WASHINGTON – With Argentina desperate for $1.3 billion of International Monetary Fund cash this month as it scrambles to avoid a debt default, IMF sources said on Tuesday that cash was unlikely to be sent soon, with the lender more interested in talking about devaluation or dollarization.
As the situation in Argentina grows ever more grim, IMF management have been pressing the nation to discuss the possibility of breaking its decade-old convertibility regime and devalue its peso, or adopting the U.S. dollar as its official currency, IMF sources told Reuters.
Relations between the IMF and Buenos Aires have grown increasingly strained because of Argentina's avoidance of a discussion on the merits of the ideas and by the maverick behavior of Economy Minister Domingo Cavallo. With the situation near the breaking point, IMF sources say it is highly unlikely the economy will win the $1.3 billion this month.
The strongly worded suggestions about devaluing or dollarizing were made in a November letter from IMF Managing Director Horst Koehler to President Fernando de la Rua.
"We have given them options and the options are to dollarize or devalue. That is what Argentina is left with," one IMF source told Reuters of the letter.
Argentina has been stuck in crisis mode for the past year as fears it will default on its $132 billion mountain of debt persist despite $48 billion in international aid and a slew of government actions aimed at jolting the economy from a four-year slump likened to the U.S. depression of the 1930s.
Another source on the IMF's decision-making board said the fund has wanted to discuss the possibility of devaluation or dollarization for months but "there has been a great deal of reluctance to discuss anything on their part. They just refuse to discuss certain options."
December Cash On Ice
That lack of discussion lies at the root of the current impasse, which could see the IMF withholding the $1.3 billion payment Argentina had hoped to secure this month to make it easier for it to service its debt payments.
De la Rua's office acknowledged it had received the letter but declined to comment further. However, IMF spokesman Thomas Dawson said the letter, delivered early in November, did not discuss the subjects of devaluation or dollarization.
"The letter referred to did not discuss devaluation, dollarization or exchange-rate regimes," Dawson said.
Those denials echo a similar situation earlier this year. During the economic crisis in Turkey, which began unfolding late last year, the IMF repeatedly advised Turkey to abandon its currency peg. But the lender denied it had given that opinion right up until Turkey floated its lira currency in February — a move that shaved half of the currency's value.
Despite wanting Turkey to float its currency, the IMF increased lending to Ankara just weeks before an ongoing banking crisis there forced the country to take action. That increased IMF assistance was given to Turkey because Ankara had made a convincing economic argument to the lender.
But insiders say that in Argentina's case the situation is far more dire because the IMF has little faith in Buenos Aires' economic plan.
Following a rush on banks, Argentina took a series of temporary emergency measures over the weekend to counter speculation and capital flight, including restrictions on cash withdrawals from banks and the transfer of funds abroad.
The IMF responded by pulling the head of its Argentina team, Thomas Reichmann, back to Washington.
"The fact that Reichmann was pulled out is a very bad sign," an IMF source said. "Essentially the IMF is saying that our main man in Argentina is being pulled out and is not going back because we were not consulted about these changes."
IMF spokesman Dawson said there was nothing unusual in Reichmann's return.
The return to home base of Reichmann, the IMF's point man for Argentina, came while he was supposed to be heading a review of the economy there — something needed before the next $1.3 billion of IMF cash can be sent to Buenos Aires.
IMF staffers said his recall underlined the annoyance and irritation felt toward a government that has repeatedly this year taken major economic decisions without consulting the lender, which led a $40 billion rescue last December and added $8 billion more in commitments in August after prodding from the Group of Seven industrialized nations.
Cavallo's One-Man Show
"They are making changes to their economy without briefing, not just the IMF, but the G7 nations that supported Argentina's request for more money in August. It is not just the fund that is upset," an IMF source said.
Now the December $1.3 billion IMF loan payment, money needed to help Argentina service its debts, has been thrown into doubt. One IMF board source said it now seems highly unlikely that Argentina will receive any cash in December.
"Increasingly, the fund is very frustrated with not being consulted about things, especially given the amount of money we have provided them," the IMF board member said.
"It is basically Cavallo running a one man show. Not only does he not consult us, but we often get the impression he does not consult his own advisers."
"To send money, we need a program for 2002 and right now that's just not ready," the IMF board source said.
"We need a budget, we need financing assurances that somehow Argentina will be able to get through next year and that is tied to the outcome of the debt swaps and then, maybe, we can talk about giving them the remaining money under the program," the source said.
But if Wall Street is worried that Argentina might default, devaluing its currency would effectively achieve that in one fell swoop. Mired in a four-year recession, the country is already finding it near impossible to service its debts and has sought to improve its lot through a bond swap. A devaluation would magnify its peso repayments.
"Argentina needs to make its economy more competitive, it needs to boost growth and the route it has to take to achieve that is devalue the currency. But the Argentines are very clear they don't want to do that," one source said.
But devaluation is not the only option. IMF staffers indicated the fund could be satisfied if Argentina dollarized, but only if accompanied by other fiscal measures.
Argentina has instituted a zero-deficit budget, which ties spending to the amount of government receipts. But the IMF remains unconvinced that the government has actually followed through on the plan, seeing much of what has taken place as just cosmetic accounting.
But for the moment, the IMF and Argentina seem locked in impasse until Buenos Aires does something that will start to rebuild trust at IMF headquarters that the government has the political will to follow through on spending cuts and has a credible plan to reinvigorate economic growth.
"This is it for the moment until they come up with some 'right' idea," one IMF source said.
The IMF board source said that for matters to move forward, Buenos Aires will need to open up a meaningful dialogue with the Washington lender — a frank discussion that will include options like devaluation and dollarization.
"The ball is in Argentina's court. Clearly we are moving into a quadrant where things need to be discussed and if there is no willingness from Argentina to discuss certain things then it becomes very difficult," the IMF board source said.