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IMF, Argentina Reach New Credit Agreement - 2004-03-10

Argentina this week avoided what would have been the biggest default ever to a multilateral lender when it made a $3 billion payment to the International Monetary Fund.

Argentina has given money to the IMF and the 184 member nation financial cooperative has, in effect, agreed to lend the money back to Argentina. The arrangement keeps Argentina in the good graces of the IMF and buys time for Buenos Aires to begin meaningful negotiations with its private sector creditors. The creditors, mostly big financial institutions in New York and Europe are owed $88 billion by Argentina. Argentina says it can't pay and is offering the creditors 25 cents on the dollar.

Tom Dawson, the IMF spokesman, said Wednesday Argentina has agreed to begin meaningful negotiations with the bondholders but he isn't sure of the outcome. "It is up to the two parties, with the many creditors in this case being one party, to negotiate. And they will determine what is a successful process of negotiations. [The IMF] are not dictating to either the authorities or the government what the outcome of the process is," he said.

Analysts are worried that an Argentine default on its IMF debt would weaken the Washington-based institution and send the wrong signal to other problem debtors like Turkey, Indonesia, Brazil and Russia.

For Argentina, a default to the IMF would have negative consequences. Jane Eddy is Latin American specialist at Standard and Poors bond rating agency in London. "Argentina is very dependent on money it receives from other multilateral lenders like the Inter-American Development Bank, the World Bank, and so forth. They are contingent on staying within the good graces of the IMF. The money is hugely important to their social programs," she said.

Argentina in recent months has been working its way out of a three year-long economic downturn. The government's tough stance with creditors is wildly popular at home. Aided by rising commodity export prices, the IMF says Argentina is making progress in putting its financial house in order. It is, however, insisting that several conditions be met.

IMF Spokesman Dawson says the new agreement [a letter of intent] builds on earlier loan conditions. "The idea that something new is added to the program-it's a little hard to define what new is. Because elements of having a fiscal target [limits on the budget defici]), a monetary target, or financial restructuring [of the banks, for example], or of the utilities issue [prices charged for services], or negotiations with creditors, every one of those was in the original letter of intent," he said.

The IMF decision to lend to Argentina at a time it was refusing to negotiate with bondholders drew criticism from some European members of the fund. They argue that until Argentina is serious about reaching a deal, the IMF should stay out of the picture.