The International Monetary Fund is in danger of breaking its own rules by continuing to lend to Argentina despite the Argentines' fractious and litigious negotiations with their bondholders, according to the leading association of global financial institutions.
Charles Dallara, managing director of the Institute of International Finance, which represents more than 300 of the world's largest banks and finance houses, yesterday said that Argentina was refusing to negotiate fairly with the creditors who hold its defaulted sovereign debt. The IIF also warned that the rush of investors into emerging markets was in danger of suffering a swift and damaging reversal.
According to IMF rules, it can only lend to a country in default to creditors if the government is negotiating in good faith. "Contrary to its Letter of Intent [with the IMF], Argentina has not engaged in timely, constructive, open negotiations with its creditors," said Mr Dallara. Accordingly, he said, "the IMF's corporate conduct is not consistent with its own stated policies".
Under pressure from the dominant Group of Seven rich shareholder countries, particularly the US, the IMF management recently recommended its executive board approve the next tranche of IMF lending to Argentina. Fund insiders expect the board to approve the lending later this month, although some small European countries on the bank's board may continue to abstain in protest. The IMF declined to comment on Mr Dallara's views.
Releasing its regular assessment of capital flows to emerging markets, the IIF said that net flows reached $187.5bn (£102bn) last year, their highest since the Asian financial crisis began in 1997, and were likely to rise again this year. But the institute warned that the rapid rises in emerging market asset prices were in danger of a sharp reversal.
William Rhodes, senior vice-chairman of Citigroup and first vice-chairman at the IIF, said: "There is now a risk that markets may again be moving ahead of fundamentals, as was the case in 1997 prior to the Asian crisis."
Mr Dallara said that countries such as Poland, the Philippines and Venezuela had seen a rapid increase in the valuation of their assets despite a stagnation or deterioration in their underlying credit quality.
"We are not sitting here and predicting a crisis in emerging markets," Mr Dallara said. "But because spreads have moved so far, so fast, they are vulnerable." J.P. Morgan's emerging market bond index (EMBI+), which measures the spread of widely traded sovereign bonds over US Treasuries, has fallen 360 basis points over the past year.