- The Washington Times - Saturday, March 6, 2004

The current showdown between Argentina and the International Monetary Fund (IMF) will probably produce a pyrrhic victory. Argentina owes the IMF $3 billion, due on Tuesday. The country’s president, Nestor Kirchner, has warned the IMF that it won’t pay until the fund signals that it will approve Argentina’s second review of its $13-billion, three-year loan.

Meanwhile, Mr. Kirchner is staring down creditors holding about $90 billion in public debt. He has offered the most drastic restructuring of all time, proposing that Argentina pay just 25 percent of the principal owed and none of the interest due until a deal is reached.

The United States has urged Argentina to make creditors a better offer. Mr. Kirchner isn’t budging. Unfortunately for him, the accommodating Horst Kohler is stepping down as IMF chief and the tougher Anne Krueger will be taking over. A report from IDEAglobal, a financial consulting group, said, “Argentina is likely to push the envelope” in its standoff with the IMF, and enter technical default for a few days. But the IMF will blink first, the report predicted. The United States, which has 17 percent of the votes on the IMF board, is expected to play a key role in securing approval of Argentina’s second loan review. This would essentially be a replay of the first loan review last September.

Such a scenario could be problematic, both for Argentina and the fund. For starters, Argentina could use some pressure to settle with its creditors. Still, creditors should not expect a radical improvement from what Mr. Kirchner has proposed, given the depth of the fiscal crisis. Investors who bought Argentine bonds assumed a very high risk and will be taking a substantive hit. But Argentina could still afford a more generous offer, said Teresa Paiz, director in the Sovereign Group for Fitch Ratings. If Argentina were to stand by its proposal to pay just 25 percent of principal, it could, for example, also restructure past due interest with a bond offering, and repackage the remaining debt with a growth-linked bond.

If Argentina can reach an agreement with creditors this year, it will probably make out acceptably. But if the IMF proves it can be pressured by Mr. Kirchner again, it will set an unfortunate example.

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