Argentina in debt repayment U-turn - Financial Times.

Financial Times, 02/09/2008

By Jude Webber in Buenos Aires

Published: September 2 2008 23:13 | Last updated: September 2 2008 23:13

Cristina Fernández, Argentine president, on Tuesday announced in a surprise U-turn that she would repay the country’s $6.7bn defaulted debt to the Paris Club of western creditors using central bank reserves.

The move came after market turbulence and heightened fears among investors that Argentina, despite strong macroeconomic data, was heading for another crash after racking up the world’s worst sovereign debt default in 2001.

Ms Fernández said she had signed a decree instructing the economy minister to use freely available central bank reserves to pay off the debt, demonstrating Argentina’s “willingness to pay”.

Argentina had steadfastly refused until now to use central bank reserves to pay back the 19 governments in the Paris Club, despite the fact that the default was blocking as much as $8bn in much-needed foreign investment to the country.

The Paris Club had been pushing for Argentina to submit to International Monetary Fund surveillance, saying that was a requirement for any renegotiation of its debt.

But Argentina, which paid off its outstanding $9.5bn debt to the IMF in one swoop in 2006, was in no hurry to return to scrutiny of its economic management by an institution the government blames for fostering the conditions that led to Argentina’s meltdown.

“The Paris Club wanted an understanding with the International Monetary Fund,” Daniel Marx, a former deputy finance minister, told the Financial Times. “Basically the government said ‘we won’t bother, we’ll just pay them off’.”

But there are restrictions on using central bank funds, which stood at just over $47bn at the start of this week, to fund government operations. “Some people might ask what the criteria are for using reserves,” Mr Marx noted.

Though the decision to resolve the Paris Club situation, which has been a huge outstanding issue for the government, was widely greeted as good news, the way it was announced underlines the government’s reputation for unpredictability. Argentina sent alarm bells ringing with investors last month when it unexpectedly sold a costly bond to Venezuela. The 15 per cent interest rate was considered excessive and made Argentina look desperate, despite the fact economists agree that with its budget and trade surpluses, strong exports and healthy central bank reserves, Argentina is not in imminent danger of a new crisis.

What compounded market alarm was that Hugo Chávez, Venezuelan president, swiftly sold the bond, sending Argentine debt prices crashing and forcing the government to implement a hasty buy-back to quell market fears.

The announcement coincided with an international seminar of central bankers and economists organised by Argentina’s central bank.

Business leaders welcomed the decision, saying it would open up new avenues of credit. But it will do nothing to improve Argentina’s access to international financial markets or ease the government’s forced reliance on Venezuela for financing.

Holders of defaulted Argentine bonds who did not accept a restructuring deal in 2005 are suing for their money back – with interest that debt totals some $29bn, according to Neil Dougall, Dresdner Kleinwort analyst. Their lawsuits are blocking Argentina from tapping international capital markets.