Argentina Fends Off Vultures

In spite of market calls for the International Monetary Fund to adopt a tougher stance against the heavily indebted nation, Argentina has managed to revive its moribund economy.

 

By Gonzalo Baeza

 

Argentina has managed to reach a compromise in its ongoing stare-down with the International Monetary Fund (IMF) amid growing pressure from the country’s creditors and the multilateral agency’s own bullying tactics.

 

The beleaguered South American nation, which only two years ago suffered the worst economic collapse in its history, acquiesced to repay the IMF some $3.1 billion mere hours before the loan’s March 9 deadline. The payment was made on condition that the fund approves its second review of a three-year standby credit granted to Argentina in September.

 

According to Sen. Cristina Fernandez, wife of Argentine President Nestor Kirchner, the IMF “respected everything that we asked for.”

 

Kirchner had refused to budge to IMF pressure for Argentina to repay the credit as well as accept a number of stringent conditions in its ongoing talks to renegotiate some $94.3 billion in defaulted bonds held by private investors.

 

Considering how more than 50 percent of Argentina’s 38 million population lives in poverty and national unemployment runs at an official 20 percent, additional demands do little to help the country’s economy regain its footing. In spite of the present situation, Argentina’s GDP grew by more than 8 percent in 2003.

 

The IMF is presently calling for a so-called “debt rescheduling acceptability principle” where Argentina’s debt repayment offer is to be accepted by a minimum of 80 percent of the country’s creditors. Argentina is being represented in renegotiation talks by Merrill Lynch, Barclays Capital, and UBS Investment Bank.

 

Conspicuous by their absence are other institutions such as Bank of Boston or Citibank, which were reportedly shunned earlier in the selection process given an ongoing probe into the banks’ alleged funneling of billions of dollars abroad just a few days before the country’s financial collapse in December 2001.

 

Foremost in the mind of IMF Deputy Managing Director Anne Krueger, one of Argentina’s most acerbic critics, was the money that the country directly owes to the fund.

 

Argentina’s IMF debt accounts for nearly 15 percent of the $106 billion in outstanding loans owed to the fund by borrowing countries worldwide. More than the frustrated hopes of Argentina’s other creditors, the IMF was worried about how defaulting to the fund would affect the multilateral agency’s own credit rating.

 

Along with its $94.3 billion debt to private bondholders, Argentina owes nearly $85 billion more in public debt. The latter obligation includes some $25 billion in bonds that were actually issued long after the country’s economic meltdown and default, leaving analysts to wonder where were the IMF and other patron saints of the financial system to monitor the new operations.

 

There is, however, a likely reason why investors and speculators have so far ignored the words of the IMF’s head honchos and the editorial page of The Wall Street Journal telling them that Argentina is not to be trusted as a debtor. They probably know that in the end they will extract a hefty profit out of Argentina just like many speculators did during Brazil’s debt renegotiation process a few years ago. The operation will not take much more effort than waiting for the IMF or the World Bank to exert the right pressure or lure the local authorities with the promise of more loans.

 

In the meantime, Argentina’s creditors have resorted to new ways of persuading the Kirchner administration to cough up the money they demand, including filing lawsuits in U.S. courts.

 

The unprecedented scenario in which a U.S. court gets dragged into a financial conflict between foreign nations and international bankers and speculators has nonetheless proved to be an effective tool for bondholders. Only on March 6, Manhattan federal judge Thomas Griesa ruled in favor of a group of 44 creditors holding some $20 million in Argentinean bonds to be paid from Argentina’s assets abroad. Griesa also confirmed a previous sentence ordering  the freezing of two U.S. accounts holding $11.5 million owned by a former Argentine postal service operator. Several New York-based law firms are reportedly lining up to file new lawsuits in favor of other claimants, including prominent European investment funds.

 

The money is, however, short change compared to the $725 million in Argentine debt held by U.S. billionaire Kenneth Dart and which, in accordance to a landmark ruling by Griesa in September, should be fully paid by the South American nation. Dart is the heir of a U.S. foam cup fortune, and owns a significant amount of the bondholder-owned debt through his investment vehicle EM Ltd. The latter is one of several agencies which Argentine Finance Minister Roberto Lavagna, among others, has called “vulture funds.”

Kirchner has privately complained how a significant amount of the defaulted Argentine bonds has ended up in the hands of so-called vulture funds, which paid an average 20 cents to the dollar for them.

 

What Dart is asking the Argentine government to do, however, is what he himself refused to in 1994, when he renounced his U.S. citizenship in order to avoid paying taxes that according to Internal Revenue Service records amounted  to $21.7 million that year as well as $34.5 million in 1993.

 

Dart has since settled in renowned tax haven Belize, from which he conducts his business operations such as when he profited $605 million in defaulted Brazilian bonds, which, just like he did with the Argentinean debt titles, were bought at a fraction of their real value.

 

Dart’s maneuvers taint the motives of smaller investors who simply fell for the hype about Argentina allegedly being a wise investment that financial establishment organs such as The Wall Street Journal reported on during the 1990s.

 

Now, the Journal has changed its tune. In a recent editorial, the Journal labeled Argentina a “deadbeat” nation and called for the IMF to adopt a tougher stance on the rebellious country.

 

 

Gonzalo Baeza, a native of Chile, is AFP’s South American bureau chief. A widely-published independent journalist with many years of experience, Baeza’s work for AFP has focused on the detrimental role of international banking in shaping U.S. policy toward Latin America.