Argentina and the IMF: Down to the Wire

Vol. 7, No. 2

April, 2004

by Alan Cibils
Center for Economic & Policy Research (a Washington, DC organization, with Cibils located in Buenos Aires)

Argentina and the IMF: Down to the Wire
by Alan B. Cibils
Center for Economic & Policy Research (based in Buenos Aires, Argentina)

On Tuesday, March 9, Argentina was teetering on the brink of default on a
$3.1 billion payment to the IMF. This high wire act sent tremors through world
financial markets. Had Argentina failed to pay, it would have been the largest
default to the IMF in the institution’s history. With claims of about $15 billion,
Argentina is the IMF’s third largest debtor, so a default would have been a
devastating blow to the Fund.

An eleventh hour call from the IMF’s Acting Managing Director, Anne Krueger,
to Argentine President Néstor Kirchner resulted in Argentina agreeing to
make the payment, and Argentina’s relationship with the IMF was preserved.

The standoff was over the uncertainty surrounding the IMF’s approval of the
second review of Argentina’s current agreement with the Fund. Argentina had
not only met, but exceeded compliance of the agreement-specified targets. So
why would the IMF withhold approval? What reasons took Argentina to the
brink of default, even against President Kirchner’s stated intentions to pay?
And what does this standoff mean for the future of Argentina’s relationship to
the IMF?

Argentina and the IMF signed a three-year agreement in September 2003
which contained specific quarterly fiscal surplus and monetary targets, among
many other traditional IMF structural adjustment policy conditions. In
exchange for Argentina’s compliance with the agreed-to targets and
conditionality, the IMF agreed to refinance Argentina’s capital payments (but
not interest payments, which Argentina has been duly paying) to the
institution for the three-year duration of the agreement. What this means in
practice is that Argentina must continue to make scheduled payments to the
IMF which, according to the agreement, the Fund promptly turns around and
refunds. Also, the IMF evaluates Argentina’s compliance with the agreement’s
conditions on a quarterly basis and grants “approval” if it agrees that
Argentina is on track. (In the case of the recent standoff, a quarterly review
and a scheduled payment happened to coincide.)

So far, Argentina has upheld its end of the agreement by not only meeting its
policy targets, but exceeding them. Nonetheless, in the case of the first
quarterly review scheduled for mid December 2003, the IMF unexpectedly
delayed its approval for one month. This delay caused considerable irritation
among Argentine government officials, who felt that the IMF failed to comply
with its end of the agreement.

The second quarterly review was due in mid-March. However, the Argentine
government had a $3.1 billion payment to the IMF — 20 per cent of the
Central Bank’s foreign reserve holdings — due on March 9th. Since
Argentina had once again exceeded its agreed-to targets, Argentine
government officials asked the IMF to give them a clear indication that the
review would indeed be approved before making the payment. The
Argentine government feared that should the IMF once again decide 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
representatives of the G7 industrialized countries, as well as others, with what
they labeled Argentina’s “blackmailing” tactics. With both sides strongly
staking out their positions, there wasn’t much room for face-saving maneuvers
for either one.

For the first time in many decades, newspapers in Buenos Aires ran reports of
government officials discussing life after the IMF, as if defaulting was an
actual possibility if not a foregone conclusion. Despite Kirchner’s stated
preference to make the payment, it appeared that the default was inevitable
until the Kirchner-Krueger phone conversation normalized the situation.

If Argentina was complying with its end of the deal, what explains the IMF’s
delays in approving the reviews? The reasons can be summed up with a four
letter word: debt. This, of course, refers to Argentina’s public debt, and
specifically the portion of that debt that is currently in default.

In December 2001, then president Rodríguez Saá defaulted on 88 billion
dollars of Argentina’s public debt. He did not default on the roughly $32 billion
debt to the IFIs (IMF, World Bank, and IDB), nor did he default on a part of the
private debt held by local banks. Argentina’s public debt currently stands at
approximately $180 billion, of which roughly $88 billion is in default.

Immediately following the signing of the September 2003 IMF agreement,
Argentine finance minister Roberto Lavagna formally announced the
government’s debt restructuring offer to its defaulted creditors. The main
points of the government’s offer were: a 75 per cent reduction (generally
known as a “haircut”) on the nominal value of the defaulted bonds, a longer
repayment period and lower interest rates for the remaining 25 per cent, while
bondholders would be able to choose between several different repayment
options, and non-recognition of past-due interest accrued since the default.

