Argentina helps keep up facade By coming to a last-minute deal with Buenos Aires, the International Monetary Fund has avoided showing how powerless it really is
Charlotte Denny and Larry Elliott Thursday March 11, 2004 The Guardian It was like a boxing match which goes to the final bell on Tuesday evening in Washington as the two sides in the long drawn-out battle between Argentina and the International Monetary Fund withdrew to their corners, punchdrunk. Both were telling the judges, the world's media, that they had won on points. At almost the last moment, Argentina had stumped up the $3.1bn (�1.7bn) it owed the Fund - on the face of it a victory for the Washington-based lender, the country's last remaining financial lifeline. But Buenos Aires said it had only signed the cheque after securing a promise from the Fund of further lending without new and more stringent conditions. The strings the Fund was hoping to attach involved the $90bn Argentina owes to private-sector creditors. The country has been offering to repay just 25 cents in every dollar borrowed, an offer seen as unacceptable by the IMF. Further lending, the Fund said, was conditional on Argentina negotiating in good faith with its private-sector creditors. Having slugged it out for days, at the post-match press conferences yesterday it was time to kiss and make up. The last minute telephone call from the IMF's acting director, Anne Krueger, to Argentina's president, Nestor Kirchner which clinched the deal with just hours to go before the deadline was "cordial and respectful", a presidential spokesman said. Both sides have made face-saving concessions. Argentina yesterday signed a new agreement with the Fund, conceding to several of its demands over the treatment of private creditors. The IMF said its agreement with Argentina included a specific course of action for negotiations with creditor groups and a tentative timetable for the talks. Argentina's economy minister Roberto Lavagna made it clear however that Argentina's September offer to repay private creditors 25 cents in the dollar still stood. Tellingly, groups representing investors in Argentinian debt were less impressed with the commitments the IMF has secured on their behalf. Argentina and the Fund are making the best fist of what is a situation fraught with danger for both. Mr Kirchner has staked his reputation on standing up to the IMF and had to take the fight to the wire in order to maintain his populist credentials. But he had to weigh up the risks of triggering the largest ever default to the Fund. Failing to make its IMF payment would have relegated Argentina to the bottom league of creditworthy countries, alongside Sudan, Zimbabwe and Somalia, putting at risk future borrowing on world capital markets. When Argentina defaulted to its private creditors in December 2001 it triggered a financial crash during which the country's economy shrunk by a fifth. The resulting political and social chaos saw four occupants of the presidential palace in a month, unemployment of more than 20% and half of Argentinians falling below the poverty line. While the short-term impact would undoubtedly be painful, Mr Kirchner could have gambled that the capital markets would eventually open their lending books again to one of the world's most important developing economies. The lesson from the Russian debt default in September 1998 is that if a country is big enough, investors will come back. "Capital markets have short memories," admits one IMF official. The Fund is usually portrayed as having the upper hand in negotiations. Argentina's debts are, however, so big that a default would have a damaging effect on the Fund's balance sheet. Of the $95bn in outstanding loans to the Fund, Argentina accounts for 15%. The Fund says it would be forced to charge other borrowers higher rates to make good its losses. That threat seems unlikely to be realised, given that two other countries, Brazil and Turkey, account for a further 57% of its loans portfolio. Higher borrowing charges would risk tipping two more countries into default. More likely the Fund would have to turn to its major shareholders, the rich countries of the west, for a cash injection. For the Fund, the confrontation with Argentina risked exposing the confidence trick on which its role as the world's financial fireman has been built. In reality, there is not enough money in its coffers to rescue a country facing imminent bankruptcy, which is why the Asian countries burnt by the series of financial crises of the late 1990s have decided to build up their own foreign exchange reserves instead. Argentina did the Fund a favour by not unmasking the illusion. But in the long term, the only solution is a proper mechanism for sharing the burden of dealing with sovereign bankruptcies more equally between the stakeholders, as Ms Krueger has argued. When she first advanced the plan, just months before Argentina spiralled into crisis in late 2001, it was opposition from Wall Street banks which stymied it. They may be more amenable these days, given the beating they are taking from Buenos Aires.
