New worries for Argentine economy as IMF opposes fresh bailout funds

Thursday, December 6th 2001, 12:00 am
By: News On 6

BUENOS AIRES, Argentina (AP) _ Word that the International Monetary Fund is opposed to an immediate $1.3 billion bailout loan for Argentina triggered renewed worries Thursday that the country could default on its debt load.

His nation saddled with $132 billion in debt accrued through years of overspending, President Fernando De la Rua met with his economy minister and top aides on a response to the announcement. He also held talks with opposition political and labor leaders.

In Washington, the IMF said Wednesday it couldn't recommend approval of a $1.3 billion loan desperately sought by the cash-strapped South American country, now weathering a severe financial crisis.

The international lending agency said its 24-member executive board had met informally to hear a report from the head of an IMF team sent to Argentina two weeks ago to study its economy.

On the Buenos Aires stock exchange, leading shares on the benchmark Merval Index had surged by 7.4 percent in afternoon trading as investors shifted cash from partially frozen bank accounts to blue chip stocks as a shelter. Share prices had risen by 8 percent on Wednesday as fears grew that the restrictions would not be lifted soon.

The government over the weekend partially froze cash withdrawals from banks and limited the amount of money Argentines can take out of the country to $1,000 in an effort to stem a run on the banks and restore confidence in the financial system.

Shares had been battered down for months, reaching a 10-year low last week in volatile trading.

Moments before trading began Thursday, Economy Minister Domingo Cavallo moved to soften the blow of the IMF decision by saying his country continued to work closely with the international agencies on deficit reduction and other economic reforms.

``The International Monetary Fund continues to work with Argentina,'' he said.

``These are truly difficult moments for our country,'' Cavallo said, but he predicted Argentina would turn the corner on the crisis.

Argentina had been urging the IMF to quickly release a $1.3 billion loan installment. The country must make $900 million in debt payments this month and had been hoping to use the bailout funds _ rather than having to look elsewhere.

Economists warned that the decision was a serious blow to Argentina's ability to avoid a default, adding the fallout would have to be seen in Thursday's stock and bond trading.

``It's a tough decision and a serious one. It brings a default that bit nearer,'' said prominent Argentine economist Juan Aleman. ``The IMF is saying Argentina has not done what it had to do.''

Last month, Cavallo announced that his country would run a deficit for 2001 that is some $1.3 billion above what it had originally promised the IMF. Meeting IMF targets was considered essential to Argentina's ongoing access to bailout loans.

De la Rua's government could raise enough money to pay the debt by tapping the country's pension funds, which on Monday were ordered to purchase government Treasury bills. That step alone was expected to raise at least $1.5 billion.

However, even if Argentina complies with its December obligations to creditors, it still faces daunting challenges ahead as it tries to meet some $8 billion in debt repayments due before April.

Unable to borrow at affordable interest rates, Argentina is steeped in a 42-month recession that has sent unemployment above 16 percent and shut down much consumer spending.

Alberto Bernal, of New York-based think tank IDEAglobal, said De la Rua must win passage of a 2002 budget that will make $4 billion in spending cuts and slash money the federal government sends to Argentina's 23 provinces.

``It is all a political question. If they do this, they're on good ground, if not the game is over,'' said Bernal.

Many independent economists contend the crisis will force Argentina to either devalue its peso or embrace the dollar as the country's legal tender. The government rejected both options Wednesday.

For ordinary Argentines, like Dora Venialgo, 52, the latest developments were just another indication of how bad things have gotten. ``This country that has really fallen apart,'' the unemployed woman said. ``There's no miracle that's about to save Argentina.''