MercoPress. South Atlantic News Agency

Argentina's defaulted debt “critical”, says IMF

Even when Argentina successfully managed to jump the hurdle of the first performance review of its stand by arrangement with the IMF, the official IMF release underlines that the “restructuring of Argentina's sovereign defaulted debt remains the most critical task for the coming period”.

After praising Argentina's fiscal and monetary policies IMF also points out that the "success of Argentina's program will depend on good understanding and cooperation between Argentina, the Fund, and Argentina's creditors in a spirit of mutual trust and improved communications".

The approval voting by the IMF Executive Board of Managing Director and Chairman Horst Köhler recommendation however was not as swift as expected and there were significant abstentions. According to Argentine sources United States, France, Germany and Canada supported the recommendation but the other G-7 members Japan, Italy and Britain abstained after a "strong discussion". Spain, Russia, Brazil and the African block supported but the Nordic countries, Belgium, Switzerland and Australia also abstained.

This could be anticipating turbulences for next March when Argentina is scheduled to repay 3 billion US dollars, unless some better understanding is reached with private creditors, mostly holders of defaulted sovereign bonds, whom Argentina has offered to reimburse under a multiple option system with a 75% cut in face vale. The IMF and several G7 countries whose nationals hold Argentine bonds are pressing for a better deal given the unexpected rebound of the country's economy but so far President Kirchner's administration remains unmoved in its original proposal arguing he first has the challenge of the "domestic social debt".

This week also the original syndicate of international first line banks scheduled to organize the swap of defaulted bonds (estimated in over 50 billion US dollars) is down to two, Barclay's and Lehman Brothers after two American institutions walked out, Morgan Stanley Dean Witter and Goldman Sachs.

The official IMF release says indicates that the completion of the first review of Argentina's performance under a three-year SDR 8.98 billion (about US$13.3 billion) Stand-By Arrangement, approved in September 20, 2003, entitles Argentina to a disbursement of the equivalent of SDR 241 million (about US$358 million).

In completing the review, the Executive Board approved waivers for the non-observance and applicability of certain performance criteria. Following the Executive Board discussion on Argentina, Horst Köhler, Managing Director and Chairman, stated:

"Argentina's ongoing economic recovery has been strong, with growth of real GDP expected to be at least 7½ percent in 2003. Inflation has remained low, and the unemployment and the poverty situation have gradually improved. This performance reflects disciplined fiscal and monetary policies, the strengthening of consumer confidence, as well as favourable external conditions and continued official international support.

"Federal and provincial fiscal performance has been evolving more strongly than programmed. Extending this performance and building sustainability are key objectives of the authorities under the program. In the near term, for the coming review, a key task is to develop further the reforms of the tax structure and of intergovernmental financial relations envisaged under the program.

"The financial performance of banks has also strengthened over the past year. Looking forward, the authorities intend to sustain this performance and, to this end, as envisaged in their program, should take steps that would strengthen bank capital, ensure tight prudential supervision, reduce the distortive financial transactions tax, and commence diagnostic reviews of the two largest public banks.

"The restructuring of Argentina's sovereign defaulted debt remains the most critical task for the coming period. The authorities' intention is to launch a debt exchange offer that aims at attracting broad creditor support and, toward this end, they are expected to deepen their dialogue with private creditors in order to reach a collaborative, comprehensive, and sustainable sovereign debt restructuring.

"The much improved economic outlook gives Argentina an important opportunity to put in place policies that will strengthen domestic and international confidence, thereby sustaining growth and allowing the authorities' employment and poverty reduction goals to be achieved. The key commitments under the program relate to steps to restore fiscal sustainability, strengthen the banking system further, address the issues confronting the utilities, and build a business environment that encourages investment. It is hoped that completion of the first review will be used by the authorities as an opportunity to move forcefully forward in these areas, as well as in deepening their relations with private creditors, ahead of the second program review. The Fund continues to stand ready to help Argentina achieve these goals.

"The success of Argentina's program will depend on good understanding and cooperation between Argentina, the Fund, and Argentina's creditors in a spirit of mutual trust and improved communications".