[stop-imf] Argentina and the IMF: Down to the Wire--Again (April 14)

[robert.weissman@essentialinformation.org]

http://www.americaspolicy.org/reports/2004/0404argentinedebt.html


IRC Americas Program Special Report
Argentina and the IMF: Down to the Wire--Again

by Alan B. Cibils | April 14, 2004

On March 9, 2004, Argentina was teetering on the brink of default on a
$3.1 billion payment to the International Monetary Fund (IMF). This
high-wire act sent tremors through world financial markets, until an
eleventh-hour call from acting Managing Director Anne Krueger to Argentine
President Nestor Kirchner resulted in an agreement to make the payment.
Thus, Argentina1s relationship with the IMF was, at least for now,
preserved.

The standoff came about because the IMF balked at approving the quarterly
review of Argentina1s current agreement, which happened to coincide with
the scheduled payment.

Since Argentina had more than complied with the targets specified in the
agreement, why would the IMF withhold approval? Why was Argentina nearly
forced to default, despite President Kirchner1s stated intentions to pay?
And what does this standoff mean for the future of Argentina 1s
relationship with the IMF?

=A0

Money for Nothing

Had Argentina failed to pay, it would have been the largest default to the
IMF in the institution1s history. Argentina owes roughly $15 billion,
making it the Fund1s third-largest debtor.

The recent history of the relationship between the IMF and Argentina has
been shaky, at best. Argentina and the IMF signed a three-year agreement
in September 2003 that contained specific, quarterly, fiscal surplus and
monetary targets.1 In exchange for Argentina1s compliance with negotiated
targets and conditionalities, the IMF agreed to refinance Argentina1s
capital payments to the institution for the three-year duration of the
pact. Interest charges, which Argentina has been duly paying, were not
included.

What this means in practice is that Argentina must continue to make
scheduled payments to the IMF and, in accord with the deal, the IMF then
promptly turns around and refunds Argentina. The IMF evaluates Argentina1s
compliance with the agreement1s conditions on a quarterly basis and grants
3approval2 if it finds that Argentina is on track.

So far, Argentina has upheld its end of the agreement by not only meeting
its policy targets, but exceeding them. Nonetheless, when the first
quarterly review came up in mid-December 2003, the IMF unexpectedly
delayed its approval for an entire month. The delay caused considerable
irritation among Argentine government officials, who felt that the IMF had
not only failed to comply with its end of the signed agreement but was
creating a climate of uncertainty that could scare off potential
investors.

The second quarterly review was due mid-March. At the same time, the
Argentine government had a $3.1 billion payment due on March 9, equivalent
to 20% of the Central Bank1s foreign reserve holdings. Since Argentina had
once again exceeded its targets, Argentine government officials asked the
IMF to give them a clear indication that the review would be approved
before making the payment. Argentina feared that if the IMF again decided
to delay the review approval, the country could find itself open to a
speculative attack on its currency due to the significant reduction in
Central Bank reserves.

The IMF's response to the Argentine request was that Argentina should
comply with its end of the deal and that no signal would be forthcoming.
Furthermore, there appeared to be increasing discomfort among G-7 members
and other representatives at the IMF with what they labeled Argentina1s
3blackmailing2 tactics. With both sides entrenched, there wasn1t much room
for face-saving compromises or backing off.

For the first time in many decades, newspapers in Buenos Aires ran reports
of government officials discussing life after the IMF, as if defaulting
were a real possibility. Despite Kirchner1s stated preference to make the
payment,2 it appeared that default was inevitable until the
Krueger-Kirchner phone conversation normalized the situation.3

=A0

The IMF as Lobbyist for Banks and Creditors

Given that Argentina had complied with its end of the deal, what explains
the IMF1s delays in approving the reviews? The reasons can be summed up in
one four-letter word: debt. Argentina 1s public debt currently stands at
approximately $180 billion, of which roughly $88 billion is in default.4

