THE row between the International Monetary Fund (IMF), jilted private bondholders and the Argentine government over the country’s $88bn (Pounds 48bn, E69bn) debt restructuring is escalating.
America’s assistant secretary of state, Roger Noriega, warned the Argentine government: “It is important in terms of economic health and the recovery of Argentina to manage the debt question in a serious and responsible manner.”He also lamented Argentina’s friendship with Cuba’s Fidel Castro and radical Bolivian coca growers leader Evo Morales. President Nestor Kirchner hit back, saying: “Argentina is nobody’s carpet. We are an independent country.”The battle will come to a head on Monday when Kirchner discusses debt restructuring with President Bush in Monterrey, Mexico, at a summit of 34 nations on poverty and corruption in the Americas.
Argentina’s debt crisis is growing, more than two years after the default. Creditors are demanding to be repaid 65 cents in the dollar of the $88bn in privately-held debt. Argentina is refusing to pay more than 25 cents a dollar.
Walter Molano, head of research at BCP Securities, thinks a combination of forces is driving the row. “It is not clear what has driven the change in tune, whether political pressure in the US from banks and hedge funds, or from Europe, where there is a lot of pressure from the retail investors,” he said.
As Argentina experiences an unexpectedly robust economic recovery – its 7.3% growth last year was the fastest in the western hemisphere – a proposed 75% debt haircut, the biggest in history rankles with the creditors. As well as big institutions, they include hundreds of thousands of small investors and pensioners in Italy, Germany and Japan who have not seen a cent of their investments since December 2001.Argentina has exceeded its 3% budget surplus target agreed with the IMF for 2003. Creditors have argued that Argentina should raise the surplus to 4%, which would allow it to improve its debt repayment offer to foreign creditors. The fund has urged Argentina to raise its primary budget surplus to 4% and move to compensate banks and utilities for the costs of devaluation in 2001.The IMF’s continued approval of the refinancing programme is critical to Argentina, which must make a $3bn interest repayment to the fund in March. Future hand-outs by the World Bank on a $5bn aid programme also await IMF approval of debt finance.Those exerting pressure include 450,000 irate Italian holders of $15bn bonds, who plan to sue the IMF for “joint responsibilty” with the Argentine goverment in the economic crisis that led to the December 2001 default. A meeting of European bondholders in Rome later this month will decide on a concerted strategy.The increasingly blunt Kirchner has deflected pressure with populist rhetoric: “We are no longer afraid of the fund or the fund’s friends. We will not accept any pressure, open or hidden, to increase payments.”He has insisted his priority is to get millions of Argentines back to work and that any excess of the 3% primary budget surplus will pay back internal, not external debt.Most economies in the region have halted in the past five years, a period that saw street violence – most sparked by IMF- backed austerity measures by the heavily indebted governments – overthrow democratically-elected presidents in Ecuador, Argentina and, most recently, Bolivia. Demonstrations have also shaken Peru and the Dominican Republic.The Monterrey summit will aim to draw up a blueprint for social policy for the troubled region, where Chile is the only stable country. The political crisis in Haiti, mad cow disease and biometric security measures are also likely to be discussed. Last week, a Brazilian judge ruled that US travellers should be fingerprinted and photographed when entering the country in response to similar measures for those coming into the US. As a result, US tourists have been held up for nine hours at Rio airport.
Brazil pulled back from a looming $260bn debt crisis in October 2002 after a $30bn bail-out from the IMF, thanks to meeting a stringent 4.5% budget surplus target in 2003, and pushing through fiscal and pension reforms. The cost has been zero economic growth and higher unemployment.
Brazilian President Lula da Silva has now teamed up with Argentina’s Kirchner to reject Washington’s view that wealth generated by neo-liberal economic reforms would trickle down to the poor, in favour of “prioritising growth with social equality”, and “facing down the destabilising movements of speculative financial capital and countervailing interests of developed blocs”. Despite the impasse over the Argentine debt restructuring, analysts are optimistic that the capacity of Argentina to pay creditors will improve as time goes on, and an agreement can be reached with the IMF by the end of the year.
BCP Securities’ Molano said: “The defaulted bonds are trading at 27 cents now, and in one year’s time, when they finally reach an agreement with creditors, they should be worth 40 cents to 45 cents. That is what I think Argentina will end up paying.”
The Argentine government will face domestic pressure to reach agreement as growth from using idle industrial capacity with reduced production costs tails off, and fresh public and private sector credit is needed to sustain the recovery.
