[stop-imf] Argentina threatening to default on payment to IMF

[Robert Weissman]

March 9, 2004
Argentina Threatening to Default on Payment to I.M.F.
By TONY SMITH

Resorting once again to political brinkmanship, Argentina has locked
horns
with the International Monetary Fund, threatening to default on a $3.1
billion
payment to the fund due today unless it gets assurances of continuing
I.M.F.
support for rolling over the debt.

The fund says that Argentina should be doing more to pay back private
investors left holding virtually worthless bonds after the country
defaulted
on $88 billion of foreign debt in January 2002, as its economy hit rock
bottom.

Since then, Argentina has forced the fund to back down twice in
negotiations
over financial aid by threatening defaults on its multilateral debt.

This time, however, brinkmanship might not work.

The Group of 7, the group of the world's seven richest nations, seems
increasingly impatient to see some progress in Argentina's negotiations
to
settle with tens of thousands of private investors across the globe
holding
Argentine sovereign bonds.

Moreover, the administration of President N=E9stor Kirchner was dismayed
last
week when the fund's director, Horst K=F6hler, considered a friend by some
in
the government, announced that he would resign to run for president of
Germany
and that he would be succeeded, at least temporarily, by his No. 2, Anne
Krueger.

Ms. Krueger has been demonized by many Argentine politicians for urging
the
fund to take a tougher stance in negotiations with the country.

But so far, the change in leadership at the I.M.F. appears to have had
little
effect on reining in Mr. Kirchner. Using fiery oratory, the president
insisted
last week that his government would dip into its hard-currency reserves
to pay
the $3.1 billion installment only if the fund were to approve a similar
amount
of lending to the country under a periodic review of a current $13.3
billion,
three-year loan program.

But the fund has sent signals it might not release the money without a
positive gesture from Argentina.

"There now seems to be a blackmail component that is not acceptable to
the
international community," said Federico Thomsen, a political analyst in
Buenos
Aires. "And I don't think it's merely a question of K=F6hler or Krueger,
but
that the G-7 seems to be in a different mood."

Late in the day, television reports in Buenos Aires said that Argentina
had
received a draft of a revised letter of intent, indicating that the two
sides
were moving closer, the Dow Jones new service said.

Mr. Kirchner's popularity has soared thanks to his lambasting of the
I.M.F.
and other creditors as the main causes of Argentina's economic collapse
and
its subsequent default in 2002.

Most Argentines applauded when the country twice - once under Mr.
Kirchner and
once under his caretaker predecessor Eduardo Duhalde - strong-armed the
I.M.F.
into approving financing by threatening default on loans made by the
fund or
associated multilateral agencies, like the World Bank.

Recent opinion polls show that only 3 percent of Argentines disapprove
of the
president's policies.

Consequently, nationalist fervor is higher than at any point since the
Falkands War in 1982, but instead of the British, the I.M.F. and the
foreign
creditors are seen as the foes.

"There is a similarity to the Malvinas issue," said Mr. Thomsen, using
the
Argentine name for the Falklands, an archipelago in the South Atlantic.
"The
local population is misinformed about the capacity of a gigantic
opponent and
its willingness to take action."

"But for now, it's 'us against the world,' and the government is very
popular
because of that," he said.

A default by Argentina today would not immediately put the country into
arrears with the fund. That is a process that under I.M.F. procedures
takes at
least a month.

The core of the problem is that Argentina has been reluctant to improve
its
offer, under which private investors would lose 75 percent of the face
value
of their bonds.

Mr. Kirchner insists his country, strained by four years of recession
that has
pushed about half the population into abject poverty, cannot afford to
pay
more.

Although the economy grew by more than 8 percent last year, Mr. Kirchner
is
refusing to increase the current 3 percent primary budget surplus, which
would, theoretically at least, give the government more cash to pay back
creditors.

Creditors, meanwhile, are also getting impatient, and some have won
injunctions in United States courts to seize Argentine state property
abroad,
though analysts say there is actually very little to be had.

The Global Committee of Argentine Bondholders, a grouping of investors,
says
it wants at least 65 percent of its money back and has hardened its line
in
recent months. It boycotted a creditors' register set up by the
government in
several cities around the globe, saying it was just a time-wasting
tactic by
Mr. Kirchner.

"The two sides seem to be talking past each other," said Michael
Chamberlin,
executive director at EMTA, the New York-based Trade Association for the
Emerging Markets. "And as long as they continue talking past each other,
the
chances for progress are slim."

While some investors are keen to pile pressure on the government to
improve
its payback offer, others are looking for alternatives. Argentine
corporate
debt, much of it already being renegotiated with banks as the economy
starts
to recover, is one option.

"Sovereign bonds? That's an asset to liquidate," said Eduardo Campiani,
director of Advent International, a $6 billion Boston-based private
equity
fund, in Argentina. "Corporate debt is a much better bet, restructuring
is
proving much quicker."

Advent has just acquired the market-leading courier OCA, for a symbolic
amount, by taking on the rescheduling of the company's $280 million debt
held
by nine banks, including Citigroup, FleetBoston and Banco Santander
Central
Hispano.

"I would say choose your sector well, but there is a market, and
corporate
bonds should go up as more and more companies restructure," he said.

In London, the hedge fund Emergent Asset Management has teamed up with
Merchant Bankers Asociados - a Buenos Aires investment bank once partly
owned
by Nicholas F. Brady, the former the United States Treasury secretary,
and
then a part of Salomon Smith Barney - to start the Patagonia Argentine
Recovery Fund.

Holders of defaulted bonds can swap them at market prices for a stake in
the
fund that invests mainly in restructured Argentine corporate debt. Susan
Payne, chief executive of Emergent Asset Management, predicted that the
three-year fund, capped at $400 million, would give investors a good
chance of
making back at least 80 percent of their bonds' value.

"We are saying to investors that restructured corporate debt is a better
risk
than sovereign debt,'' Ms. Payne said. "We believe there will be very
little
upside on sovereign bonds over the next three years: you can't get blood
from
a stone."