Immediately following the signing of the September 2003 IMF agreement,
Argentine finance minister Roberto Lavagna formally announced the
government1s debt-restructuring offer to its defaulted creditors. The main
points of the government1s offer were:

*    a 75% reduction (generally known as a 3haircut2) in the nominal value
of the defaulted bonds
*    a longer period and lower interest rates for repayment of the
remaining 25%, allowing bondholders to choose between several repayment
options *    nonrecognition of past-due interest accrued since the default


Defaulted creditors were very unsatisfied with the Argentine government1s
offer, and most bondholder groups in Europe, the U.S., and Japan have
rejected the haircut as too extreme. However, the Argentine government has
refused to budge from its initial offer, saying that the 75% reduction is
based on calculations of what Argentina will actually be able to pay=8Bin
other words, what is sustainable for Argentina .5 In the words of
Guillermo Nielsen, undersecretary for finance at the Ministry of the
Economy and chief debt negotiator, 3We cannot say that any [debt
restructuring] agreement is better than no agreement at all. There is a
type of agreement that is worse, and that is an agreement that will take
us to another default.26

Initially, the IMF1s position on the Argentine debt-restructuring proposal
was to leave it up to Argentina and its defaulted creditors to hammer out
a solution and IMF officials even gave their blessing to the Argentine
proposal.7 But lately the Fund has begun to act as a lobbyist for the
defaulted creditors. Representatives of the G-7 governments on the IMF
board, presumably reflecting pressure from bondholder groups, have voiced
growing concern over what they call Argentina 1s 3bad faith2 in dealing
with its creditors.8

In response to these pressures, the IMF has been using the quarterly
review process of the Sept. 2003 agreement to twist Argentina 1s arm.
Given that the agreement contains only general language regarding the
debt-negotiation process, the IMF1s pressures on behalf of bankers and
bondholders constitute a form of 3blackmail2 aimed at forcing Argentina to
comply with requirements not related to the signed agreement between the
IMF and the Argentine government.

The key demands of the IMF in this area have been:

*    Increased fiscal savings for debt payments: The current agreement
with the IMF stipulates that in 2004 the Argentine government will
allocate revenue equivalent to 3% of GDP to make payments on its debt=8Ba
historically high amount.9 So far, Argentina has met, and exceeded, this
onerous goal. However, the IMF is notorious for the poor predictive
ability of its models10, and its predictions for Argentina were no
exception.11 Since Argentina has grown at rates considerably above the
IMF1s projections, fiscal revenues have also been larger than projected.
Acting like the owner of this revenue, the IMF has demanded that the
Argentine government use its greater surplus to increase the funds
allocated to debt payments. The government1s response so far has been to
flatly refuse this demand, since the agreement clearly stipulates target
amounts. Furthermore, Argentine officials are worried that higher debt
payments will snuff out the economic recovery, plummeting Argentina back
into recession.
*    Selection of the bank syndicate: The current debt-restructuring
process involves swapping the defaulted bonds for new bonds with new
maturity dates and interest rates. This process is typically handled by
investment banks. The IMF strongly pressured Argentina to name the group
of banks that would carry out the restructuring. The Argentine government
published a request for proposals, but banks in the North were reluctant
to act as
intermediaries so the process was considerably delayed. Argentine
government officials finally issued the decree nominating the bank
syndicate on March 15. The nominated banks were Merrill Lynch for U.S.
bondholders; Barclay1s and UBS Warburg for European bondholders; and Banco
Naci=F3n (a public bank), Banco Galicia , and Banco BBVA Franc=E9s for
Argentine bondholders.
Merrill Lynch, UBS, and Banco Galicia have been accused of money
laundering and other irregularities in their Argentina operations by a
commission of the Argentine Congress based on data provided mostly by the
U.S. Congress.12 Opposition politicians in the ARI (Afirmaci=F3n por una
Rep=FAblica Igualitaria) Party sent a letter to Minister Lavagna protesting
participation by these banks, but there has been no official response.
Lavagna himself initially refused to accept the Merrill Lynch bid, citing
the very same
irregularities.13 Many suspect that the inclusion of Merrill Lynch was a
result of IMF pressure.
*    Legal jurisdiction of the new bonds: The Argentine government
initially refused to have the bonds issued under any other legal
jurisdiction than Argentina 1s. However, the IMF insisted that the new
bonds be issued under the legal jurisdiction of the U.S. state of New York
and the decree naming the bank syndicate reflects the IMF victory on this
point. A bond issue1s legal jurisdiction determines, among other things,
where claims are filed if the investment contract between issuer and
purchaser is not fulfilled. Currently, only 11% of defaulted bonds were
issued under Argentine legislation. This has resulted in a proliferation
of costly lawsuits against Argentina =8Bprecisely what the government was
hoping to avoid should the restructured debt eventually run into problems.
*    Negotiations with bondholder groups: The IMF also demanded that the
Argentine government promptly begin negotiations with the different groups
of bondholders that have emerged and that all bondholders be given equal
treatment. There are many complex issues involved in this demand: Should
Argentine and European retirees who invested in Argentine State bonds be
given the same priority as the speculative funds (known as 3vulture funds2
in Argentina ) who made last-minute bids on the debt of a bankrupt state,
hoping to reap huge profits? Should the Global Committee of Argentine
Bondholders, a creditors1 umbrella group, be given preferential treatment?
The IMF initially promoted this group as the main bondholder
representative. However, the Argentine government alleges that it
represents far fewer bondholders than it claims and insisted that the
group negotiate on an equal footing with the rest. Talks with Argentine
bondholder groups have already begun.


