IMF grants new loan to bail out Argentina
By Eva Karnofsky
BUENOS AIRES: Argentina's President Fernando de la Rua rejoiced: "The uncertainty is now over." Early Wednesday, the International Monetary Fund (IMF) finally declared its willingness to give financial aid to his country once more after 12 days of negotiations.
The IMF will provide US$ 8 billion to help save Argentina from bankruptcy and economic ruin. It also approved payment of the $1.2 billion promised at the beginning of the year to redeem debts due. In turn, Argentina commits itself not to incur a budget deficit this year also and to save money by means of reforms.
A liquidity guarantee of five billion dollars is intended to help convince Argentina's savers not to withdraw further deposits and the IMF earmarked three billion in order to convert a part of the country's national debt -- amounting to $130 billion -- into low-interest bonds. Argentina last had to pay around 15 per cent in order to gain access to fresh money at all. Thus it has to find $11 billion for debt servicing this year alone.
The planned new issues are supposed not only to have a longer maturity but, in particular, to be characterized by a payment security along the lines of Brady bonds. Brady bonds are interest-bearing securities issued in the early 1990s by Latin American borrowers as part of an arrangement to reschedule international bank debt.
The bonds were denominated in US dollars and U.S. government securities carrying no interest provided collateral security. The idea originated from former U.S. Treasury Secretary Nicholas Brady.
It is not yet certain who will undertake the guarantee. According to Argentinean daily Clarin, the World Bank, the United States and Germany are all being mentioned. The planned debt exchange is supposed to take place solely on a voluntary basis.
Argentina's depositors have withdrawn more than $10 billion from their deposits since the end of June. More than $400 million in withdrawals were made last Friday alone. The IMF standby loan is intended as a signal to savers that they may leave their money in the bank without worrying. It is thus expected that, for the time being, Argentina will not even need to touch the payment scheduled for early September.
Initial reactions from economic experts encourage hope that savers will react positively and that bank rates will decline as a result so that companies are able to think of investing once more.
Details of the fine print on the agreement with the IMF are still unknown but one thing is certain: President de la Rua will have to take drastic steps in order to fulfill the conditions. So far he has succeeded in not allowing a deficit to occur in August but in view of the shrinking tax revenues he will find it difficult in September to make ends meet without new budget cuts.
Experts expect that he will have to increase the pay cuts in the public service to at least 20 per cent from the current 13 per cent; only, nobody knows up to now how he intends to push this through. He does not have the majority in Parliament and public displeasure is high. Polls show that only about 20 per cent of the population is still in agreement with his administration.
People blocked dozens of roads throughout the country for three days last week in protest against the cuts and trade union federations have announced that they will stage demonstrations in the capital next week. Even violence can no longer be excluded if more saving is carried out.
By now every third Argentinean is living in poverty and the income curtailments among public servants and pensioners ensure that more families are now joining the ranks of the poor.
Argentina's chief negotiator Daniel Marx reportedly promised in Washington to make the amount of the monthly money transfers to the provinces in future dependent on the level of the state's tax revenue. The resistance of the provincial governors is foreseeable: Most of the provinces spend their contributions from the state coffers mainly for wages and salaries.
Partial national elections are scheduled for October 14 and no governor will be voluntarily prepared to cheat the voters by slashing wages. De la Rua will have to find a solution because he has to keep the agreements with the IMF. In recent years, Argentina too often has made promises which it deliberately forgot later.
A commentary in the daily newspaper La Nacion warns that the IMF will not give the country another chance. If de la Rua does not take advantage of it, then not only will Argentina's bankruptcy be inevitable, but also his days as president will be numbered.
-- Sueddeutsche Zeitung