Argentina Hasn't exempted IMF from moratorium on paying debts

By:  Pamela Druckerman
The Wall Street Journal, January 4, 2002


New York -- Argentina's pending default is posing some prickly questions about whether one of its biggest creditors -- the International Monetary Fund -- is going to get paid.

President Eduardo Duhalde, who took office Tuesday promising to enforce the moratorium on foreign-debt payments announced by one of his predecessors, hasn't singled out the IMF or other so-called multilateral lenders. But he hasn't excluded them either, as the government scrapes together its remaining cash to keep the economy afloat.

The IMF, World Bank and Inter-American Development Bank are typically exempted from government-debt defaults because they lend at extremely low interest rates, often below 3% annually, and do so during crisis situations when other lenders have backed off. An official at Argentina's Economy Ministry wouldn't comment.

Multilateral banks, which are funded by governments including the U.S., have lent Argentina's central government about $25 billion of its $141 billion in total debt. A $74 million payment to the IMF is due Friday, and $936 million is due Jan. 17. The bigger payment can be deferred by as much as a year, if the Argentines request it. But many of the smaller sums due throughout the year must be paid on time, or the government will fall into arrears.

People familiar with the IMF say it will probably make an extraordinary effort to avoid letting Argentina fall into arrears -- possibly by lending more money -- even though it froze pending payments to Argentina late last year, when the government failed to hit economic targets. But if Argentina fails to make payments to the IMF for six months, it would join a shortlist of deadbeat states that includes Afghanistan, the Democratic Republic of Congo, Iraq, Liberia and Sudan.

I don't anticipate that Argentina will go into that class," says Michael Mussa, who was the IMF's chief economist until June and is now with the Institute for International Economics in Washington. "If Argentina has a sensible economic program, the fund will reopen its lending window fairly soon."

But many in the private sector -- particularly foreign bondholders who face certain default -- insist the IMF should share their pain. Some say emergency aid packages the IMF administered to Argentina over the past year allowed the country's long recession to deepen, ensuring that bondholders' losses will be more severe when the country renegotiates its debts in coming months.

The default became palpable Thursday, when a government official said the country missed a $28 million payment on a bond denominated in Italian lire.

"Many people in the market felt the IMF should have backed off Argentina over a year ago and allowed Argentina to deal with its difficulties," says Francis Rodilosso, a portfolio manager at Van Eck Capital in New York. "Our feeling is that there should be equal treatment across all creditors, including multilaterals."

Others on Wall Street say the IMF is guilty of doing too little for Argentina, noting the country's long financial crisis went into high gear after the fund refused to disburse a $1.3 billion loan in December.

"The multilaterals have some responsibility in pushing Argentina over the edge and in building up this whole myth that is called Argentina," says Walter Molano, an economist at BCP Securities Inc. in Greenwich, Conn. "Argentina was their star student and was being sustained in that star position."

Even as default grew increasingly likely over the past six months or so, economists typically said multilaterals wouldn't be affected should the country actually stop payments. Instead, the focus has been on the roughly $95 billion in government bonds held by commercial and investment banks, investment funds and private creditors.

Soon after President Fernando de la Rua resigned last month, amid raging street violence over his inability to reverse the country's economic collapse, his successor Adolfo Rodriguez Saa announced a moratorium on foreign-debt payments.

An IMF spokesman wouldn't comment on Argentina's status as a debtor but insisted the fund is prepared to help. "It is the government's first day in office, and obviously too soon to expect there to have been an exchange of view on policy," said David Hawley. "However, we are ready to work closely with the new government to help it meet the economic challenges that it faces."

A spokesman for the Inter-American Development Bank said it expects Argentina to stay current on its payments, despite the announced moratorium. "Argentina is not in arrears with us, and we don't have any indication that they are headed into arrears," the spokesman said.

A World Bank spokesman said its representatives hope to meet with Argentine officials next week to discuss the status of its $9.5 billion in loans. "There's time to work things out," the spokesman said.