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Argentina’s Proposal to Pay Off its Debt

The grace period granted to President Cristina Fernández de Kirchner after the sudden death of her husband and life-long political partner on October 27 has ended with physical violence in congress. Heated debates on November 17 over the 2011 budget ended when opposition congresswoman and president of the Commission on Constitutional Affairs, Graciela Camaño, publicly slapped fellow congressman Carlos Kunkel. With the opposition’s slight majority in both houses of congress, the government has its work cut out to pass its budget plan. The administration is taking an all-or-nothing approach to its legislative proposal and the result is division, fighting and accusations of vote-buying by Kirchner supporters.

Partly as a means to distract from days of deadlock over the budget, President Fernández made a televised announcement on November 15 that her government will start negotiations with the Paris Club, an informal grouping of lenders from the world’s principal economies, to pay off the last of its debt since its $100 billion default in 2001. She emphasized that the negotiations will take place without the intervention from the International Monetary Fund (IMF).

Any deal will cost the government anywhere from $6.5 billion to $8 billion, and it remains to be seen where it will get the money. It could tap into the $52 billion in international reserves, but it needs congressional approval to do so. This could be tough. Indeed, its current budgetary proposal includes an earmark of $7.5 billion of Central Bank funds to be used for debt payments, but congress is fighting tooth and nail to prevent its passage. Then there is the possibility that the government will issue sovereign bonds to generate the cash in 2011.

It behoves the Argentinean government to make a deal with the Paris Club before the upcoming IMF spring meeting on April 17, 2011. At the meeting, IMF members will debate the Argentine case and its refusal to comply with the Article IV consultations, which are conducted annually in each of the Fund's 186 member countries. Argentina may receive sanctions for refusing to submit data and participate in annual reviews since January 2006 when it paid off its $9 billion debt to the international organization. There’s also the chance it could lose its membership in the Board of Governors, the highest decision-making body of the IMF.

While the Paris Club recently gave the green light to negotiations without the involvement of the IMF, it will likely pressure the government for a quick, cash payment without the backing and guarantees usually provided by the international financial institution. The president and her economic minister, Amado Boudou, have made it clear that they prefer a more flexible time frame. President Fernández said she would accept “payment periods that will allow for continued economic growth with social inclusion.” Later, to the press, Minister Boudou mentioned a reasonable five-year time period. It’s questionable whether the Paris Club would agree to such generous terms.

Since Nestór Kirchner´s death, Ms Fernández has maintained a hectic schedule of G-20 meetings in South Korea, stadium-filled public acts and televised announcements. She has made it clear too all that she is in charge. And the bold, popular announcement about Paris Club negotiations shows the Argentine public that her government is steering economic policy.

It also pits her against a divided congress, which ultimately holds the purse strings. She has already given the legislative body a warning that should they refuse to authorize the debt payment, she will be obliged to find alternative means. With cut-throat congressional budgetary debates underway, the president has used a familiar, combatant style while criticizing the opposition for trying to sabotage and destabilize her government. After her husband’s passing, there was some hope that President Fernández would take a more conciliatory approach to governance. So far, this doesn´t seem to be happening.

Strong Asian demand for commodities will likely safeguard Argentina´s economy for the next few years and provide a fortuitous political environment for the president should she choose to a run for a second term in October 2011. Successful Paris Club negotiations may even boost the economy by paving the way for more investments. But the key for long-term growth and development will be the trust of the domestic and international communities in Argentina’s economic policies.

*Janie Hulse is an analyst based in Buenos Aires, Argentina and the editor and producer of Insights from the Field, a quarterly publication promoting perspectives from within Latin America on politico-economic and security issues affecting the region.

Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
Tags: Argentina, Cristina Fernandez de Kirchner

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