Argentina's military government, already in technical default on its $40 billion foreign debt, may soon be forced to reach an unwanted settlement in its conflict with Britain by the international bankers who hold the country's loans, according to government and banking sources here.
In line with the government's continuing claim to the British-held Falkland Islands, the ruling Army government of President Reynaldo Bignone has sought to keep up the pressure on Britain by refusing to agree to an end to economic sanctions mutually imposed in April, including a freezing of British assets and a trade blockade.
The tough diplomatic strategy, however, has run up against the realities of a balance of payments crisis as the new minister of economy, Jorge Wehbe, prepares to meet Argentina's creditors at the International Monetary Fund meeting in Toronto next week to seek renegotiation of billions of dollars in loan payments it cannot meet.
"Argentina must renegotiate," an official at an American bank here said flatly. "And the banks have said they will not agree to advance more credits until the economic blockade comes to an end. That is seen as a necessary condition."
In order to renegotiate the debt, the foreign bankers have told officials here, Argentina will have to settle accounts with Britain, which holds a large portion of the debt. That will mean the lifting of the sanctions imposed by the two governments and possibly Argentine acceptance of Britain's insistence on a declaration of cessation of hostilities in the South Atlantic.
The reason, foreign banking officials interviewed here said, is that Argentina cannot exclude Britain in refinancing its debts with West European banks because of the way international loans are spread among a variety of banks. As long as Argentina refuses to pay the British loans in keeping with the freeze on British assets, all banks involved in Argentina's loans are shortchanged, the officials said.
"This is not political pressure," said one executive of a leading American lender to Argentina. "The problem is that as long as there is an embargo, everyone is getting shortchanged. And so new credits cannot be extended until this problem is corrected."
The only alternative for Argentina, bank officials here say, would be a form of default by the government on its $40 billion debt or the continuing failure to make payments now due. Either action could place a severe strain on a large number of international banks and could lead foreign companies and governments to halt all exports to Argentina, these officials say.
Diplomats here say lifting of the mutual sanctions is complicated by a delicate question of timing. Argentine officials say Britain should lift its economic sanctions first, then allow Argentina to act on measures against Britain. But Britain, the diplomats believe, is expected to insist on a simultaneous lifting of sanctions.
The financial necessity to settle with Britain could cause substantial political damage to Argentina's Army government, which already is surrounded by continual rumors of coup plots. Lifting the sanctions also could sabotage Argentina's diplomatic campaign to force Britain to negotiate on Argentina's sovereignty claim to the Falklands and anger military hard-liners, who oppose any further accommodation with London.
Argentina's foreign debt, which has more than quadrupled in 6 1/2 years of military rule, has become a major subject of political debate and led to demands for investigations against the government.
Both the government and private companies accumulated the debt by borrowing from international private banks and lending organizations such as the World Bank. Argentina's total foreign debt, while only half the size of Mexico's, is the third largest in the developing world; the nation owes substantially more than Poland, whose near-default this year provoked bankers' concern.
In recent weeks, government opponents have charged that most of the money Argentina borrowed was used not for revenue-generating projects but to make up for overspending by state companies and to pay for trips abroad and financial speculation. The military also has been accused of giving powerful leverage over Argentine affairs to U.S. and West European bankers, who hold the majority of the outstanding loans.
The issue of the sanctions, and hard-line military opposition to any concessions, was partly responsible for the resignation last week of the minister of economy, Jose Dagnino Pastore, after little more than a month in office, financial sources here said. Dagnino Pastore reportedly argued without success to President Bignone that Argentina could not solve its severe economic crisis without accepting the banks' conditions and settling with Britain.
Wehbe, the veteran economic technician who replaced Dagnino Pastore, told foreign reporters in a briefing here before leaving for Toronto that the government now hopes to renegotiate an estimated $12 billion in due payments without lifting its freeze on British assets.
"There could be another solution," he said. "It has always been good business to lend money to Argentina. American banks could replace British banks" involved in Argentina's debt.
Wehbe said that he plans to meet with private bankers and IMF officials in Toronto to explore plans for settling the interest payments, on which Argentina is already more than $2.5 billion overdue. The government hopes to receive either a private package of new loans to pay its obligations or an IMF "standby" package like that now being negotiated with Mexico, he said.
Wehbe said that Argentina had no choice but renegotiation, but he hinted that he will have no more authority than Dagnino Pastore to promise a settlement of the conflict with Britain.
"If conditions are brought up that are not strictly financial," he said, "that is not my sphere. This is the responsibility of the Foreign Ministry."