ARGENTINA'S DEBT: FINANCIAL IMPERATIVES IN A STRUGGLING DEMOCRACY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85S00317R000200040003-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 19
• Document Creation Date: December 22, 2016
• Document Release Date: May 3, 2010
• Sequence Number: 3
• Publication Date: July 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Argentina's Debt:
Financial Imperatives in a
Struggling Democracy
July 19$47 4
Copy 5
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Directorate of Secret
Intelligence
Argentina's Debt:
Financial Imperatives in a
Struggling Democracy
Secret
ALA 84-10074
July 1984
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with a contribution from
African and Latin American
Analysis. It was coordinated with the Directorate of
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Operations.
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Comments and queries are welcome and may be
directed to the Chief, South America Division, ALA,
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Argentina's Debt:
Financial Imperatives in a
Struggling Democracy
Key Judgments President Raul Alfonsin took office in December with an electoral mandate
Information available that would have permitted him, in our view, to fulfill his pledge to reconcile
as of 10 July 1984 differences with foreign bankers and the International Monetary Fund
was used in this report.
over Argentina's debt. He has failed to show much progress on this front
largely because his administration's principal political goals have conflicted
with foreign creditors' insistence on austere economic adjustment policies.
The first elected civilian president after eight years of military government,
Alfonsin is primarily concerned with reestablishing democratic rule, which
in his view necessitates maintaining strong popular support for his
administration. Thus, he. has pressed reform of the military, pledged to
improve living standards for workers, and sought to avoid giving his
political opponents-principally the Peronists-opportunities to attack
him. He believes foreign creditors and.the IMF should be sensitive to the
fragility of Argentine democracy and ease the debt repayment burden.
Despite the difficulties to date, we believe there is a strong chance that Ar-
gentina will conclude an economic stabilization accord with the IMF this
year. Even with an IMF accord, however, we believe Buenos Aires will
make only partial progress in arranging with foreign banks the debt
rescheduling and new loans necessary to resolve financial difficulties. This
would leave Argentina with an overhang of past-due debt, while the delay
in obtaining new loans would probably prevent the normalization of debt
payments. These circumstances would hinder the chances for Argentina's
economic recovery and cause political troubles for Alfonsin but probably
would not be serious enough to destabilize the government.
We believe there is still some chance that Argentina will fail to conclude an
agreement with the IMF, causing the. collapse of debt talks with foreign
banks.. In addition, a rapid rise in interest rates could result in a new clash
with. lenders over repayment terms, with similar consequences. In this
scenario, the inevitable- payments moratorium could snowball into an
outright debt repudiation with grave consequences for the Argentine
economy, the civilian government, and world bankers.
Secret
ALA 84-10074
July 1984
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Beyond 1984, Argentina will remain vulnerable to the resurgence of cash
problems:
? We expect that Buenos Aires will be clearly out of compliance with the
Fund stabilization program by early 1985.
? This breach would again cut Argentina's access to fresh flows of foreign
exchange, resulting in another moratorium on debt payments.
? Our research also indicates that Argentina will probably face a large
bulge in payments during 1986-87 when government bonds covering
private-sector debt come due, which will only add to the increasing
interest burden resulting from past heavy borrowing.
Even under favorable economic conditions, we expect Argentina's borrow-
ing needs would exceed bankers' willingness to provide new loans. Conse-
quently, we believe bankers may need to voluntarily offer Argentina
substantially stretched out repayment terms in order to avoid demands
from Buenos Aires for some innovative form of relief from interest
payments.
We believe Buenos Aires expects the US Government to bolster Argentine
democracy by taking extraordinary steps to help resolve its financial
difficulties, such as restraining interest rates and soliciting cooperation
from US bankers. If the Argentines perceive that Washington is being
supportive, we believe this would increase their willingness to make
compromises necessary to keep financial talks on track. Under these
conditions, US bankers would benefit from the normalization of payments,
US exporters would probably have easier access to the Argentine market,
and bilateral ties would be strengthened.
Alternatively, a rapid rise in interest rates or the perception that the
United States is pressing Alfonsin to adopt economic policies he regards as
politically detrimental could lead to trouble. In these cases, Buenos Aires
could retaliate against US interests, resulting in diminished trade, strained
political ties, and a cutoff in payments to US banks. Alfonsin would
probably also seek to gain a following of other Latin American debtors to
act in concert against lenders.
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Key Judgments
Civilians Take Charge of the Debt
The Roadblocks to Financial Progress 3
Political Pressures Against Austerity 3
Technical Difficulties and Disagreements Over IMF Targets 4
Tensions in the Negotiations 5
Challenges Ahead 5
Outlook for Debt Negotiations 7
Bank Negotiations Drag On 8
Longer Range Prognosis 10
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Argentina's Debt:
Financial Imperatives in a
Struggling Democracy
Introduction
In December 1983 the popularly elected government
of Raul Alfonsin and the Radical Civic Union took
office in Argentina, ending eight years of military
rule. Among the most pressing problems facing the
civilians was managing the $45 billion foreign debt
inherited from their military predecessors. President
Alfonsin and his Economy Minister Bernardo Grin-
spun soon followed through on campaign pledges to
seek easier repayment terms and use the savings to
stimulate the economy. Foreign bankers, meanwhile,
were pushing for. an austerity program they believed
necessary to cut inflation and improve Argentina's
ability to repay its debt. These differences have yet to
be resolved and have nearly precipitated an interna-
tional financial confrontation.
