Argentina said it may delay a US$3 billion payment to the IMF next year and plans to tap a US$1.5 billion emergency credit line from private banks to ensure it meets obligations to bondholders.
The country would be the first to exercise an option to delay payments that the IMF has allowed only three others -- Brazil, South Korea and Russia. The last time any nation deferred an IMF payment was in the early 1980s, when Guyana and Vietnam made special requests before defaulting on their debts.
Argentina's latest financing plans, outlined by government officials on a conference call with investors, underscore the IMF's willingness to help as the nation tries to convince investors it will meet payments on US$95 billion of bonds.
"There's a window for a solution but it's a very narrow one," said Mead Welles, who manages about US$160 million in emerging market assets for Octagon Asset Management, LLC, which sold all its Argentine bonds in recent months and now owns securities in the country backed by commodities. "We see this as a long-term problem that's not easily going to go away." Argentina's benchmark bond rose 0.6 to an offer price of 76.81, to yield 22.5 percent, down from a yield of 33.8 percent before the IMF announced the new loan agreement Aug. 21, according to prices provided by JP Morgan Securities Inc.
With tax revenue and central bank reserves falling, Argentina sought IMF assistance last week to bolster confidence it can meet debt payments. The agreement requires spending cuts, which will be difficult as a recession drags on, depositors pull savings and Argentines protest lower wages and pensions.
"The near-term risk of default has lessened significantly, and going forward it will be tied to depositors and politics," said Mark Dow, a former IMF economist who manages US$500 million in emerging market debt at MFS Investment Management in Boston.
"What Argentina wants to do is tough, but not undoable." The IMF last week announced a new loan for Argentina, part of which is tied to a rescheduling of some of the country's bonds.
Government and fund officials didn't release details of the accord, though in meetings this week the US signaled it was willing to support additional loans for Argentina.
The US$3 billion payment due to the IMF next year is part of the US$14 billion loan the fund approved for the country in December. The loan agreement allows a payment deferral of as long as two-and-a-half years. Argentina's interest on the loan would climb 50 basis points every six months.
The three other countries that were granted this option all repaid their loans ahead of schedule, said IMF spokesman Francisco Baker.
Argentina, with US$130 billion in total debt and cut off from capital markets, won't need to borrow overseas until October 2002, government officials said. The country expects to have to raise US$2.1 billion next year on international markets.
The government plans to ask local banks and pension funds to buy or roll over at least US$3.7 billion of bonds in 2002.
The government this year will tap an emergency credit line from international banks to help cover withdrawals, central bank board member Amelia Martinez said on the conference call.
"The real risk is not at the government level anymore, but the potential impact on banks and the corporate sector," Octagon's Welles said.
Deposits at the nation's banks have fallen by more than US$9 billion, or more than 10 percent, since the end of June on concern the government would freeze accounts or devalue the peso, which is fixed one-to-one with the dollar. Withdrawals eased this week, with total deposits rising by US$731 million between Aug. 14 and Wednesday, according to central bank figures.
Argentina needs to cut another US$900 million in spending this year to meet a promise with the IMF to spend only what it takes in during the second half, government officials said.
That may include either reducing transfer payments to provinces, which has met opposition, or by further limiting federal expenditures. The government already has slashed state wages and pensions by 13 percent, saving US$1.3 billion and prompting nationwide protests.
The measures will do little to pull the economy out of recession, analysts said.
Argentina expects the economy to shrink 1.4 percent this year, marking the third year of a slump, Secretary of Economic Policy Federico Sturzenegger said. The new forecast was revised from expected growth of 2 percent to 2.5 percent.
The economy probably will shrink 1 percent in the third quarter, after contracting 0.5 percent in the second quarter, he said Argentina said it expects growth of 3.5 percent next year.
That's lower than the 5 percent annual growth rate that Economy Minister Domingo Cavallo promised the country would achieve by the end of this year when he took office in late March.
As part of the IMF agreement, Argentina lowered its budget deficit target for next year to US$2.3 billion and kept this year's target at US$6.6 billion. The country also promised to spend only what it received in revenue next year.
The provinces, which receive about US$1.4 billion per month in government transfers, have so far resisted any change.
"The provinces are in a pretty difficult position right now," said Dow at MFS Investment Management.
Of the IMF's new US$8 billion loan for Argentina, US$5 billion will be provided in September and the rest is earmarked to help the country carry out a swap of bonds for new longer-term securities or to buy back debt.
Argentina said it will use US$4 billion of the IMF loan to replenish central bank reserves, which have fallen by about a quarter since the end of June. Another US$1 billion will go to the government for debt payments.
The country plans to lower its total amount of Treasury bills to US$1 billion from US$5 billion in the near term, Finance Secretary Daniel Marx said.
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