Pledge to Negotiate With Bondholders Keeps Loans Flowing to Buenos Aires

By Paul Blustein
Washington Post Staff Writer

Stepping back from the biggest default in history to an international lending agency, Argentina agreed yesterday to pay money it owes to the International Monetary Fund, and the IMF promised to keep lending to Argentina.

The accord came after the two sides compromised on how Argentina will deal with its private creditors, a highly sensitive political issue for President Nestor Kirchner. Argentina has already defaulted on about $90 billion in obligations to those creditors, many of whom are bondholders in the United States, Europe and Japan.

The pact was reached a few hours before the evening deadline for a $3.1 billion payment that Argentina owed the IMF. Had Argentina gone into default to the fund, both sides would have faced enormous potential costs -- for Buenos Aires, a deeper isolation from the international community; and for the fund, steep losses on loans that represent about 15 percent of its portfolio.

Averting that scenario allows Argentina and the IMF to maintain a tenuous partnership that is aimed at gradually bringing Argentina back from its collapse in early 2002, when it defaulted on its bonds and was forced to devalue its currency. Under their current agreement, the IMF lends Argentina only enough to ensure that Buenos Aires can repay the fund what it owes -- an arrangement that keeps the country from becoming even more of an international pariah than it already is. Countries that fail to pay the IMF become ineligible for all sorts of aid, including World Bank loans. That list consists mostly of "failed states" such as Sudan and Somalia.

The arrangement has been increasingly strained in recent months because the IMF is supposed to lend to countries in default only when they are negotiating in good faith with their private creditors, and Argentina's creditors protested that condition was not being met. Kirchner's government has taken a very tough line with the creditors, announcing last year that it will repay about 25 cents on the dollar on the defaulted bonds and can afford no more in light of persistently high unemployment and poverty since the 2002 crash. That stance has made Kirchner hugely popular with the Argentine public, but it has outraged bondholders who argue that the offer is closer in value to just eight cents on the dollar once unpaid interest is included.

The details of yesterday's agreement were not announced, but sources familiar with the accord said Argentina has agreed to "negotiations" with its creditors after months of insisting that it would conduct only "discussions." That is a subtle but important distinction that implies some willingness by Buenos Aires to be flexible on the repayment terms -- though how flexible is left unstated, sources said. The Argentines also agreed to aim for acceptance of the terms by a reasonably sizable percentage of its bondholders -- though precise figures were not spelled out. In addition, the Argentines agreed to recognize the Global Committee of Argentina Bondholders, a group claiming to represent a large number of bondholders whose legitimacy has been questioned by officials in Buenos Aires.

Officials in Washington and Buenos Aires were quick to suggest that the other side had blinked after a tense confrontation over the past several days during which Kirchner repeatedly vowed he would default to the IMF rather than deprive his government of the resources it needs to meet pressing social needs. Kirchner's wife, Sen. Cristina Fernandez de Kirchner, told Argentine television that the government had rejected IMF demands for "things that were outside of the original accord" signed last year. "Argentina hasn't signed up for anything that we cannot fulfill, which is what we always promised," she said, according to wire service reports.

But in Washington, officials portrayed the agreement as containing enough important concessions by Argentina to attract the support of major governments that have derided previous accords as too weak. Last autumn, eight members of the 24-member IMF executive board took the unusual step of abstaining from approval of Argentina's program. Included in that group were three members of the Group of Seven major industrialized nations -- Italy and Japan, where many individuals holding Argentine bonds reside, and Britain.

"Argentina has agreed to negotiate with established creditor groups in order to get broad participation in its debt restructuring," said a source who agreed to be identified only as a G-7 official. "This is significant and it represents progress. . . . There is a great deal of unanimity among the G-7 on this issue."

But one high-ranking IMF source, while welcoming the agreement as preferable to a breakdown, noted that two years have passed since Argentina defaulted on its bonds and it is now only agreeing to negotiate. The source also pointed out that Argentina may continue to take a hard line whether it is "negotiating" or "discussing."

"This isn't a victory to be celebrated with champagne -- only beer," the IMF source said.

Whatever the current agreement says, more confrontations loom down the road, because if Argentina is perceived by the G-7 as being unreasonable with creditors, pressure will arise anew for a cutoff of IMF lending when the next Argentine payment comes due in June. At the same time, Kirchner also faces tremendous pressure to limit concessions to the bondholders.

"If Argentina makes a payment now, it will have another period of three months in which it will try to convince the world that it is earnestly trying to resolve the issue of the debt," said Federico Thomsen, an independent economist in Buenos Aires. "I would keep it separate from what Argentina is actually offering, which is always going to be something irritating to bondholders because there is not much to offer."

Special correspondent Brian Byrnes contributed to this report.

© 2004