Argentina default pressures Krueger

26 November 2002

After a record-breaking eleven months of failed talks with the IMF Argentina has, for the first time, defaulted on a payment to the World Bank. Choosing to pay only the interest of $79 million rather than the $805 million which was due, Finance Minister Roberto Lavagna said however “that we have every intention of paying once a deal with the Fund has been struck”.

Argentine officials insisted in mid-Novewmber that paying the Bank would have brought foreign exchange reserves below Fund-stipulated levels. In a further snub of the Fund, value-added taxes were reduced in order to “reactivate consumption” – in direct contradiction to one of the several Fund conditions which the Argentine government is claiming can not be met. A government appeal to the Supreme Court is still waiting to be heard after Buenos Aires courts determined in September that a number of measures insisted upon by the Fund were unconstitutional.

Observers have been divided over the impact of the default on the international financial institutions. Argentina is the fourth largest debtor of the Bank after China, Indonesia and Mexico. There had been conjecture that the default would lead to a downgrading of World Bank bonds by the credit rating agencies. However, in the hours after the default, Standard & Poor’s affirmed the stability of the ratings of both the World Bank and the IADB. In the weeks before the default, Bank president James Wolfensohn insisted that the Bank could survive the default, “but wouldn’t like it much.” If Argentina is still in arrears after 30 days, it will be denied disbursements from existing Bank loans.

Meanwhile Fund watchers are waiting to see the reaction of deputy managing director, Anne Krueger. Editors of the Argentine daily La Nación have called her the chief “obstacle to overcome”. Lavagna’s brinkmanship is interpreted by many in the crisis-stricken country as an attempt to force Krueger to either end her opposition to a deal with Argentina or resign. Outside of Argentina, there are some who argue that Krueger is intentionally stalling, hoping to raise support for her proposal for a sovereign debt restructuring mechanism (see Bretton Woods Update 28).

Default on WB payment,

S&P affirms World Bank rating after Argentina default

Anne Krueger, el obstáculo por vencer

IMF fiddles while Argentina burns

Argentina’s Crisis: The Costs and Consequences of Default to the IFIs, CEPR