Alfonsin's strong stand against bank-imposed auster-
ity, his continuing criticism of increases in US interest
rates, and his role in convening the Cartagena confer-
ence ' have pushed Buenos Aires to the forefront of
those LDCs seeking to change borrower-lender rela-
tions. With the third-largest foreign debt among
LDCs, international lenders fear that an Argentine
failure to meet contractual obligations while pushing
for unified action against creditors will undermine
financial rescue programs worldwide. Bankers, more-
over, perceive Buenos Aires-because of its self-
sufficiency in food and fuel-as the most likely of the
major debtors to repudiate its obligations, thereby
forcing large losses on them.
Roots of the Debt Problem
Starting in 1976, Argentina became one of the Third
World's major borrowers. Financial reforms under-
taken by the military-under the previous Peronist
government the Argentine economy was character-
ized by stagnant growth, accelerating inflation and
mounting payments problems-restored the country's
economic health and reopened access to world capital
markets. Between 1976 and 1978, according to IMF
' Latin American foreign and finance ministers met during 21-22
June in Cartagena, Colombia, to discuss their common concerns on
and World Bank reports, the total foreign debt rose 50
percent to $12 billion as the government undertook a
major public investment program to diversify the
economy. On top of this, the Argentines increased
borrowing during 1979-81 to cover persistent pay-
ments deficits. In this period, Buenos Aires deliber-
ately held exchange rate devaluations below prevail-
ing inflation to encourage the import competition seen
as necessary to revitalize domestic industry. The
overvalued peso encouraged private-sector firms to
borrow overseas, mainly in short-term markets, to pay
for imports. Public-sector corporations also continued
borrowing to sustain investments and shore up the
external accounts. Consequently, Argentina's foreign
debt tripled to $36 billion by 1981.
Lender confidence in Argentina began to decline in
1981 in the face of the sharp deterioration in the
payments accounts and growing repayment obliga-
tions. New loans became harder to obtain, forcing
Buenos Aires to draw down reserves from a peak of
$9.5 billion in 1980 to $3.3 billion in December 1981
to avert payments problems. Moreover, rising world
interest rates added to the cost of both old and new
borrowing. The London Interbank Offered Rate, the
base from which most of Argentina's interest pay-
ments are calculated, increased from an annual aver-
age of 8.7 percent in 1978 to 16.4 percent in 1981.
Taken together, Argentina's debt-servicing burden-
principal repayments and interest charges jumped
from $2.6 billion in 1978, equivalent to 40 percent of
exports, to $6.3 billion in 1981, or 70 percent of export
earnings. With exports restrained by the'slow pace of
devaluation and reserves dwindling, Argentine bor-
rowers became more vulnerable to external shocks.
Disruptions stemming from the Falklands war in early
1982 caused the debt to become unmanageable. Em-
bassy reports and the financial press indicated that
foreign bankers, unsettled by the war and Argentine
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political turbulence, ceased new lending and demand-
ed repayment of maturing loans. With its exports
disrupted by the conflict, Buenos Aires faced serious
liquidity strains by August. Argentine Economy Min-
ister Jorge Wehbe set up a financial rescue program
under IMF auspices in late 1982, but, because the
military government hesitated to remove financial
sanctions against British firms, bankers and the Fund
delayed loan disbursements. Without these funds,
Buenos Aires could not make scheduled interest pay-
ments, putting them out of compliance with the IMF
accord by September 1983. In October, pressure from
Argentine Air Force officers caused a federal judge to
rule illegal the model agreement for the rescheduling
of the public sector's debt. The US Embassy reported
that simultaneously the military relaxed fiscal disci-
pline in its remaining days in office in order to
increase public spending and grant wage increases
aimed at preventing popular protests against the
government. The incoming civilians thus inherited a
collapsed IMF agreement, a de facto moratorium
large arrearages, and depleted foreign reserves.
Civilians Take Charge of the Debt
Raul Alfonsin's electoral victory by a 52-percent
majority in October 1983 gave promise of political
stability, which buoyed world bankers' expectations
that the new administration would tackle debt prob-
lems decisively. Alfonsin reinforced these expectations
by publicly committing the new government to paying
the debt. Most observers believed his strong election
mandate gave him the opportunity to seize the initia-
tive and impose the austerity measures widely regard-
ed as necessary to begin the financial adjustment
process. As a show of support, bankers pledged finan-
cial backing even before the new administration took
office in December. The honeymoon, however,
masked the different approaches both parties brought
to the negotiating table.
