ECONOMY-ARGENTINA: Uncertainty Surrounds Ability to Pay Debt

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Sep 24 2002 (IPS) - The Argentine government has its doubts about “how and when” it will comply with impending deadlines for making debt payments to multilateral credit organisations like the World Bank and Inter-American Development Bank (IDB).

Economy Minister Roberto Lavagna admitted Tuesday that an immediate agreement with the International Monetary Fund (IMF) is essential.

Lavagna spoke in reaction to the IMF’s harsh criticism Monday of the Argentine government in which it blamed the Eduardo Duhalde administration for the failure to reach a bilateral agreement with the institution.

“Since late July there have been no technical obstacles for closing an agreement with the IMF,” said Lavagna. In his opinion, the IMF has made a “completely erroneous diagnosis” of the Argentine situation, and of the alleged lack of political consensus, which he says “is just an excuse”.

With the eruption of a severe economic, social and political crisis last December, Argentina defaulted on its external debt to private creditors. But since then it has continued to meet the series of deadlines for payments to multilateral credit bodies, for a total of 3.5 billion dollars.

The suspension of payments to multilateral sources of loans would turn Argentina into an international pariah, agree local and foreign observers.

But it would also be a blow to the World Bank and the IDB, whose portfolios are broadly exposed to the Argentine situation.

President Duhalde said this week that his government is not willing to tap into Central Bank reserves to make the debt payments because those funds are necessary to stabilise the Argentine peso in the case of heavy demand for dollars.

The Central Bank’s coffers have dwindled from 15.5 billion to 9.0 billion dollars since December.

The key date will be Oct 9, when Argentina is slated to pay 250 million dollars to the World Bank. Total commitments for October and November to multilateral credit organisations total nearly 1.8 billion dollars in debt payments.

Lavagna told an international press conference Tuesday that Argentina has “unrenounceable priorities”, such as funding the subsidy plan for unemployed heads of household that benefits 1.9 million people, and the provincial governments, to which the federal government owes a portion of its tax revenues.

“The only way to meet the external obligations without giving up our domestic objectives — which are extremely important — is through an agreement with the IMF. It would not be to receive fresh funds, but rather to re-programme the payment schedule for this year and next,” said the minister.

Otherwise Argentina will use the 30-day “administrative extension”, beginning Oct 9, as authorised by the multilateral lenders to their debtor nations, and afterwards, “we’ll see”.

Lavagna ventured that “there could be other mechanisms, extendible mechanisms. The debt maturity debts are not.”

The economy minister will detail the situation in bilateral meetings to take place on the weekend in Washington with governmental delegates and multilateral credit executives.

Monday, he is to meet with IMF managing director Horst Köhler, but not to negotiate. On the agenda are talks “to outline the path for the coming weeks,” said Lavagna.

The official emphasised that between March and May the IMF had made catastrophic predictions about Argentina’s economy, assuring that its future would be one of hyperinflation, financial collapse and ever-deeper crisis.

But none of that occurred, and now the IMF “is having a hard time digesting those errors,” he said.

Lavagna mentioned that Duhalde sent a letter to Köhler in which the president points out that inflation — which reached 10.4 percent in April — is now just two percent per month, that industrial output grew 6.7 percent in the last two months, that the Central Bank is rebuilding its reserves and that the peso remains stable.

He also said that the number of hours worked is increasing — “but not employment,” he clarified –, that 1.9 million people benefit from social subsidies and, for the first time since 1999, there has been growth in gross domestic product (GDP).

The GDP rose in the second quarter of this year by nearly one percent over the three previous months.

“The changes have been substantial, however, there is a gap between reality and the IMF’s perception of it,” commented Lavagna.

He believes there were fatal errors in economic diagnosis and policies throughout 2001, the year of Argentina’s economic and financial breakdown.

“When it became evident that the convertibility regime (which pegged the peso at par to the dollar) was exhausted and was on the verge of collapse, the financial institutions agreed to net assistance of 9.0 billion dollars.”

“Just as the money flowed in, it flowed out to finance the rampant capital flight or the early cancellation of loans,” the minister said.

The currency “convertibility” system, established in 1991, increased Argentina’s production costs, thus favouring imports. Duhalde lifted the regime in January, declaring it unsustainable. Rapid depreciation of the peso followed.

“Primary responsibility belongs to Argentina for the imbalance of the convertibility regime that began in 1994,” said the minister.

But since then, the IMF “acted with a certain amount of blindness in maintaining a model that led to phenomenal indebtedness, rising unemployment, the crisis and the final collapse,” he added.

Lavagna said negotiations with private creditors for reprogramming Argentina’s suspended debt payments should begin once an agreement is reached with the multilateral lending organisations.

He also stressed that under no circumstances would Argentina isolate itself from the international community, but “nor will it sign anything that threatens its social policies.”

The subsidy for unemployed heads of household was launched May 1. According to official figures, it has reduced indigence from 24.8 percent to 16 percent of the population in just four months. Each beneficiary receives 150 pesos (currently around 34 dollars) each month.