More than a year after cutting off its lending to Argentina, the International Monetary Fund is poised to grant a "transitional" loan to the country, a move that is generating intense controversy because part of the motivation is to stave off a threatened default by Buenos Aires on its obligations to the IMF and other official institutions.
The loan could be approved by the IMF's executive board as early as Friday, when Argentina is due to make a payment of about $1 billion to the fund, although it might have to wait until next week, officials in Washington and Buenos Aires said yesterday.
Argentine officials have been warning that in the absence of an IMF deal they would refuse to make either the IMF payment or another $1 billion owed this week to the World Bank and Inter-American Development Bank. But one high-ranking official said the country will pay "if we think there is enough evidence" that the IMF agreement is certain to be finalized.
Terms of the loan, under which Argentina would get only enough to repay about $3 billion it owes to the IMF between now and August, are still being negotiated by IMF and Argentine officials. But the loan is drawing criticism from private economists who worry that it may set a poor precedent by showing that a default threat can force the fund to lend to a country that hasn't spelled out a coherent plan for restoring growth and stability.
Some IMF staff members share those concerns. According to sources familiar with the situation, the loan is going forward at the insistence of several powerful member countries of the IMF, notably the United States, at least in part because of a desire to avoid the repercussions of a big borrower's default to the multilateral lending institutions.
"Both sides realize they have a lot to lose" by failing to strike a deal, said Kristin Forbes, a professor at the Massachusetts Institute of Technology and former official in the Bush administration's Treasury Department. But at the same time, "to just give more money, even if there's a low chance that Argentina will do what is needed to recover, is hard to justify."
The idea behind the loan is to tide over Argentina's crisis-stricken economy until after a presidential election April 27. That makes sense for the IMF politically, said Christian Stracke, head of emerging-markets research at CreditSights, an independent credit research firm, because it may help defuse mounting sentiment within the country to sever ties completely with the fund and the international financial system.
But economically, while Buenos Aires has made progress in getting its budget and inflation under control, "if you look at most of the reasons why the IMF has resisted entering into an agreement over the past year, most of those reasons still stand," Stracke said, citing as an example the lack of a long-term plan to restructure the ailing banking system. The IMF and its political masters "just don't want Argentina to default," he said.
Argentine officials hotly disputed those assessments. "The agreement is going to be far more ambitious than many people envisage," Guillermo Nielsen, Argentina's finance secretary, said yesterday in a telephone interview. He added that the country has "a clear strategy" for tackling its major problems, including those of the banking system, as witnessed by the fact that depositors have been returning funds to the banks after fleeing in 2001.
An IMF spokesman said he could "confirm that the talks are continuing but have not been concluded." Tony Fratto, a Treasury Department spokesman, said that "we continue to encourage the fund and Argentina to arrive at a short-term, transitional program," which would "allow for some breathing room for Argentina to continue making the reforms necessary for them to move forward."
Already stagnating amid a long recession, Argentina's economy was sent reeling early last year when the government, facing a financial panic, abandoned the peg linking the peso to the U.S. dollar. It defaulted on nearly $100 billion in debts owed mostly to commercial banks and private bondholders.
The country's credit standing worsened even further in November when it defaulted on all but a fraction of an $805 million payment due to the World Bank; countries that default to the official institutions -- a list that mostly includes "failed states" such as Somalia -- risk becoming full-fledged international pariahs.
Securing an IMF loan could be Argentina's first step toward reversing the deterioration in its creditworthiness, a step the government badly wants to take because many of its exporters cannot get financing to ship their goods abroad. Nielsen disclosed that this week, the government will take another step toward restoring its foreign credit by naming a short list of firms that may be selected as the government's adviser in renegotiating the private debt.
For the official lenders, sealing a deal with Argentina is important because a default by a major borrower would deal a blow to their status as "preferred creditors" that get repaid even when private lenders don't. Although IMF officials professed to be unworried about the potential impact of a default on the fund's financial condition, there were greater worries at the Inter-American Development Bank. A default there would force the bank to raise interest rates on loans to other developing countries in the Western Hemisphere.