Argentine govt. may gain from World Bank default

Emad Mekay
Inter Press Service
November 22, 2002

Argentina’s decision to default on its debt to the World Bank could hurt the country’s poor but might also prove beneficial in the long run, some analysts here say.

Thursday’s decision could also harm the World Bank and the International Monetary Fund (IMF), both interested in maintaining their positions and reputations as superior patrons of the world economy.

Argentina defaulted Thursday on its $ 805-million debt to the Bank, paying only a token amount of $ 79.2 million, prompting questions on the future of the cash-strapped Argentine economy and its relationship with the Bank and the Fund.

On Friday, Argentina blamed the default on savage policy recommendations by the IMF, which require the government to tighten its budget and anti-inflation measures before it can strike a deal for emergency funds. But Argentina may be already benefiting from the default decision, since it will have more cash on hand for social and health programmes, much needed as the economy recovers painfully slowly.

“In the long term, and for other countries, the impact could be very positive,” said Soren Ambrose, of the Washington-based 50 Years Is Enough network.

“This unique challenge to the power of the World Bank and IMF to dictate both macroeconomic policy and debt repayment terms could change the perception of their infallibility (or infinite power), he added.

Ambrose says that would give governments and civil society forces more room to plan, and to begin to whittle away at the overwhelming power wielded by the IMF, the Bank and other international financial institutions (IFIs), which has caused so much unnecessary poverty, deaths and suffering over the past few decades.

By defaulting to the Bank, Buenos Aires may also be sending a message that it may no longer feel forced to accept the IFIs’ programmes, and that there are other alternatives, he added.

In a report distributed electronically, the Brussels-based anti-debt group Eurodad argues that the World Bank might be equally harmed by the high-profile default, which could call into question the Bank’s own creditworthiness and reputation. Bond-rating agencies could downgrade the ratings of the Bank’s bonds, depriving the institution of its AAA rating, which allows the Bank to sell bonds to institutional investors as “blue chip” investments.

If the contagion pushes other countries in the region into making similar defaults or refusals to deal on the IFIs’ terms, the trend could spread, says Eurodad.

Already one of the biggest U.S. pension funds, TIAA-CREF (for retired teachers) has sold all its World Bank bonds, for what it called economic reasons..

But World Bank officials Friday vehemently denied that they would be hurt by the default. “Our capital is strong,” said Chris Neal of the Bank’s external relations arm.

After Thursday’s default, Standard and Poor’s Ratings Services said that it was affirming its credit ratings and outlook on the World Bank at ‘AAA/Stable’, along with those of other multilateral lending institutions with large credit exposures to the Argentina.

Eurodad also believes that if a country the size of Argentina defaulted, then others could follow. The South American nation is the fourth largest debtor of the Bank after China, Indonesia and Mexico and it is number one in terms of per-capita income.

It also differs substantially from other states to have already defaulted on World Bank debt – including Somalia, Iraq and Zimbabwe – in that it is part of the Western world and has considerable links with Northern institutions. The default could eat away at their credibility also, according to Eurodad.

Argentina owes $ 8.5 billion to another Washington-based IFI, the Inter-American Development Bank (IDB).

If Argentina were to default on that loan, the IDB risks losing its triple-A rating, which could increase the cost of borrowing from the institution for other Latin American countries.

Regardless of the potential damage to the IFIs from the defaults, Argentina still faces many hurdles to get its economy back in shape and rescue its population from internecine poverty.

The main obstacle, many say, is reaching a deal with the IMF, whose job is to bail out countries in fiscal trouble. The Fund has not reached out to Argentina since the country defaulted on its $ 140-billion debt last December, owed in part to private lenders.

The Fund is worried that plans put forward by President Eduardo Duhalde do not have enough political support at home. The Bank has backed IMF demands for a viable economic plan that has such support.

“Argentina needs to get an economic plan that has all of the political actors behind it and support first from Argentine’s political class and then from the international community,” said Neal of the Bank.

Among the sticking points in the talks is the IMF’s request that Argentina increase the price of privatized public services. The IMF asked for a 30 percent increase while Argentinean officials offered 10 percent. The Fund also wants a tax increase but the government refused.

The Fund also wants the country to immediately liberalize its exchange market, while leaders want a gradual move.

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