Alfonsin's Plans. In pre- and postelection speeches,
Alfonsin consistently committed his administration to
pay all foreign debt properly registered at the Central
Bank. The US Embassy reported that Buenos Aires
also publicly promised an economic program that
seemed to respond to creditor concerns for adjust-
ment. The new administration emphasized, however,
that it would not accept recession in return for loans
or reschedulings. Instead, Alfonsin indicated that
Argentina must generate repayments by stimulating
economic growth, which he saw as necessary to
preserve political stability. To complement this objec-
tive, Alfonsin called for lenders to extend interest
rates and other repayment terms on a par with the
most favorable agreements achieved by other Latin
American debtors.
In practice, Alfonsin has generally ignored his oppor-
tunity to initiate economic adjustments and subordi-
nated debt management to his political goals. Accord-
ing to press and US Embassy reports, he repeatedly
stressed that the first 100 days of the new administra-
tion were crucial for establishing the institutions of a
democratic Argentina. Alfonsin turned his immediate
attention to prosecuting military officers for human
rights abuses and bringing the armed forces under
civilian control, while attempting to break the back of
union opposition and reform its leadership. Attention
to these efforts, in our opinion, impeded progress in
framing and implementing a comprehensive debt
management strategy. Indeed, Alfonsin stated in his
unprecedented letter in June proposing a program
directly to the IMF-instead of to its negotiating
team-"Strengthening constitutional freedoms and
institutions, and the system of constitutional represen-
tation is the main objective of the Argentine govern-
ment's policy."
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The Roadblocks to Financial Progress
Alfonsin announced upon assuming office his inten-
tion to secure a package of new loans and reschedul-
ings under IMF auspices by June. Instead, the gov-
ernment's slow movement toward an agreement with
the IMF and an economic plan quickly soured rela-
tions with bankers. It also created an image of
Argentina as the most recalcitrant of the major
debtors, and nearly precipitated a financial show-
down. In our view, the social democratic philosophy of
Alfonsin's Radical Civic Union, inexperience in deal-
ing with creditors, and domestic political pressures
combined to impede progress in resolving debt diffi-
culties.
Alfonsin '5 Sense of Ethics. US Embassy reporting
was quick to indicate that Alfonsin and his Radical
Civic Union's economic policies operated against an
ethical background that would bedevil any quick
agreement with the banks and the IMF. For example,
Alfonsin's strong commitment to improving the living
standards of Argentine workers worked against his
willingness to accede to banker demands for austerity.
He publicly indicated his belief that the traditional
adjustments advocated by the IMF were neither
relevant nor politically feasible for Argentina. In-
stead, Alfonsin believes-as manifest in his speech-
es-that debt servicing must be reconciled with the
need to create more jobs and to raise real wages to
maintain social peace. According to the US Embassy,
Alfonsin planned to implement these philosophical
convictions by increased spending for social services
such as health, education, and low-income housing.
As a result, devising budget compromises with the
IMF would be difficult.
tial interest rates from creditors.
Alfonsin's view, reports the US Embassy, typifies the
Argentine perception-contrary to Western economic
thought-that the earning of interest is somewhat
immoral. This has translated into Argentine domestic
policies aimed at keeping real interest rates negative,
and it has drawn the Argentines into conflict with the
IMF. Moreover, it has led Alfonsin to seek preferen-
Finally, a commitment to honesty-while it contribut-
ed to the Radical consensus that international debts 25X1
must be repaid-also led the Radicals to believe that
their election produced a more trustworthy Argentina
and bankers should show more flexibility in negotia-
tions. According to the US Embassy, the Radicals
also believed they deserved an IMF program at least
as favorable as that accorded the previous military
regime. Because the IMF approved a 5-percent
growth target as an integral part of that program, it
became a minimum negotiating position for the Al-
fonsin government.
Political Pressures Against Austerity. A public opin-
ion survey taken in mid-May indicates that, despite
soaring inflation, the majority of Argentines approved
of Alfonsin's management of the economy, especially
his belief that IMF remedies would put at risk
Argentina's fragile democracy. While boosting his
domestic position, he has created high public expecta-
tions regarding easier debt repayment, according to
various Embassy and press reports. He has been
susceptible to political pressures-from within his
electoral coalition as well as from rivals-that have
generated considerable confusion and administration
indecisiveness about debt management.
Alfonsin's own party is divided over the debt issue,
inhibiting coherent policymaking and progress on an
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The Peronists-the leading opposition party, which is
fragmented but dominates organized labor-have
been even more troublesome. The US Embassy re-
ports that Peronists in general have vowed to resist
IMF and lender pressures for austerity measures and
are insisting that Alfonsin honor his commitment to
economic growth and real wage increases. In late
June, for example, an estimated 90,000 people dem-
onstrated in the streets in Buenos Aires against
"international usury" and the IMF. Alfonsin, fearing
political unrest, has thus far acceded to their demands
for wage increases.
