Argentine president perceives dim light at end of long tunnel of IMF negotiations

Nearly one year after it requested financial assistance from the International Monetary Fund, the Argentine government says it now perceives a dim light at the end of the tunnel.

President Eduardo Duhalde Jan 3 said he believed an agreement could be signed as early as Jan. 8. But he added, "I say ‘I believe’ because so many times in the past I was expecting a final agreement and then it got postponed, that I’d rather wait now."
According to the government, the Group of Seven richest nations has told a reluctant IMF to loosen up the purse strings and help the beleaguered South American country out of the worst economic crisis in its history. According to the IMF, all it will likely provide is a short-term program that would kick Argentina’s payments forward without disbursing any fresh funds.

U.S. Backing Cited

"We must thank the United States for its gesture of notifying us of the G-7 decision," Foreign Minister Carlos Ruckauf said Dec. 30, after reporting that a Bush administration official called him on the phone on Christmas day and told him the group had decided the fund should help Argentina "within the shortest possible period of time."
The fund recently issued a statement saying it was ready to consider an interim agreement "which would involve no positive net new financing" as a prelude to a full-fledged program once a new administration takes the reins of government May 25, following elections in April.

The fund’s board will consider such an arrangement in early January. "Usually, when the board of directors meets to discuss an agreement with a country, the agreement gets approved," economist Jose Luis Espert told BNA. A short-term deal that includes no disbursements is no big deal, "but it’s better than nothing," he added.
For the government, time is of the essence: having defaulted a year ago on most of its $141 billion public debt and, more recently, on an $805 million payment to the World Bank, it now faces two key debt payments–a $680 million installment to the Inter-American Development Bank on Jan. 15 and a $1.0 billion installment to the IMF on Jan. 17.

Without a deal with the fund to kick those payments forward, it would also default with those two other agencies and become a total pariah, joining the ranks of other financial outcasts of the world such as Iraq or Zimbabwe.

Reserves Shielded

However crucial, those payments are just a tiny fraction of the $17 billion in payments to the lending agencies maturing this year. With only $10.3 billion in hard currency stashed at the Central Bank, the Duhalde administration recently decided it made no sense to use up more scant reserves to meet those payments. And this year’s budget has set aside a paltry $4.3 billion for debt repayment.
To complicate matters even further, most of those $17 billion -including the two big installments coming due in January–have already been rolled over before and cannot be put off again unless a new credit line is agreed upon with the fund. Of the $10.7 billion Argentina owes the IMF this year, a full $6.0 billion are non-reschedulable.

Many economists in Buenos Aires believe that the fund is now finally willing to accommodate, not because Argentina has met all qualifying criteria but because of other considerations, including the fact that letting the South American nation fall back on further payments could also hurt the lending agencies.
"Argentina is not in a position to meet all the technical conditions set out by the fund," Espert said. "It cannot meet a 2.5 percent fiscal surplus, or ensure the monetary program or the increase in utility rates the fund expects."

Regional Concerns Trump IMF Conditions

IDB President Enrique Iglesias makes no bones about the risks of having Argentina miss its Jan. 15 deadline. "There will be an impact," he said recently. If Argentina does not come up with the money, the bank would have to consider raising fees on $46 billion in lending to nations throughout Latin America and the Caribbean.
Higher borrowing costs would hurt regional countries, where private investment has already dropped by 64 percent last year to $25 billion, according to the World Bank.

Economist Jose Herrera of the Centro Ciudadano think-tank says geo-political concerns also played a role in the minds of the G-7 leaders who allegedly pressed for a quick deal. With the recent election of the leftist Luiz Inacio "Lula" da Silva in Brazil and the presence also of leftist Hugo Chavez in oil-producing Venezuela, the last thing they’d like to see is a left-wing government also emerging in Argentina, he reasons.

"The G-7 may be trying to flexibilize its relations with Buenos Aires to try to avoid the formation of a Venezuela-Brazil-Argentina axis," Herrera told BNA referring to the three largest economies in South America.
Then, there’s the issue of President Bush’s planned Free Trade Area of the Americas. "An FTAA with countries in eternal default in inconceivable," he said.
The "political considerations" theory was recently cemented by the IMF itself, whose chief spokesman told journalists asking what particular problems remained in the way of a deal to "steer away from focusing on individual … deal-breaker issues."
In the past, the fund was much more blunt about what precise subjects or targets it wanted Argentina to comply with.

Bondholder Talks Need Launching

Meanwhile, the government is in the process of selecting a financial adviser to negotiate with bondholders. Different market estimates have put the country’s current debt to bondholders at anywhere between $50 billion and $65 billion, and the government has already served notice that it would expect a substantial write-off.

Yet, it was not clear whether creditors would rush into talks or wait until a new, four-year administration is in place before launching serious negotiations that may prove protracted. Neither was it obvious whether the fund would adopt a close-monitoring attitude or simply focus on economic indicators and economic policy issues and let talks with bondholders run their course.
A 4-1/2-year-old recession has thrown more than half the population into poverty and caused unemployment to soar. When the economy imploded in December 2001 the government halted bond payments and clamped on a banking freeze to head off a wild run on deposits which was later only partially lifted.
In February, it let the peso float free for the first time in 11-years, causing the local currency to lose 70 percent of its value in just a few days. Yet, the peso later firmed up and the economy stabilized somewhat. The peso Jan. 3 hit a 7-month high of 3.35 to the greenback

Picture of José Luis Espert

José Luis Espert

Doctor en Economía

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