Argentina yesterday dipped into its foreign exchange reserves to pay $250 million of the roughly $1.2 billion in overdue interest it owes its bank lenders.
The payment was about $100 million bigger than banking sources anticipated Argentina would make after it reached tentative agreement on a tough new economic program with the International Monetary Fund Tuesday. The IMF also will loan Argentina $1.18 million once its executive board formally ratifies the pact in August or September.
Banking sources said the payment yesterday apparently was designed to show U.S. regulators that Argentina is trying to reduce its interest arrears as fast as possible and as a show of good faith to its several hundred bank lenders. Most of those lenders have agreed to make a new $4.2 billion loan to Argentina once the IMF approval is formalized.
The U.S. Treasury said yesterday that it is negotiating with a number of Western and Latin American governments to put together a temporary $450 million loan to Argentina that the country will repay once the IMF disburses the first installment of its loan. Argentina will use the so-called bridge loan to trim its interest arrears at commercial banks.
William R. Rhodes, the Citibank executive who heads the committee of major banks that negotiates with Argentina, hailed the payment as "another positive step by the government of Argentina" that will help the banks complete arrangements for the $4.2 billion loan cash-strapped Argentina desperately needs.
In Buenos Aires, the government of Raul Alfonsin took further steps to reduce domestic consumption in an attempt to slash the government's budget deficit, make Argentine goods more saleable abroad and, eventually, reduce its raging 1,000 percent inflation rate.
Import tariffs were raised 10 percent, and export levies were increased between 7 percent and 10 percent. The export tariff increase will generate more revenue for the federal treasury but also will vitiate some of the impact of the 18 percent peso devaluation announced Tuesday. The central bank announced a further 1.29 percent peso devaluation yesterday, and gasoline prices were increased 12 percent as government subsidies were reduced further.
The painful austerity measures -- which will have an initial impact of exacerbating the inflation rate -- met with predictable opposition from labor unions and some business organizations. Those groups began protesting austerity programs even before Alfonsin undertook them.
Banking sources said yesterday they felt confident that in the aftermath of the IMF agreement and the interest payments, regulators will not judge Argentine loans to be so risky that they will seriously reduce their ratings on the loans. If they did so, bankers said, many banks might use it as an excuse to back out of the loan. All but about $40 million of the $4.2 billion loan has been committed.
The U.S. Treasury Department said it hoped to complete arrangements for a bridge loan in a few days.