[A-List] Argentina: IMF Stand-off

[Anyutka]

Global Market Brief: March 8, 2004

U.S. economist Ann Kruger has assumed the post of interim director of the
International Monetary Fund (IMF), following the resignation of Horst
Kohler, who was nominated in his home country of Germany to the largely
ceremonial post of president. German presidents have much cushier jobs than
do IMF executive directors, with many perks of office and no migraines
resulting from sovereign debt defaults.

Kohler bailed out of the IMF with more than a year left to go in his
five-year term as executive director. He came into the fund pledging to halt
bailouts for undeserving countries that borrowed themselves into default,
but under his tenure huge bailouts were granted to Turkey, Brazil and
Argentina. It's not Kohler's fault that he could not fulfill his promise of
a tougher approach: He was just following orders from the IMF's masters in
Washington and Brussels. The Bush administration has been a much bigger
supporter of sovereign bailouts than has Kohler himself.

However, Kohler's departure capped a week full of bad news for Argentine
President Nestor Kirchner. Kruger, the second most important official at the
IMF - and one who has been routinely reviled by senior officials in Kirchner
's government because of her tough stance on Argentina's debt problems --
will be the institution's interim executive director on March 9, when
Argentina is due to make a payment of $3.1 billion to the fund.

Though it is the IMF's board of directors that ultimately will decide
whether to approve the most recent (second) review of Argentina's compliance
with the September 2003 agreement - which rolled over $21 billion of debts
owed to the fund and other multilateral entities -- Kruger is in a position
to influence that decision significantly.

The question is, where will Kruger seek to push the issue? Will she urge the
IMF's board to approve the review, or will she argue that Argentina has not
met all of the targets in the September 2003 aid agreement with the fund?

Argentine Economy Minister Roberto Lavagna insisted March 4 that the IMF
board must approve the review because his Buenos Aires has complied with all
of the performance targets established in the 2003 aid agreement. In fact,
the IMF mission that just returned from Buenos Aires already has said
publicly that Argentina indeed did achieve all of the fiscal, monetary and
financial targets - but they also cautioned that this did not automatically
assure Buenos Aires of a passing grade.

Since January, IMF officials have repeatedly said the IMF's board of
directors would approve the review only if Argentina shows tangible good
faith and progress in restructuring talks with foreign creditors, who are
owed nearly $100 billion in defaulted government debts. IMF officials
reiterated this condition just a few days ago. If the review isn't approved,
the IMF would stop rolling over Argentina's debts to the fund; Buenos Aires
would have to make the scheduled $3.1 billion debt payment to the IMF on
time and using its own Central Bank reserves.

IMF officials also said very carefully, if anonymously, that Argentina is
expected to make its $3.1 billion payment on schedule -- independently of
any measures that might be approved by the fund's board. However, that's not
how Kirchner sees the issue.

Kirchner repeated his mantra again at the end of last week, saying that if
the IMF board continue with debt rollovers, Argentina would not make the
$3.1 billion debt payment, and making it clear that the financial review
must be approved before Buenos Aires puts up the money. However, it could be
strongly argued that Buenos Aires is not complying with the aid agreement's
terms because it is not making a good-faith effort to advance debt
restructuring negotiations with its creditors. In fact, Argentina arguably
is stalling progress by maintaining what the country's creditors view as an
irrationally inflexible position.

Kirchner has said repeatedly since late 2003 that he would not change any
part of his debt restructuring proposal, which if accepted by Argentina's
creditors would result in a de facto writedown of more than 90 percent of
the defaulted debt. Last week, he said so again. To drive home his
determination to hang tough against pressures from creditors and the Group
of Seven governments, Kirchner will lead a mass "protest against the debt"
before the end of March in front of the presidential palace in Buenos Aires.
Kirchner's wife, Cristina -- a senator for the ruling Justicialist Party
(PJ) (whose members are also called peronists) -- said recently that it
doesn't matter if Argentina becomes isolated from international markets.

If Kruger lives up to her reputation as a fiscally conservative economist
who thinks debtors should do the responsible thing and pay their debts, it's
likely she will seek to force a default on Argentina -- even if that rocks
the fund's credit rating and drives up its borrowing costs. Without a doubt,
some of the fund's G-7 member governments would be upset, since they might
have to inject fresh capital into the IMF to compensate for losses and
higher future funding costs resulting from an Argentine default.  However,
hanging tough on Argentina now would send a clear message to other major
debtor nations like Brazil - signaling that they should not entertain
populist solutions for debt crises that involve fleecing creditors and
investors who made loans on good-faith assumptions about repayment.

Stratfor does not think that Kirchner will back down. If pushed, Argentina
will default. Kirchner is feeling strong: The Argentine economy grew 8.4
percent in 2003 and is expected to grow more than 4 percent this year.
Inflation has come down, the peso has stabilized, the unemployment rate is
falling, imports have risen sharply and the country is enjoying a boom in
agricultural commodities exports to China.

Kirchner also is popular with more than 70 percent of Argentine voters,
according to recent polls. As a result, peronist legislators are rushing to

outdo each other in terms of declaring that the debt can never be repaid and
is illegitimate anyway. Never mind the fact that Argentina's public-sector
debt was piled up in the 1990s under the two successive governments of
then-President Carlos Menem, a lifelong peronist.

Argentina is in deep denial on the debt issue and the likely consequences of
repudiating the debt unilaterally. Kirchner has been in power since May
2003, yet so far he has taken no action to move restructuring talks forward.
He also hasn't done anything to fix the broken banking system or create a
legal climate that respects private assets. Instead, Kirchner has adopted a
populist strategy of confronting Argentina's creditors that appeals to
xenophobic and nationalist elements. He dismisses foreign creditors, who
mainly consist of some 700,000 small individual bondholders, of behaving
like rapacious vultures.

However, if Argentina defaults on its debts to the IMF, life in that country
would head south quickly. If a default occurs, all multilateral loan
programs to Argentina likely would be suspended immediately, shutting off
funds needed for social and infrastructure programs. All international trade
between Argentina and other countries would be strictly cash before
delivery. Foreign direct investment likely would come to a nearly complete
standstill. The freeze on credit likely would soon lead to exchange controls
and chronic shortages of products.

Eventually, Argentines likely would grow tired of the penuries they would
suffer as a result of Kirchner's pugnacious approach to their country's
creditors, and they probably would turn against him -- as they turned
against former President Fernando de la Rua in 2001. However, that scenario
is still a year or two in the future.