=A0

What Next?

The Argentina-IMF saga did not end when the Fund1s board of directors
unanimously approved the second review on March 22. Due to strong
disagreements between Argentine and IMF negotiators, the current accord
only stipulates specific policy targets for 2004. The fiscal surplus and
monetary targets for 2005-06 are scheduled to be set in negotiations
starting in September 2004, and statements from Anne Krueger and President
Kirchner have made it clear that this will not be an easy negotiation.

In a recent interview, Krueger stated that the 3% of GDP primary fiscal
surplus is a base number that should be increased.14 President Kirchner,
on the other hand, has made it equally clear that 3% of GDP is the highest
he plans to go.

So how will the two positions be reconciled? First, official data shows
that the 3% formula will not cover Argentina1s debt-service requirements
for the next six years, even under a very favorable debt-restructuring
agreement.15 However, it is also clear that despite the economic recovery,
the country is still reeling from the impact of the most severe economic
crisis in its history: unemployment currently stands at 19.4% and a
roughly equal proportion is underemployed, 48% of the population lives
below the poverty line, and a fifth of the population is indigent. In this
context, increasing debt payments could endanger a still-tentative
recovery.

Nonetheless, there are indications that the government will indeed
increase the funds allocated for debt service. One possible scenario,
given Kirchner1s 3% limit, would be for the federal government to provide
3% of the GDP, while provincial governments contribute an additional
amount that could range from 0.6 to 1 percent.

One thing is certain: come September, Argentina and the IMF will be at it
again.

Argentina1s relationship with the IMF reveals the limits of democracy in
the developing world: Argentines may elect their government officials, but
economic policy--including how the government uses tax-payers1
money--continues to be set by a body that is neither elected nor
accountable to the Argentine citizenry: the International Monetary Fund.

Alan B. Cibils is a Research Associate at the Centro Interdisciplinario
para el Estudio de Pol=EDticas P=FAblicas (Interdisciplinary Center for Pub=
lic
Policy Studies-CIEPP) in Buenos Aires, (www.ciepp.org.ar) and a Senior
Research Associate at the Center for Economic and Policy Research in
Washington, DC (www.cepr.net).