As he ended his visit to Buenos Aires on 24 June, IMF managing director Horst Köhler confirmed what Anoop Singh, director of the Fund's western hemisphere department, had anticipated at the beginning of the month: that both sides -the IMF and Argentina- had agreed that the next step should be a medium-term agreement.
Köhler was a little more specific; he spoke of a three-year programme, which would just about cover President Néstor Kirchner's term of office, as the idea is that the new deal should kick in as the current rollover agreement runs out, in August.
Köhler said the Fund had underestimated the vigour of Argentina's recovery, then warned that its slowing pace over recent months was a reminder that means had to be found to strengthen that growth and consolidate it. He said his visit had given him a better understanding of Argentina's present situation and admitted that the IMF should have listened more carefully to the Argentines -only to counterbalance this by saying that the Fund should not be made the scapegoat for situations the Argentines themselves had created.
The Fund's MD promised that he would 'design' a programme that will be 'clear' to both sides -which sounded like a breach of IMF protocol: the official line is that the countries design the programme; the IMF just 'helps'.
As to the nature of this programme, both he and economy minister Roberto Lavagna were understandably vague. Only recently, though, the IMF's first deputy managing director, Anne Krueger, outlined what the Fund would like to see: 'Some kind of medium-term fiscal framework that enables the Argentine authorities to get together with their private creditors and -in doing so- get a restructuring of the debt behind them and within that framework get the banking system freed up and going again.'
To this Köhler added that what was required was a strategy to rebuild confidence, based on transparency, coherence and juridical foreseeability.
Debt: first hints. Regarding the restructuring of the debt, Köhler advised the Argentine authorities to get on with it, but said that the IMF would not interfere. He was not being wholly candid about this, as the size of the fiscal deficit the IMF agrees to will determine the size of the 'haircut' Argentina will ask its bondholders to accept.
A source close to Argentina's finance secretariat told us that a deficit figure bandied about in preliminary conversations was 2.5% of GDP. This would necessarily require, he said, a 'haircut' of almost 80%. Huge as this is, the Lavagna team is working on a sweetener: a formula that would allow a yield tied to the performance of the economy, which would mean that creditors would get more if the Argentine economy were to grow more.
This is the exact opposite of how the system works now: better performance tends to lead to lower yields, worse performance to higher ones.
Two-step effort. Right now, Lavagna's finance secretary, Guillermo Nielsen, is engaged in the gruelling task of identifying and locating the thousands of holders of some 150 issues of Argentine bonds.
The next step will be the submission to the creditors of the restructuring proposal. This has been tentatively scheduled to coincide with the IMF-World Bank annual meetings at Dubai, on 23 September. By this time, of course, a new agreement with the IMF should have been finalised, to replace the one expiring in August.
The restructuring proposal is expected to apply to at least US$76.7bn of debt, but the figure could rise to US$102.7bn if guaranteed debt held by Argentine institutional investors is included.
It is worth noting that, contrary to popular belief, Argentina has not defaulted on all of its external debt. It has remained current on about half of it, a portion that includes what is owed to multilateral lenders, and what is owed to banks in Argentina. If payments on the latter were to cease, much of the banking system would collapse.
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