Bloomberg News

Anti-IMF Stand Forgotten When Cash on the Line: Argentina Credit

April 26, 2013

When it comes to getting more dollars, President Cristina Fernandez de Kirchner is more than willing to comply with the International Monetary Fund.

Argentina, which the IMF censured for underreporting inflation less than three months ago after three warnings over the past two years, last week authorized the deposit of $400 million with the Washington-based lender to increase the nation’s access to emergency cash. The move will boost Argentina’s special drawing rights that currently total $3.2 billion and comes as reserves, Fernandez’s main source for bond payments, declined to a six-year low of $39.8 billion.

Fernandez, who has also criticized the IMF for causing the country’s record $95 billion default in 2001, is using the bank to bolster her dwindling supply of dollars as a decade-long legal dispute with holdout creditors and her increasing influence over the economy leaves Argentina as the world’s least creditworthy debtor nation based on swaps trading. With overseas borrowing costs at 13.92 percent, Argentina hasn’t sold bonds globally in over a decade, prompting Fernandez to tighten capital controls and ban most dollar purchases.

“They’re doing this because they’re worried, and the special drawing rights helps them have more liquidity,” Claudio Loser, a former IMF director who now heads research firm Centennial Group Latin America, said by telephone from Washington. “Once the drawing rights are approved, they can use the money practically immediately, like cash.”

IMF Reforms

Fernandez’s spokesman Alfredo Scoccimarro didn’t return an e-mail and telephone calls seeking comment on whether the government plans to use the drawing rights.

The planned increase in Argentina’s deposits with the fund is in response to the IMF’s 2010 call for increased contributions from members as part of a “package of far- reaching reforms of the fund’s quotas and governance.”

The IMF proposal still needs the approval of the U.S. Congress.

Argentina used its special drawing rights in 2000, 2001 and 2003, fund data show. In January 2006, Fernandez’s late husband and predecessor Nestor Kirchner paid back the country’s $9.5 billion debt to the fund, saying he wanted to be free of the IMF’s “dictatorship.”

South America’s second-biggest economy also received as much as $2.7 billion in a general allocation of funds by the lender in 2009, returning them by the end of that year. It currently owes nothing to the IMF.

No Improvement

Fernandez has tapped more than $30 billion of central bank reserves since starting to use the funds to pay foreign debt in 2010. The following year, she banned most purchases of foreign currencies to stem capital outflows.

JPMorgan Chase & Co estimated on April 18 that reserves will plummet to $37.5 billion by the end of this year, the biggest drop in a decade.

An increase in drawing rights won’t improve Argentina’s creditworthiness or reduce its borrowing costs, according to Aldo Pignanelli, a former central bank president. For that to happen, the government needs to reduce its fiscal deficit, which increased last year to the widest since 2001, and improve the accuracy of its statistics.

Investors demand 11.96 percentage points more to own Argentine bonds instead of U.S. Treasuries, leaving the nation as the only distressed borrower among 55 emerging markets tracked by JPMorgan.

Default Swaps

The cost of protecting $10 million of Argentine debt for five years using credit default swaps rose 100 basis points, or 1 percentage point, to 2,239 basis points yesterday. That’s the most expensive of any country in the world and more than twice as high as Cyprus, which agreed on March 25 to a 10 billion-euro ($13 billion) loan from the euro area and the IMF after the nation buckled under the weight of its financial industry.

“Spreads can drop if the country improves credibility and begins to do the right things,” Pignanelli, who now runs economic research firm Saver in Buenos Aires, said in a telephone interview. “The way we are going, we’ll never be able to reduce rates.”

In February, Argentina became the first member country to be censured by the IMF for not providing accurate data on inflation and economic growth under a procedure that can end in expulsion. The government’s data has been questioned by economists since early 2007, when Kirchner changed personnel at the statistics agency.

Inflation Data

Consumer prices rose 24.4 percent in March from a year earlier, according to a report by opposition lawmakers that is based on estimates by independent economists, who face fines if they release statistics that differ from official data.

The statistics agency said inflation was 10.6 percent in that period.

The fund set a Sept. 29 deadline for the country to take “remedial measures” to improve the accuracy of the data. If it fails to do so, the lender can apply further sanctions, such as suspending its voting rights and barring the country from taking loans. The final step is “compulsory withdrawal.”

A central bank official, who asked not to be named because of bank policy, declined to comment on how an increased deposit with the IMF would affect reserves or if it planned to use the special drawing rights. An IMF official declined to comment when contacted by Bloomberg.

‘Yellow Card’

When IMF’s Managing Director Christine Lagarde said on Sept. 24 that the lender may give Argentina a “yellow card” for failing to improve inflation data, Fernandez responded that the lender has always “picked on” Argentina.

“The IMF considers us a bad example, a bad pupil, we are the ones that said ‘no’ to each and every one of its recipes since 2003,” Fernandez said on Sept. 26 at Georgetown University while on a trip to Washington. “We don’t have anything against the IMF ideologically, but it led us into Argentina’s worst-ever tragedy.”

Since Kirchner’s break with the fund in 2006, Argentina has been the only Group of 20 nation that hasn’t allowed the lender to review its finances, which is mandatory for all.

If the U.S. approves the proposal, Argentina will be eligible to receive sufficient funds to ensure that it can maintain debt payments over the next few years, according to Alfonso Prat-Gay, an opposition lawmaker and former central bank president.

The government “is just trying to grab $1.6 billion so that it can take it easy, perhaps until 2015,” Prat-Gay told the lower house of congress on April 17.

To contact the reporter on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net


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