Even so, opposition to Alfonsin's economic policies has
helped the splintered Peronists at least superficially to.
unite their party leadership and regain the support of
many workers who had defected to the Radicals. As a
consequence, according to a variety of reporting, the
Peronist leadership has been reluctant to moderate its
tough stand against austerity. Labor rank and file has
been even more vocal in demanding economic conces-
sions-such as reinstituting monthly indexation of
wages to offset inflation-and local strikes have in-
creased dramatically since mid-May.
Congress has yet to exercise a direct role in the IMF
negotiations but is pressing for increased government
spending. In mid-March the administration promised
to consult the legislators on debt negotiations and,
according to the US Embassy, hinted that they could
comment on any IMF agreement. Alfonsin has since
backed away from allowing formal congressional re-
view with the right of veto, but he did submit the June
letter of intent for legislative endorsement. More
important, however, Congress must approve the feder-
al budget, which is the linchpin for any accord with
creditors. The budget, as submitted in late June, was
already out of line with banker requirements, accord-
ing to the press, in part because Congress was insist-
ing on increased public spending, especially for social
welfare programs.
Technical Difficulties and Disagreements Over IMF
Targets. Since coming to office, the Alfonsin govern-
ment has publicly indicated a willingness to undertake
economic adjustments aimed at battling down infla-
tion and reconciling with creditors. According to the
US Embassy, Economy Minister Grinspun publicly
espoused a set of economic steps-tax increases,
reduction in the public deficit, continued devalua-
tions-that were consistent with IMF prescriptions
without being seen as a threat to political stability in
Argentina. Grinspun stated that such adjustments
would enable the Alfonsin government to grant real
wage increases and spur growth while reducing infla-
tion and improving the payments accounts.
Grinspun's ambitious economic plans, however,
proved difficult to carry out. For example, according
to the US Embassy, the government has been unable
to pull together the technical data required to imple-
ment these complex financial plans. Economy Minis-
ter Grinspun has had to work with little assistance in
responding to bank requests for comprehensive infor-
mation supporting a stabilization plan. The US Em-
bassy also reported that Central Bank President Gar-
cia Vasquez's poor health also hampered efforts to
develop a realistic budget. These difficulties were
compounded, according to recent Embassy reports, by
bureaucratic resistance to Grinspun's requests for
detailed spending and investment plans from public-
sector agencies.
Since discussions began in February, the IMF has
been skeptical about the Alfonsin government's ability
to reconcile conflicting goals. According to various
sources, the most difficult issue bogging down the
IMF discussions has been the target for the size of the
public-sector deficit this year-measured as a share of
GDP. Grinspun has abandoned his initial, optimistic
position that the deficit could be cut to 4 percent in
1984 in favor of an 8-percent target because of the
political difficulties encountered in cutting expendi-
tures and raising taxes. Although the IMF has agreed
to a higher target, press and US Embassy reporting
indicate that Grinspun has had trouble developing a
draft budget acceptable to the Fund.
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Argentine wage policy has proved to be another
sticking point. Alfonsin has sought to placate labor by
setting monthly salary hikes to fulfill his campaign
pledges to boost real wages. Because this policy fuels
inflation, it has proved unacceptable to the Fund.
According to recent US Embassy reports, presidential
adviser Prebisch was sympathetic to IMF arguments
and supported a modified wage policy to cut the
inflationary spiral, which is now near 600 percent
annually. Even the modified wage policy,
Buenos Aires has been unable to resolve several other
policy disagreements with the Fund. US Embassy and
press reporting indicate that these include clashes over
exchange rate, credit, and commercial policies:
? Although the policy of small daily devaluations
remains in effect, the IMF is pushing for a large
devaluation to correct for the overvaluation of the
peso caused, in part, by the appreciation of the US
dollar.
? Despite the IMF's desire for tight monetary policies,
Grinspun contends that credit expansion must be
commensurate with supporting economic recovery.
? Because of rules against discrimination among its
members, the Fund is insisting that Buenos Aires
lift restrictions on remittances to UK banks and
businesses and work toward a workable plan for
clearing interest arrearages.
? The Fund's request for gradual phaseout of subsi-
dies for exports and controls on imports have also
Under pressure, Grinspun has become aggressive and
even combative in negotiations. As the 30 March US
regulatory deadline for reviewing the status of Argen-
tine loans approached, creditors insisted that Argenti-
na pay past-due interest and set forth a stabilization
program. Grinspun reacted angrily,
and refused to use Argentine reserves to
When it became clear that the Argentines would not
have an IMF agreement by the end of March,
Grinspun announced publicly that Buenos Aires
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would not be able to repay its overdue interest. In 25X1
retaliation, creditors refused to bend and disburse the
funds. Direct intercession by President Alfonsin, how-
ever, and a Latin lending consortium averted a last-
minute confrontation that would have caused a col- 25X1
lapse in the debt negotiations.
Challenges Ahead
Alfonsin's inability to move the IMF discussions along
rapidly has precluded any progress in commercial
bank negotiations. An accord with the Fund is essen-
tial, in our view, for Buenos Aires to reschedule 1982-
84 outstanding debts, and raise new loans necessary to
close the projected balance-of-payments gap for 1984.
