[A-List] Argentina: playing chicken with IMF

["Michael Keaney" <michael.keaney@xxxxxx>]

Argentina plays dangerous game with IMF
By Alan Beattie
Financial Times: October 30 2002

While the world's financial markets have been focusing nervously on Brazil,
a hazardous game of chicken has been unfolding in neighbouring Argentina.

Ten months ago, Argentina suffered the fate Brazil is desperately hoping to
avoid and defaulted on its sovereign debt. Now it has just two weeks left to
come up with a $750m payment to avoid defaulting to the World Bank as well
as to its private creditors.

Default to the multilateral financial institutions is a last resort,
generally only taken by countries such as Iraq or Somalia when their
governments are such international pariahs they have little to lose.

And while few believe the Argentines will actually go over the brink, it has
given them a new weapon in their interminable negotiations with the bank's
sister institution, the International Monetary Fund.

The Argentine government wants the IMF to roll over payments on its $13bn
outstanding debt to the fund. Without this, it says, it will not be able to
make the payment to the bank.

Roberto Lavagna, Argentine finance minister, came to the IMF annual meetings
in Washington last month with his sabre all ready to rattle. "Usually when
you are negotiating you don't explain the next move," he told reporters.
"But there are some positions which Argentina will defend absolutely."

Chief among these, he said, was protecting Argentina's social security
system, and if it was a choice between keeping that going and paying the
bank, he would choose the former. The Argentine government has already shown
its willingness to break norms of behaviour vis-a-vis the multilateral
financial institutions by defaulting on a $250m loan to private creditors
which was backed by a World Bank guarantee.

Publicly, the IMF insists it is not going to be blackmailed. "I wouldn't say
our posture is at all related to the issue of the [World Bank] payments,"
says Tom Dawson, the IMF's director of external relations.

The IMF is keen not to be bounced into signing a new agreement, fearing the
loss of credibility if it goes off track.

The World Bank, too, has been affecting nonchalance. James Wolfensohn,
president of the World Bank, says that the bank would survive a default,
though he "wouldn't like it much".

But progress in talks has accelerated over the past few weeks, and there is
little doubt among observers that the prospect of default adds to the
pressure on the Fund. "The IMF wants to avoid becoming an issue in the
forthcoming Argentine election," says Alberto Ades, head of emerging markets
strategy at Goldman Sachs in New York. "There is political pressure on the
fund to reach an agreement."

Still, there remain considerable areas of disagreement between the IMF and
Argentina.

Some bones of contention are so old they have grown mouldy in the chewing,
such as the disputes over plans to unfreeze bank accounts without creating a
run on the currency. And as the detail of an agreement is hammered out, new
tensions have arisen, such as the IMF's request that utilities bills rise to
cover the costs of the service companies whose dollar-denominated debts
threaten to overwhelm them.

A recent draft of the "letter of intent" - the agreement between Argentina
and the IMF - seen by the Financial Times still has a challenging amount of
square brackets and white space. Mr Aldes' best guess is that despite their
protestations, the Argentines will scrape together enough dollar reserves to
make the World Bank payment by the deadline of November 9 with the
understanding that an IMF agreement is to be signed within a couple of weeks
after that.

But at best, this will be an uneasy truce. Huge questions remain unresolved.
The letter of intent talks vaguely of a future "comprehensive reform of the
state" including changes to the civil service, social security and health
care systems, for which the legislative enthusiasm in Argentina is likely to
be low.

And the level of trust between the two sides does not seem to have improved,
despite the progress made in talks.

"Making an agreement comes down to a matter of political will," says one
senior Argentine official.

Indeed it does, IMF officials privately say, and argue that without
agreements sufficiently detailed that they can act as an effective
constraint on Argentina's unruly political system, any deal that relies
purely on trust may well come unravelled.

Argentina seems likely to get its rollover agreement during the coming
weeks, even days.

But this may owe at least something to the old adage, adapted for the
occasion by CSFB's director of Latin American economics, Lacey Gallagher:
"If you owe the bank $100, it is your problem. If you owe the multilateral
institutions $13bn, it is their problem."