Argentina defaults on $805 million payment
BY JANE BUSSEY
Argentina surprised the international financial community Thursday by defaulting on an $805 million payment to the World Bank, a risky step taken only by the world's biggest deadbeat nations.
The move creates further obstacles to the country's recovery
from the economic crisis that has added several million people to the ranks
of the poor and driven
unemployment levels to more than 23 percent.
Amid the country's deepening poverty, the government Thursday was reeling from the political fallout after the deaths of four children from malnutrition in the province of Tucuman, where local officials warned that unemployment reached 50 percent.
Thursday's step toward default was the latest surprise from the country that was once the South American economic success story and now has become the black sheep of the financial world.
After a series of telephone calls between President Eduardo Duhalde
in Buenos Aires and Economy Minister Roberto Lavagna in Washington for
debt talks, the
government announced it would defer debt payments of $805 million and pay merely $77 million in interest.
It was a blow to rising public confidence and stocks and the peso fell on the news.
The move puts the country on the path to full default with the World Bank. It has until April to re-establish its payment schedule and avoid being grouped with financial pariahs like Iraq, Liberia, Zimbabwe, Seychelles and the former Republic of Yugoslavia, which are barred from global borrowing. In January, Argentina defaulted on some $95 billion in bonds to private lenders -- the largest sovereign debt default in history.
It cannot be happy news for the multilateral lending agencies,
either. At the World Bank, Argentina is the fourth-largest borrower after
heavily populated Indonesia,
China and Mexico. An even larger share of the Inter-American Development Bank's loan portfolio is lent to Argentina.
In recent years, buoyed by the idea that the country's economy
would grow and grow, Argentina borrowed heavily to finance its domestic
economy. When the economic
boom ended, lenders fled and country was like a bankrupt Enron, unable to pay its debt.
The trigger for the de facto default was the failure of the Argentine
government and the IMF to reach a new agreement that would have provided
new money for
Argentina that would have been used to pay the World Bank. The Argentine government said that paying the full amount with its foreign reserves would put the $9 billion stash of foreign exchange in danger.
Duhalde defended the move, saying it would be ''risky'' to pay the World Bank the full amount without having an IMF agreement. He called provincial governors and lawmakers to a meeting in Buenos Aires on Monday to discuss the problem.
Lavagna also tried to play down the seriousness of the move as he hurried between meetings at the IMF and World Bank in Washington.
''It's not an excessively grave situation,'' he said. ``We were
expecting to close the agreement with the IMF before this date. After we
reach an agreement, we will
normalize the payments situation.''
Conventional wisdom held that Argentina and the World Bank would find a technical way to finesse the appearance of a payment to avoid default until the problems with the IMF had been ironed out.
Financial analysts said the move could be part of Argentina's bargaining stance to pressure the IMF into accepting Argentina's terms in a new loan agreement.
''Is this a real default or a negotiating strategy,'' said Martin Schubert, chairman of European Inter-American Finance Corp. in Miami.
''They are playing a dangerous game,'' Schubert said, adding that the default would appear to put ``pressure on the IMF to finalize a debt package with them in order to avoid making a default on all the multilateral debt.''
But the IMF has shown no sign of backing down, raising criticism that it was intent on making an example of Argentina.
Negotiations have stalled over numerous issues, most recently
IMF demands that Argentina allow foreign-owned utilities companies to raise
rates by some 30 percent. On the other hand, the Argentine National Congress
balked at a recently approved bankruptcy bill.