The Argentines are continuing efforts to reconcile
with the Fund but are still insisting that a stabiliza-
tion plan must not jeopardize Argentine democracy.
The Financial Stakes. I we
estimate the Argentines still have some $17 billion in
external debt that requires rescheduling in order to
lengthen the repayment profile to ease foreign ex-
change outlays in the future. Although Buenos Aires
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The Latin Financial Rescue Operation
In March of this year, Mexico devised a $500 million
bridge loan to Buenos Aires to help settle past-due
interest payments and avert a confrontation with US
banks over past-due interest payments. Press and US
Embassy reporting indicate that Mexico and Venezu-
ela contributed $100 million each while Brazil and
Colombia provided $50 million each. The bank steer-
ing committee also contributed $100 million, while
the Argentines used $100 million from their reserves.
The US Treasury agreed to loan Argentina $300
million against a firm IMF letter of intent to assure
the Latin lenders of a more rapid repayment.
While the rescue package solved an immediate prob-
lem for US banks-and resulted in a big boost for
US-Argentine relations because of the favorable pub-
licity-it did not result in a quick reconciliation with
the Fund. Negotiations for an IMF-endorsed stabili-
zation program have dragged on since March. Be-
cause bankers refused to resume new lending and the
United States canceled the guarantee in June, the
Argentines were moved to try to resolve the stalemate
with the IMF.
has publicly agreed to honor the terms of the model
debt rescheduling plan arranged last year for the state
airline, the government will probably press for a more
lenient restructuring of the remaining public-sector
debt. We expect the Argentines will request a
stretchout of repayment terms to 10 years with five
years of grace, comparable to terms for other Latin
debtors such as Peru and Brazil. We also believe the
Argentines will petition for a reduction of front-end
fees and the interest rate spread in order to blunt
higher US interest rates.
We expect the Argentines also will request about $3.5
billion in new money this year, although the US
Embassy calculates that as much as $4.5 billion might
be required to cover the payments deficit. At a recent
banking conference, most lenders recognized the need
to extend fresh credit but indicated that any new
lending would only be in support of an IMF program.
Even so, these bankers also believe that it will be quite
Table 1
Argentina: Current Account Statistics
Trade balance
2.3
3.5
3.3
Exports (f.o.b.)
7.6
7.7
8.0
Oil
0.5
0.4
0.4
Nonoil
7.1
7.3
7.6
Imports (f.o.b.)
5.3
4.2
4.7
Oil
0.8
0.5
0.5
Nonoil
4.5
3.7
4.2
0.5 0 0
Current account balance
-2.5
-2.0
-2.2
Arrearages
2.9
2.5
0
Principal repayments c
2.7
0
12.0
Foreign financing requirements d
5.2
4.9
16.7
Debt servicing to export e
105
71
219
Interest payments to exports
70
71
69
Interest payments and arrears to
exports
108
104
69
a Embassy estimates.
b Scheduled interest payments minus arrears.
e Principal repayments of medium- and long-term debt.
d Foreign financing requirements equals current account balance
plus the previous year's interest arrearages plus principal repay-
ments on medium- and long-term debt.
e Interest payments and principal repayments.
rThese ratios are probably not meaningful given the sharp inflation
and exchange rate movements as they would heavily reflect mone-
tary changes.
difficult to get all 320 banks in the consortium to
agree to any substantial increase in exposure because
of the ill will toward the Argentines stemming from
past negotiations
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Reconciling With the IMF. Although bankers contin-
ue to report that an agreement with the IMF is
essential to breaking the financial impasse, President
Alfonsin's unprecedented move to propose a program
directly to IMF management in June has made a
resolution more difficult. The US financial press
tended to view the Argentine move as a "take-it or
leave-it" proposition, but we judge it was merely
another unconventional negotiating tactic aimed at
extracting concessions on IMF conditionality. Argen-
tine press reports also indicate the letter was meant to
serve as a basis for continuing negotiations for a
standby program. Moreover, we believe Alfonsin's
proposal was intended to bolster his domestic position
against Peronist critics of the administration's posi-
tion on the debt and give him leverage with the IMF.
To avoid undermining incentives to cooperate with the
Fund, however, the IMF Executive Board refused the
proposal. Instead, another round of negotiations was
begun in mid-June to resolve technical disputes, prob-
ably centering on Argentine wage policy and the size
of the budget deficit. President Alfonsin indicated
toward the end of the month that he would be more
flexible in order to reach an IMF accord.
We judge the Argentines are willing to make addi-
tional compromises necessary to reconcile with the
Fund. On 29 June, for example, the Central Bank
announced a sharp increase in interest rates as the
first concrete measure taken in support of Alfonsin's
efforts to reach an agreement with the IMF. This
move was followed by hikes in gasoline prices and
transport fares aimed at eliminating subsidies to
public-sector corporations. Although he continues to
assure workers that their interests will be protected,
Alfonsin also announced a 12-percent ceiling on
private-sector pay raises for July, an increase that we
expect to fall well below prevailing inflation. We
believe the IMF will compromise with the Argentines
on wage increases-the Fund acceded to Brazil's
more generous wage settlements last year-but will
insist on additional spending cuts to control the
deficit. In the end, we believe this stumblingblock will
be hurdled through higher taxes.
