Argentina Says It Will Restructure Debt
Government Hopes to Avoid Defaulting on Loans as Economic Crisis Deepens
By Anthony Faiola
Washington Post Foreign Service
BUENOS AIRES, Oct. 28 -- Confronting a deepening economic crisis, Argentine
officials today acknowledged the need to restructure the national debt,
cash-strapped government will move this week to voluntarily renegotiate payments with its foreign and domestic creditors.
The decision -- which is expected to be officially announced by President
Fernando de la Rua in coming days and was outlined by de la Rua and Economy
Domingo Cavallo in interviews today -- was the first admission after months of financial turmoil here that foreign lenders are unlikely to receive everything they are
owed. But the decision also amounted to an effort by Argentina to find a middle ground with creditors that stops short of an involuntary suspension of payments, or
default, on the country's $132 billion debt.
With the failure of the government's repeated crisis-fighting measures,
and the nation's economy mired in its fourth year of recession, economists
have predicted for
months that Argentina would eventually have to renege on its debts. Still, the news could further unsettle global financial markets already in a fragile state as a result
of the worldwide economic slowdown and the Sept. 11 terror attacks.
The impact is most likely to be felt in other Latin American countries,
especially Brazil and Chile, whose currencies have been plummetting for
much of the year
because of fears that Argentina would be forced to default and abandon the system that keeps its currency rigidly linked to the U.S. dollar.
The debt-restructuring negotiations are expected to be arduous and could
last months. Argentine bonds are among the most widely held in the world.
pension funds, mutual funds and financial institutions have invested in them. Argentine officials said in interviews that the government would continue to honor its
outstanding debt, but hoped to swap new bonds with lower interest rates for billions of dollars' worth of outstanding bonds now yielding interest as high as 20
The resulting savings, de la Rua told La Nacion newspaper today, would
allow Argentina to implement a long-delayed financial stimulus package
that is expected to
be announced this week. The package is "aimed at [economic] reactivation and social rejuvenation" after four years of recession, de la Rua said, and would include a
job creation program, relief for the unemployed, reduced taxes and other measures to jump-start the country's economy.
The Argentine crisis also represents the first major test of how the
Bush administration, which reluctantly agreed to an $8 billion International
Monetary Fund bailout
of Argentina last August, will deal with financial crises after Sept. 11. Indeed, Argentina hopes to induce investors to accept the new bonds by securing them with an
additional pool of money authorities hope to amass through major international lenders such as the IMF, World Bank and Inter-American Development Bank.
Sources close to the government said today that Argentine authorities
are in talks with the World Bank and Inter-American Development Bank about
contribution of between $5 billion and $6 billion. But permission to apply existing loans along with new IMF money to back up the new bonds, as well as the political
support of the U.S. Treasury, could prove essential.
IMF and Treasury officials in Washington declined to comment.
"Without international support," said a source close to the government, "a voluntarily swap is probably impossible."
In exchange, Argentine officials suggested, they would be willing to
continue to overhaul state bureaucracies, eliminate subsidies on such products
as gas in
Patagonia, and perhaps take further measures to link the economy to the U.S. dollar.
Although the government had publicly announced that a smaller debt swap
was in the works with domestic creditors, the broader decision to enter
renegotiations with foreign creditors comes as Argentina's economic and political crises have serverely worsened.
In the past month, Argentine unemployment has soared almost 2 percentage
points to reach a record high of 18 percent. Dozens of businesses are closing
month, and consumer confidence has reached an all-time low. De la Rua has faced repeated calls from the opposition Peronist Party, which won control of both
houses of Congress two weeks ago, to call early elections.
De la Rua has refused calls to step aside, but he is also facing increasing
isolation from his own party and his cabinet appears locked in internal
breaking point, however, was the collapse last week of a pending deal with provincial governments to limit the amount of tax dollars they receive in order to service
Still, even a successful debt swap is likely to cause private lenders
to shun Argentina for months, if not years, and top bond-rating houses,
such as Standard &
Poors, have threatened to declare Argentina in default anyway if the country is perceived as imposing lower interest rates on unwilling creditors. But analysts say the
government is willing to take that risk because the worsening recession and increasing social unrest have eliminated the option of further belt-tightening to make ends
Staff writer Paul Blustein in Washington contributed to this report.
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