility, De la Rúa would have to sign a decree on the basis of “need and urgency”, and hope that parliament would fail to muster the special majority needed to override the decree.

But a decree based on “need and urgency” could trigger a new conflict within the governing coalition, which has been hanging together by a thread since Carlos Alvarez — the leader of the left-leaning Frepaso, which along with De la Rúa’s centrist Radical Civic Union forms the Alliance — resigned as vice- president on Oct 6.

The second bill, which looks more likely to win approval in Congress, is next year’s budget. Now that the government agreed, over the weekend, to increase next year’s projected fiscal imbalance from 4.8 to 6.5 billion dollars, the government stands a better chance of drumming up the necessary support in both houses of Congress.

The rise in spending will go towards improving social safety nets in the provinces, as well as maintaining subsidies for tobacco and fuel in several regions that were loudly demanding that these benefits, essential for the survival of the regional economies, be maintained.

On Monday, economists criticised the decision to increase public spending rather than cut taxes in the search for ensuring higher levels of social assistance and stronger economic growth in 2001, which according to projections will stand at 2.5 percent.

With those measures in the pipeline, the IMF delegation — which will be completed Wednesday with the arrival of economist Teresa Ter Minassian — is putting the final touches on an agreement allowing Argentina to draw around 15 billion dollars.

Deputy Economy Minister Mario Vicens said Monday that “both the government and the IMF believe it is more reasonable to disburse the resources than to keep them on stand-by as in the case of previous credits for Argentina.”

The stand-by loan will be completed with 15 billion dollars from the World Bank, the Inter-American Development Bank, the governments of Italy, France and Spain, and local banks and private pension fund administrators.

The stand-by loan is aimed at guaranteeing a safe world for investment banks, economist Jeffrey Sachs, director of Harvard’s Centre for International Development, remarked over the weekend.

Sachs was referring to the guarantee of repayment that investment banks which have acquired Argentine treasury bonds would enjoy. In the latest bidding, the bonds were placed at annual rates of up to 16 percent.

The IMF deal will ensures the returns of holders of Argentine treasury bonds at the cost of higher indebtedness for the government, said Sachs.

The last stand-by arrangement with Argentina, which was precautionary in nature, carried an interest rate of 6.8 percent, while the loan currently under discussion could be at an interest rate of nearly 10 percent. And instead of 36 months, the current loan would have to be paid back much sooner, the negotiators admit.

Analysts warn that while for the government, the IMF bail-out is vital for staving off bankruptcy, in the long-term it will increase this Southern Cone country’s foreign debt burden.