A Hard Sell at Home. We and the US Embassy
believe that convincing the Argentine electorate to
accept any IMF agreement will be very difficult. We
believe it will require substantial expenditure of Al-
fonsin's political capital and almost certainly entail
concessions to Peronist labor bosses. He will be under
pressure to demonstrate that the program is growth
oriented-a tactic the military used to sell the 1983
IMF agreement-and leaves room for real wage 25X1
increases and social welfare spending. Hints of Alfon-
sin's emerging strategy surfaced in late June, when a
new round of high-level talks with Fund officials
began following the Cartagena debtors conference. In
a national address, Alfonsin claimed that further
public sacrifices would be required to resolve debt
problems, but he stated that the adverse impact of any 25X1
austerity measures would be blunted for the poor.
We expect Alfonsin's carrot and stick strategy to buy
him the maneuvering room required to reconcile with
the IMF. His personal popularity-90 percent of
those polled in early May approved of his perform-
ance-and appeals for national unity will give him
some protection from opposition attacks. Additional
concessions to labor bosses probably will also temper
their opposition to an IMF program. Moreover, the
Peronists are badly fractured and suffering from a
tarnished public image. Thus, we judge that the
Peronist factions will disagree over whether to try to
block an IMF accord and leave themselves vulnerable
to charges of destabilizing Argentina by blocking
access to funds needed to sustain economic recovery.
Outlook for Debt Negotiations
The Alfonsin government's current willingness to
compromise makes an IMF accord likely. We believe
formal approval will be time consuming, and the
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Argentines may even falter temporarily when it be-
comes necessary to enact legislation to secure final
approval of the Fund program. Consequently, we
judge it may be necessary for creditors to provide
another bridge loan at the end of September to
prevent writeoffs of Argentine credits. Even when an
IMF accord is finally in hand, however, we believe
that progress in completing debt agreements with
commercial banks will be slow and uneven. In the
meantime, Buenos Aires will continue to struggle to
keep its payments current in order to maintain access
to trade financing.
Bank Negotiations Drag On. We believe there is a
strong chance that the Argentines will be unable to
conclude their debt restructuring and new money
negotiations with commercial banks in 1984. Even if
an accord with the IMF is reached before the end of
September-when US bankers will be legally obligat-
ed to set aside loan loss reserves-serious talks with
the bank advisory committee will likely be only
beginning. We expect, however, that, as soon as a
letter of intent is agreed upon in principle, bankers
would probably release frozen loans to.enable Buenos
Aires to settle past-due interest payments. The imme-
diate cash transfusion would also enable Buenos Aires
to increase imports to reactivate industry. The com-
pletion of a "growth-oriented" IMF program would
also provide a temporary lift for the government by
moderating opposition attacks on adjustment policies.
At this point, however, the foreign bank advisory
committee would then begin to develop a plan for
providing new financing in support of the Argentine
IMF program, which we believe will prove difficult to
assemble..
Even if both sides cooperate fully, the restructuring of
some.$12 billion in loans will require protracted.
negotiations, because the Argentines have already
indicated publicly .they expect softer repayment
terms. Should bankers resist substantial easing of
terms, Alfonsin, dismayed at recent interest rate
hikes, would probably toughen his negotiating stance.
We believe that only partial progress would be made
in completing debt rescheduling this year.
Similarly, negotiations for new money will be tough.
As noted, the size of the package will prove to be
contentious, and the loan will be difficult to syndicate.
This year, Brazil, Mexico, and Chile-all complying
with Fund programs-have encountered long delays
in assembling new credits, mainly because of the
reluctance of smaller banks to take part. In Argenti-
na's case, numerous regional bankers already have
reported that they will refuse to participate in such
new lending.
Protracted negotiations for new money will impede
domestic economic recovery in 1984. Difficulties in
obtaining trade financing would continue to curtail
imports necessary for industrial reactivation and in-
creased employment. The country would experience
temporary cash flow difficulties in the face of seasonal
export declines. The Argentines would probably again
resort to temporary suspension of payments to ease
financial strains later in the year.
Politically, we believe that protracted debt negotia-
tions would erode Alfonsin's popular support and limit
his maneuvering room on a range of noneconomic
issues. With an electorate anxious for economic im-
provements, the Peronists could profit from an appar-
ent financial deadlock. Labor and the media would
probably begin to question the wisdom, of continuing
economic sacrifices for few apparent benefits. Mem-
bers of Alfonsin's own party may also press him to.
abandon the program to preserve social peace and
avoid losses in the congressional elections in Novem-
ber 1985. They would also probably argue that squan-
dering his limited political capital on the debt issue
would prevent him from pressing his case in Congress
in such areas.as military reform and foreign policy.
