[stop-imf] Argentina Agrees to Pay IMF

[Robert Weissman]

washingtonpost.com

Argentina Agrees to Pay IMF
Pledge to Negotiate With Bondholders Keeps Loans Flowing to Buenos Aires

By Paul Blustein
Washington Post Staff Writer
Wednesday, March 10, 2004; Page E01

Stepping back from the biggest default in history to an international
lending agency, Argentina agreed yesterday to pay
money it owes to the International Monetary Fund, and the IMF promised
to keep lending to Argentina.

The accord came after the two sides compromised on how Argentina will
deal with its private creditors, a highly sensitive
political issue for President Nestor Kirchner. Argentina has already
defaulted on about $90 billion in obligations to those creditors, many
of whom are bondholders in the United States, Europe and Japan.

The pact was reached a few hours before the evening deadline for a $3.1
billion payment that Argentina owed the IMF. Had
Argentina gone into default to the fund, both sides would have faced
enormous potential costs -- for Buenos Aires, a deeper isolation from
the international community; and for the fund, steep losses on loans
that represent about 15 percent of its portfolio.

Averting that scenario allows Argentina and the IMF to maintain a
tenuous partnership that is aimed at gradually bringing
Argentina back from its collapse in early 2002, when it defaulted on its
bonds and was forced to devalue its currency. Under their current
agreement, the IMF lends Argentina only enough to ensure that Buenos
Aires can repay the fund what it owes -- an arrangement that keeps the
country from becoming even more of an international pariah than it
already is. Countries that fail to pay the IMF become ineligible for all
sorts of aid, including World Bank loans. That list consists mostly of
"failed states" such as Sudan and Somalia.

The arrangement has been increasingly strained in recent months because
the IMF is supposed to lend to countries in
default only when they are negotiating in good faith with their private
creditors, and Argentina's creditors protested that condition was not
being met. Kirchner's government has taken a very tough line with the
creditors, announcing last year that it will repay about 25 cents on the
dollar on the defaulted bonds and can afford no more in light of
persistently high unemployment and poverty since the 2002 crash. That
stance has made Kirchner hugely popular with the Argentine public, but
it has outraged bondholders who argue that the offer is closer in value
to just eight cents on the dollar once unpaid interest is included.

The details of yesterday's agreement were not announced, but sources
familiar with the accord said Argentina has agreed to "negotiations"
with its creditors after months of insisting that it would conduct only
"discussions." That is a subtle but important distinction that implies
some willingness by Buenos Aires to be flexible on the repayment terms
-- though how flexible is left unstated, sources said. The Argentines
also agreed to aim for acceptance of the terms by a reasonably sizable
percentage of its bondholders -- though precise figures were not spelled
out. In addition, the Argentines agreed to recognize the Global
Committee of Argentina Bondholders, a group claiming to represent a
large number of bondholders whose legitimacy has been questioned by
officials in Buenos Aires.

Officials in Washington and Buenos Aires were quick to suggest that the
other side had blinked after a tense confrontation over the past several
days during which Kirchner repeatedly vowed he would default to the IMF
rather than deprive his government of the resources it needs to meet
pressing social needs. Kirchner's wife, Sen. Cristina Fernandez de
Kirchner, told Argentine television that the government had rejected IMF
demands for "things that were outside of the original accord" signed
last year. "Argentina hasn't signed up for anything that we cannot
fulfill, which is what we always promised," she said, according to wire
service reports.

But in Washington, officials portrayed the agreement as containing
enough important concessions by Argentina to attract
the support of major governments that have derided previous accords as
too weak. Last autumn, eight members of the 24-member IMF executive
board took the unusual step of abstaining from approval of Argentina's
program. Included in that group were three members of the Group of Seven
major industrialized nations -- Italy and Japan, where many individuals
holding Argentine bonds reside, and Britain.

"Argentina has agreed to negotiate with established creditor groups in
order to get broad participation in its debt restructuring," said a
source who agreed to be identified only as a G-7 official. "This is
significant and it represents progress. . . . There is a great deal of
unanimity among the G-7 on this issue."

But one high-ranking IMF source, while welcoming the agreement as
preferable to a breakdown, noted that two years have passed since
Argentina defaulted on its bonds and it is now only agreeing to
negotiate. The source also pointed out that Argentina may continue to
take a hard line whether it is "negotiating" or "discussing."

"This isn't a victory to be celebrated with champagne -- only beer," the
IMF source said.

Whatever the current agreement says, more confrontations loom down the
road, because if Argentina is perceived by the G-7 as being unreasonable
with creditors, pressure will arise anew for a cutoff of IMF lending
when the next Argentine payment comes due in June. At the same time,
Kirchner also faces tremendous pressure to limit concessions to the
bondholders.

"If Argentina makes a payment now, it will have another period of three
months in which it will try to convince the world that it is earnestly
trying to resolve the issue of the debt," said Federico Thomsen, an
independent economist in Buenos Aires. "I would keep it separate from
what Argentina is actually offering, which is always going to be
something irritating to bondholders because there is not much to offer."

Special correspondent Brian Byrnes contributed to this report.

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