Mon, Jul 30, 2001 page21

• IMF takes a hard line on Argentina

  FINANCIAL BAILOUTS The international lender of last resort won't accelerate payments of its promised US$40 billion in loans

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  Argentine Economy Minister Domingo Cavallo has voiced hope the IMF will speed up loan payments to his debt-strapped government, saying it would send "a clear message to the markets."

  Many investors and analysts have a message for Cavallo: Faster aid won't help unless it includes the billions of dollars in loans the IMF has pledged Argentina for 2002 and 2003. And the IMF says that is "not on the table." "Argentina has to be seen taking the pain," said Nicholas Field, who manages US$150 million in emerging market debt for WestLB Asset Management in London.

  The fund is sticking with plans to provide only a US$1.2 billion payment in September, part of a US$40 billion bailout arranged last year. That's the latest sign the lender is taking a harder line toward borrowers such as Argentina, Turkey and Indonesia, analysts say.

  

  Argentine police clash with state workers who protested against Argentine President Fernando de la Rua's salary cut proposal in Posadas late last month.

  PHOTO: AFP

  The IMF, under pressure from the US and other major shareholders, is being more stringent on borrowers after drawing fire for arranging a quarter-of-a-trillion dollars in emergency loans for countries from Mexico to Russia to Turkey since 1994.

  Those loans, critics say, did little more than save private creditors from bad investments and give borrowing governments scant incentive to overhaul their policies.

  For Argentina, an acceleration of payments from the US$7 billion in loans the government has remaining in the credit line the IMF pledged last December would help the country cut its deficit to zero and reassure investors it can stay solvent.

  A public show of support from the US Treasury Wednesday fanned Cavallo's optimism about quicker payments and signaled that at least the country won't be pushed to default on its US$130 billion in debt.

  Yet the IMF has refrained from offering accelerated or additional support since making its last disbursement on May 21.

  It has stayed on the sidelines while the price of the country's floating rate bond due in 2005 has fallen more than 20 percent since the end of May.

  Argentine bonds declined for the fourth day in a row Friday, with the yield on its 2005 floating rate bond rising to 33.5 percent after Moody's Investors Service Thursday downgraded the country's credit rating for the second time this month. The yield is more than double what it was a month ago.

  The IMF is pushing the Latin American country to follow through on its promise to reduce its borrowing to zero, which has forced the government to get businesses to pay taxes years in advance and public employees to take pay cuts.

  "This is a time for tough love for Argentina," said Walter Molano, head of research at BCP Securities.

  The fund also delayed a US$1.5 billion loan payment to Turkey until the government sold or shut troubled banks and appointed professionals to the state phone company's board. And it has withheld US$400 million from Indonesia for seven months on concern over political unrest and the central bank's autonomy.

  Argentina is the largest emerging-market borrower from the capital markets so its case is being closely watched.

  Argentine officials, led by Finance Secretary Daniel Marx, were in Washington this week for talks with the IMF and Treasury.

  At the same time, a team of IMF officials is in Buenos Aires, negotiating terms of the next US$1.2 billion loan payment.

  The fund's US$40 billion bailout of the Latin American nation included a credit line of about US$14 billion from the IMF itself.

  Argentina has about US$7 billion of that left.

  In a meeting Thursday with reporters in the Argentine capital, Cavallo pointed to a statement the previous day by John Taylor, the US Treasury's undersecretary for international affairs, which called on the IMF to approve the next loan payment "quickly." Taylor asked the IMF to speed the funding and "possibly bring it forward, to give a clear message to the markets that we have support," Cavallo said.

  "I believe the IMF will respond favorably," Cavallo said.

  The IMF won't speed up disbursement of the estimated US$4.6 billion that Argentina has coming in 2002 or 2003, to provide it this year, spokesman Thomas Dawson said this week.

  "There's nothing planned at this point," Dawson told reporters.

  Some investors agree the IMF is right to take a harder line.

  "Investors won't make responsible investments and governments won't make responsible fiscal policy until they learn they are going to be left to take responsibility for their own actions," said Francis Rodilosso, who helps manage about US$130 million in emerging-market debt for Van Eck Capital in New York.
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