Governing would become more difficult for Alfonsin,
although the strains probably would not be serious .
enough to destabilize the government.
Debt Talks Collapse. We believe there is still some.'
chance that the Argentines will be. unable to conclude
an IMF.agreement, causing its debt talks with foreign
banks to collapse. The major danger, in our view,
stems from the Argentine penchant. to react impetu-
ously to unanticipated events. If. the volatile Grinspun
has trouble concluding an IMF accord, he could in.a
fit of pique advise Alfonsin to halt negotiations
abruptly. The President will also remain vulnerable to
congressional attacks on the IMF agreement during
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the period before its formal approval by the Fund's
Executive Board. Resurgent labor unrest could cause
Alfonsin to scuttle a wage policy favored by the IMF.
Without an IMF program, we believe foreign lenders
would drag out financial discussions in an effort to
press the Argentines to submit to IMF discipline-a
tactic still being employed against the Venezuelans.
Consequently, the Argentines would again be forced
into a de facto moratorium.
Continued rises in international interest rates could
also cause financial negotiations to collapse. President
Alfonsin and the leaders of other major parties recent-
ly attacked the increases in the US prime rate as a
danger to their democracy and social peace. If rates
continue to rise, we believe Argentine negotiators will
exert even stronger pressure on creditors to reduce
concessions would increase materially.
spreads and lending charges for new loans and for
rescheduling of 1982-84 maturities. We judge that
bankers will be only partially responsive to such
requests, because they typically offer eased repayment
terms only as a reward for successful economic adjust-
ments. Under these circumstances, the chances that 25X1
the Argentines would walk out of the talks to force
strains would be mounting, Argentina would be fur-
ther encouraged to employ tough tactics. The likeli-
hood that Buenos Aires would repudiate its debt
would increase sharply. The Argentines might first
publicly threaten such an action in an effort to
convince banks to extend new credit needed to cover
interest payments. Although bankers have gone to
great lengths in the past to avoid declaring a default
A breakdown in financial negotiations-probably ac-
companied by a temporary moratorium-would entail
major dangers, in our opinion. Alfonsin's inclination
to attack lenders would probably increase, straining
foreign bank and IMF willingness to support the
rescue program. We judge that he would also become
more assertive in coordinating joint action by Latin
American debtors, further increasing tensions with
bankers. Because these developments probably would
cause banks to resist new lending at a time when cash
and may cut a deal with Buenos Aires, we believe that
such a threat would only heighten the current ill will
bankers privately express against Argentina. Under
these conditions, we fear bankers would be increasing-
ly likely to declare Buenos Aires in default and seek to
attach Argentine assets abroad. In the worst case, the 25X1
groundwork would be laid for an economic war that
could easily involve other Latin debtors and threaten
to disrupt the international financial system.
A collapse of the Argentine financial program would
probably result in creeping paralysis in the domestic
economy. Although Argentine agricultural exports
would be difficult to disrupt by legal action and some 25X1
may even be redirected toward the Soviets, we believe
that import bottlenecks would exert an increasingly
adverse impact on the economy. Even with substantial
foreign exchange earnings and reserves, we believe
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Argentine businesses would have difficulty maintain-
ing a consistent flow of imports because of a near
cessation of trade financing and legal actions taken to
seize Argentine assets. We expect that industrial
activity in the chemicals and metals sectors-heavily
dependent on inputs from abroad-would begin to
contract and cause disruptions in manufacturing,
while spot shortages of key imported commodities
would add to inflation. Moreover, the lack of external
funds for investment would probably lead the govern-
ment to undertake excessive monetary expansion to
buoy the economy. Although these stimulants would
probably sustain economic activity temporarily, they
would contribute to hyperinflation that would para-
lyze the economy in the longer run. In our view,
Argentine businesses would react to monetary expan-
sion and runaway inflation by again diverting invest-
ment into speculation and away from production..
Should there be a major confrontation with creditors,
we believe that Alfonsin would quickly mount a
domestic political campaign to rally support by at-
tacking international lenders. He would probably call
for greater sacrifices from workers in an economic
war with what he would portray as outside forces
trying to destabilize Argentina. This approach would
probably succeed, at least in the short run, in uniting
various political groups behind the government's
stand. We believe, however, that the unity would
quickly give way to political dissension, resulting in a
return of political instability over the longer run.
Longer Range Prognosis
Given the challenging economic goals common to
Fund programs, we expect that Buenos Aires will
remain -vulnerable to cash flow problems beyond
1984. We believe that the Alfonsin government will
have trouble meeting IMF targets and is likely to be
seriously out of compliance early in 1985. Failure to
receive IMF drawings would in turn probably stall
bank disbursements and cause payments to be sus-
pended. Once such a self-perpetuating process began,.
it would probably lead to another prolonged payments
moratorium.
