The IMF board split over whether to approve its first review of a US$12.5bn loan deal signed with Argentina in September 2003. At least eight of the 24 countries represented on the board, including Japan, the UK and Italy, abstained on the vote. This is the traditional way IMF members dissent. The US, however, backed approval.
The scale of some countries' doubts over whether the Fund should be supporting Argentina is clear from the fact that approval was delayed by 40 days. Besides the three G7 countries, Holland, the Nordic countries, Belgium, Switzerland and Australia all refused to support the executive on the issue.
The dissidents' principal worry is Argentina's lack of progress in convincing bondholders to accept the 75% cut in the value of its US$88bn defaulted commercial debt. The dissidents claim that, in fact, the Argentine offer represents a 90% cut in the net present value of the debt, because it is not clear how the government intends to treat interest arrears.
The IMF underlined that the government cannot float on as it has been. It said that the restructuring of Argentina's sovereign defaulted debt remains the most critical task for the coming period, and called on the government to deepen (ie, improve) its relations with private creditors before the second review, which is due to take place in March.
So the news at the end of January, that three more investment banks have pulled out of the running to oversee Argentina's debt restructuring, did not raise expectations that a deal would be done soon. Argentina dallied in choosing two banks for the task before the initial deadline in December 2003. Since then, the list of institutions from which it can choose has been shortening rapidly; JP Morgan and Citigroup were the first to withdraw, and were followed in late January by Morgan Stanley, Lehman Brothers, and Goldman Sachs.
This leaves UBS as the only truly global bank on the list of potential candidates. The concern is that the banks are pulling out of the process because they do not believe creditors will accept the government's offer. Nor do they believe that the government will make a meaningful improvement on the offer. This will mean, almost certainly, that some creditors will go to court. Peru has already learnt to its cost that the US courts can force sovereign borrowers to pay out more than they originally offered.
As a result of the board's approval, the IMF will disburse US$358m to Argentina, while the World Bank will go ahead with a US$6bn four-year credit agreement.
