For what its worth, here is a recent Stratfor analysis. Sabri +++++++++++++
Argentina: Duhalde May Have More To Gain in Default 24 September 2002 Summary The chance that the International Monetary Fund will sign an aid agreement with Argentina's government appears slim at best. Senior fund officials believe the government lacks the support needed to guarantee compliance with any possible conditions, while the absence of an agreement increases the pressure for President Eduardo Duhalde to default on about $6.7 billion in debt owed to multilateral entities. Analysis The executive director of the International Monetary Fund, Horst Kohler, urged Argentina's society and political classes Sept. 23 to set aside their differences and give President Eduardo Duhalde the support he needs to negotiate a binding financial aid agreement with the fund. The remarks underscored the fact that nine months after defaulting on $95 billion in international bonds, Argentina is no closer to an agreement with the IMF today than it was in December 2001, when the peso was devalued and the country stopped paying its debts to private international lenders. The IMF has not offered Duhalde's government a firm aid agreement because senior fund officials have said they believe that any deal signed now would fall apart in three months or less. Moreover, the fund's concerns about the sustainability of an aid agreement with Duhalde's government appear justified. As time passes without any progress in negotiations, Argentina's financial bind is growing much worse. During the fourth quarter of 2002, Argentina's government must repay $2.4 billion it owes to the IMF, World Bank and Inter-American Development Bank. This is nearly a quarter of its current international reserves of $9.4 billion. Another $4.5 billion owed to these multilateral entities comes due in the first quarter of 2003. So far in 2002 the IMF has granted Argentina one-year delays on the repayment of $4.6 billion it owes the fund. However, nearly all of the $2.2 billion due to lenders in the final three months of this year is owed to the World Bank and IADB, and payment cannot be pushed back under the existing loan agreements with both entities. This means that Duhalde's government confronts a grim choice. If Argentina pays its debts to the IMF, the World Bank and IADB, it will remain in their good graces. This would facilitate the granting of new loans from these multilateral entities, eventually helping to launch debt-restructuring talks with private international creditors who hold the $95 billion in defaulted government bonds. However, draining Argentina's international reserves likely would weaken the peso and accelerate inflation even more. This could further aggravate social hardship in a country where unemployment now tops 25 percent, more than 50 percent of the populace is poor and the economy contracted more than 14 percent during the first half of 2002. As a result, last week senior Argentine officials hinted publicly that Duhalde's government might default on the country's debt obligations to lenders such as the IMF in order to protect its international reserves and currency. The statements prompted the IMF's second-ranking official, Anne Krueger, to warn that the international financial community would "punish" the country if it defaults on its multilateral debts. This week Argentine officials softened their position. Cabinet Chief Alfredo Atanasof said Sept. 24 that the Duhalde government would pay $329 million due by the end of September and continue negotiations with the IMF. Argentina owes the IMF, World Bank and IADB another $836 million in October, $295 million in November and $790 million in December, according to its Economy Ministry. Duhalde's government is divided internally over making these scheduled repayments without first signing a firm agreement with the IMF, Buenos Aires daily La Nacion reports. However, Kohler's Sept. 23 remarks indicate that the IMF will not sign an aid deal with Duhalde that would carry Argentina through the end of 2003 without political guarantees that all of the conditions attached to such an agreement would be fully complied with by Duhalde as well as his successor, who won't be elected until March 2003 and will not assume the presidency until next May. Although the IMF's position may be financially and politically prudent from the fund's perspective, Duhalde simply does not have sufficient popular and political support to assure that his government could fully comply -- for longer than a few weeks -- with any agreement it signs with the IMF. Recent opinion polls show that Duhalde is unpopular with more than 90 percent of the adult population, and Congress and the courts have undermined his economic reform policies. The impasse between the IMF and Duhalde's government cannot be solved in Buenos Aires, because Argentina's unpopular and isolated president does not have the political influence to compel the country's political class to support or comply with any deal he may sign with the fund. This means that if the IMF does not soften its stance, negotiations will continue to drag on and the political pressure will grow on Duhalde to default on the government's debt obligations to the multilateral entities. Such a default would aggravate Argentina's current pariah status in global financial markets, but Duhalde likely could decide that he has less to lose politically by defaulting, preserving the country's diminished international reserves and dumping the debt crisis in his successor's lap. However, with Argentine government bonds now trading for as little as 20 cents on the dollar in secondary debt markets, this option also could increase the likelihood that Argentina's next government will demand a forced restructuring process in which most of the bond debt will be written off and never repaid.
