East West Debt, solving defaulted trade and bank debt

East-West Debt oct. 2002 news, update : ARGENTINA

Argentina is still a question mark economy as it is difficult to predict if the country will recover from the financial crisis. This uncertainty is provoked by the shaky political situation. The feeling is strengthened by recent absurd actions of the government in the financial and banking sectors and the introduction of various confusing tax and legal regulations.

Argentina is on the edge of complete economic ruin. The peso has sunk from one-to-the dollar to three-to-the-dollar. From deflation, the country has moved into inflation, with a rise of 30 % in the consumer price index in the first six months of this year. The country is about to enter a hyperinflation spiral, with the inflation forecast for the year 2002 at more than 60%. Real GDP for the country is expected to shrink by 11% and in the first quarter it was down over 15% than a year earlier. The fiscal revenue is expected to be lower than in previous years. To make matters worse, interventions to reduce pressure on the peso are depleting official reserves.

It is still possible for the country to rescue itself from the danger of hyperinflation. In order to do that, the government agreed to a 14-point plan that includes suggestions from the International Monetary Fund and the World Bank. If the government wants to implement the plan, it will need to take tough measures necessary to improve the situation.

Firstly, the Argentine authorities must cut public spending in the federal government and the provinces. Fiscal indiscipline was one of the major reasons for the Argentine crisis. Limits must be imposed on provincial deficits, and if necessary, spending should be limited to the money available, month by month. Secondly, the Argentines must, as the IMF has insisted, reform the bankruptcy code to enable creditors to recover assets and eliminate the law on economic subversion. Thirdly, the government must also plan to reopen the banks. However, policy on this must be related to the choice of the monetary regime.

In respect of the monetary regime, the government can choose from one of the following alternatives. It can either decide to enter a floating exchange rate system or it can prefer dollarisation. It can also decide to free the banks to decide what to do about their depositors, which would be possible under an autonomous monetary regime. Argentina is not alone in its efforts to implement a credible economic plan.

Although the IMF has already lent Argentina $14 billion, the country can expect further aid of about $5 billion from the IMF, the World Bank and the Inter-American Development Bank (IADB) in support of a tough program. The country also benefits from failing to service its debts. The estimates of those benefits show that Argentina saves between $8-12 billion a year. Already in July, Argentina has won extra time to meet its debt obligations as it has been given a one year's extension on the repayment of a loan from the International Monetary Fund.

Thanks to that, Argentina avoided default by paying $550 million in interest to the IADB. This money came from Argentina's own funds because the IMF gave the Argentineans another year to repay a separate debt worth $985 million. This way, the extra time has allowed the country to avoid defaulting on the separate loan from the IADB, keeping that source of funding alive. The IADB had in March agreed to let Argentina restructure some of its debt, channeling $694.2 million to social and development programs. Additionally, the World Bank continues supporting Argentina by providing a new $150 million loan to fund reforms designed to restore economic growth. To keep the money flowing, it is necessary for the Argentine government to implement a coherent plan which will enjoy international support. If this happens, an export-led economic recovery could start as early as next year.

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