U.S. banking regulators have classified a large portion of Argentine debt as "substandard" because the country is past due in making many of its interest payments, banking sources revealed yesterday.
But bankers said the regulators' decision was crafted in such a way that it should not impede current negotiations between lenders and the debtor nation and may hasten an agreement. Argentina is seeking to renegotiate terms on about $20 billion in maturing loans as well as another $5 billion in new funds.
The new bank funds are crucial to formal approval by the International Monetary Fund of a tentative lending agreement it signed with Argentina last September.
The regulators classified as substandard any Argentine loan on which interest payments were 30 days past due.
The regulators said they would not classify as substandard any loan commitments banks make to Argentina, even though older loans to the Argentine government are in that category. Apparently to induce U.S. banks to come to a quick agreement with Argentina, banking sources said regulators promised to reexamine their stance on past-due Argentine loans when Argentina signs a formal IMF agreement.
All told, Argentina owes foreigners about $45 billion, of which roughly $25 billion is owed to commercial banks. U.S. banks, the only ones affected by the regulators' decision, hold about one-third of bank loans to the debtor nation.
Argentina's key bank lenders had worried that regulators -- the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve Board -- might have classified both current and future Argentine loans as substandard, giving many reluctant regional banks an excuse for backing out of any new loan commitments to the country.
A substandard classification does not force banks to write off as uncollectable any portion of the loans, although it does require them to pay special attention to the quality of the loans. Most loans that regulators call substandard, however, are placed on problem lists by banks. Banks already have put many of their Argentine loans on those lists.
In addition to loan commitments, the regulators also excluded from the substandard classifications trade credits, interbank loans and loans that are current.
The new classifications should have little impact on banks because the lending institutions already have placed on their problem lists all Argentine loans 90 days past due. That represents about half of the Argentine loans held by U.S. commercial banks.
Argentina has paid enough interest to keep itself current on government loans through mid-May.
Argentina signed an economic agreement with the IMF in late September -- after nine months of negotiations -- under which Argentina committed itself to take steps to reduce inflation (now in excess of 700 percent a year), cut public spending, devalue its currency to increase exports and reduce its need to borrow.