Defaulted creditors were completely dissatisfied with the Argentine
government’s offer, and most bondholder groups in Europe, the US, 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
percent reduction is based on calculations on what Argentina will actually be
able to pay—in other words, what is sustainable for Argentina. Indeed, even if
Argentina’s initial 75 per cent haircut offer were accepted, Argentina would be
left with a 90 percent debt-to-GDP ratio, a level that is still unsustainable. In
the words of Guillermo Nielsen, Undersecretary for Finance at the Ministry of
the Economy and chief debt negotiator, “We 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.”

Initially the IMF’s position on the Argentine restructuring proposal was to
leave it up to Argentina and its defaulted creditors to hammer out a solution.
While the IMF initially gave its blessing to the Argentine debt restructuring
proposal, it increasingly began to act as lobbyist for the defaulted creditors.
Representatives of the G-7 governments on the IMF board have increasingly
voiced concern over what they call Argentina’s “bad faith” in dealing with its
creditors, presumably due to the pressure that bondholder groups have
exerted on G-7 governments.

For these reasons, the IMF has increasingly been using the quarterly review
process of the agreement to twist Argentina’s arm on behalf of bondholder
groups in G7 countries. The agreement itself has nothing but the most general
language regarding the debt negotiation process. Therefore, the IMF’s
pressures could indeed be considered “blackmail”, in that they are aimed at
forcing Argentina to comply with requirements which were not agreed to.

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 three percent of GDP to make payments on its debt—an
historically high amount. So far, Argentina has met, and exceeded, this
onerous goal. However, state revenues (and therefore savings) are
calculated based on GDP growth, among other factors. The IMF is notorious
for the poor predictive ability of its models, and its predictions on Argentina
were no exception. Since Argentina has grown at rates that are considerably
larger than the IMF’s 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 government’s response so far has been to
flatly refuse this demand, since the agreement clearly stipulates the fiscal
surplus targets. Furthermore, Argentine officials are worried that higher debt
payments will snuff out the economic recovery, sending Argentina once again
into a devastating recession.

Legal jurisdiction of the new bonds: The Argentine government initially
refused to have new bonds issued (to replace those on which it defaulted)
under any other legal jurisdiction than Argentina’s. However, the IMF insisted
that the new bonds be issued under the legal jurisdiction of the far-off state of
New York. Argentina capitulated on this point.

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 subsumed under this demand. For
example: Should Argentine and European retirees who invested in Argentine
state bonds be given the same priority in the debt restructuring process as the
speculative funds (known as “vulture funds”) which made last minute bids on
the debt of a bankrupt state hoping to make huge profits? Should the Global
Committee of Argentine Bondholders, a bondholder group which, according
to Argentine government officials, claims a much broader constituency than it
actually has, be given preferential treatment? The IMF initially was promoting
the group as the main bondholders’ representative. However, Argentina’s
refusal to go along has forced the group to negotiate on equal footing with the
rest. The Argentine government announced in mid-March that talks with
bondholder groups were to begin on March 24th and continue through April
16th.

One thing is certain: come September, Argentina and the IMF will be at it
again, when the Argentine government and the IMF are scheduled to
negotiate fiscal surplus and monetary targets for 2005-06. Positions on both
sides are already hardening, with President Kirchner vowing not to exceed
current surplus levels and Krueger sending equally strong signals that she
expects it to rise.

On March 24th -- the 28th anniversary of the military coup that left 30,000
disappeared -- President Kirchner presided over a highly symbolic and
politically significant event. The Navy School of Mechanics, a notorious
concentration camp and torture center where thousands of people were
murdered during the dictatorship, was transferred to civilian control. The
premises will now house a Memory Museum that will tell the history of
Argentina’s darkest moments for future generations.

In stark contrast, exactly two days before, the IMF’s approval of the second
review of its current agreement with Argentina demonstrated that Argentina’s
economic policy continues to be squarely under IMF domination. Human
rights groups which applauded the transfer of the Navy School of Mechanics
simultaneously condemned the ongoing social genocide that results from
Argentina’s implementation of IMF conditionality. Indeed, the current IMF
agreement obliges Argentina to continue to implement the neo-liberal
economic model, which was first introduced by the military dictatorship.
Argentines still face a struggle to escape the legacy of the 1976-1983
dictatorship.

Argentina’s relationship with the IMF is particularly egregious, as it shows the
very real limits of democracy in the developing world: Argentines may elect
their president, representatives and senators, and other local government
officials. However, regardless of the ideological inclinations of those elected,
economic policy — including how the government uses the funds it collects
from Argentine tax payers -- continues to be set by the IMF, which nobody
elects and which is not accountable to the Argentine electorate.

Perhaps it is time for a second declaration of independence.

^TOP

50 Years Is Enough Network - 3628 12th St NE, Washington, DC 20017 USA
Tel: 202-IMF-BANK (202-463-2265) Email: info@50years.org