Even if Argentina can reschedule its 1982-84 maturi-
ties and eliminate its current interest arrearages, we
believe the external debt will remain a problem
throughout the rest of the 1980s. Several studies by
Chase Econometrics, Data Resources, Inc., and
Wharton Econometrics project that interest payments
alone will continue to outstrip yearly trade surpluses,
thus necessitating substantial new bank lending.2
While bankers expect developing countries to be net
borrowers, we do not believe
that they will favor
continually increasing their exposures in Argentina
solely to keep interest payments current.
Instead, we expect bankers to maintain pressure on
Buenos Aires to enact austerity measures in hopes of
reducing projected new borrowing needs. Gaining
cooperation on the Argentine side will be difficult.
Buenos Aires has a history of being unable and
unwilling to maintain austerity policies and could
easily require a greater flow of foreign funds than
current projections indicate.
We believe that the present approach to handling the
debt crisis shows little promise of long-run success for
Argentina. The continuous need for new borrowing to
pay interest suggests that measures beyond the re-
scheduling of principal payments will probably be
necessary to prevent insolvency. In our opinion, banks
may voluntarily have to forgo a portion of their
expected interest earnings and extend repayment peri-
ods well beyond the terms currently offered. Failure
to do so, in our opinion, would set off sharp reactions
to force easier repayment terms by Buenos Aires. As
noted, the political climate in Argentina cannot en-
dure continuous austerity to meet foreign financial
obligations without generating stronger antilender
reaction. Given Argentine nationalism, the Alfonsin
government may yet
lose the economy to the West-including
debt repudiation, closer ties with the Communist
Bloc, and willingness to rely on cash purchases of
necessary imports.
' Estimates of Argentine debt figures by econometric services do not
take account a future bulge in foreign payments that could
precipitate a second-round crisis. During 1981-82 the government
offered exchange rate guarantees for private debts, thereby acquir-
ing an obligation to provide the foreign exchange to cover some $9
billion in payments for which they have issued bonds. As the bonds
mature in 1986-87, they will put pressure on Argentina's exchange
position and its ability to meet its rising debt servicing. This bulge
in repayments will renew the need for extraordinary foreign
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Table 2
Argentina: Debt Projections a
a Projections based on varying sets of assumptions.
b Published April 1984.
c Published March 1984.
d Published May 1984.
e Favorable economic conditions scenario published by the Office of
Global Issues.
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Implications for the United States
We believe that Buenos Aires expects the US Govern-
ment to help bolster Argentine democracy by taking
extraordinary steps to resolve its financial difficulties.
In our opinion, the Argentines believe Washington
has the power to elicit cooperation from bankers and
to control the interest rates banks charge. We believe
this perception made Buenos Aires responsive to US
demarches in March and June to take actions to
prevent the debt talks from collapsing. On the other
hand, as the negotiations progress unevenly, develop-
ments that the Argentines perceive as detrimental to
their financial or democratic interests-such as a
rapid rise in interest rates-could cause Buenos Aires
to attempt to take retribution against US banks.
Bank and Commercial Interests. Should Argentina
reach an IMF agreement by 30 September, we would
expect interest payments to get back on track and
remain reasonably current through the end of the
year. The earnings of US banks and the integrity of
the international financial system would escape seri-
ous damage. Even under these conditions, however,
we are concerned that large money center banks will
face growing pressure to lend more to Argentina.
Small banks with relatively limited exposures are
increasingly tempted to write down their loans, leav-
ing the task of meeting Argentina's borrowing needs
too concentrated in large banks. Alternatively, if the
IMF financial program derails, US banks would see
only a trickle of payments from Buenos Aires and
would probably begin writing off Argentine credits, a
move we believe would impose significant, but not
critical, losses on some US money center banks.
Trade and Investment. Under our most likely scenar-
io, we expect a greater availability of financing for
bilateral trade. This would enable US exporters to
retain their share of the Argentine import market,
which was about 20 percent last year. Direct invest-
ment, however, would probably continue to languish
because of economic uncertainties, persistent high
inflation, and continuing problems with dividend and
profit remittances stemming from tough exchange
controls. If the refinancing program collapses, howev-
er, we would expect trade with the United States to
diminish because of a lack of credit and Argentine
retaliation. Communist nations might then be some-
what more successful in their attempts to expand
trade-from a negligible base-with Buenos Aires,
particularly the USSR, which is seeking sales to
Argentina to offset the large exchange imbalance
resulting from grain trade.
Political Ties. The 30 March rescue loan drew public
praise from President Alfonsin and the media for the
constructive US role. More recently, however, rising
US prime rates have produced strong criticism of
Washington from a cross section of the Argentine
populace. Despite this, we agree with the US Embassy
that Buenos Aires is likely to be generally supportive
on political issues. If a bank or IMF confrontation
arises, however, and Alfonsin believes that the United
States is not moving strongly enough to help the
fledgling democracy, he would probably reduce bilat-
eral and multilateral cooperation with the United
States on a range of issues.
The Cartel Issue. Should Argentina and its creditors
reach a financial impasse, we expect Alfonsin would
quickly call on other Latin debtors to act in concert
against lenders. We believe that he would receive
support from hardliners in several Latin countries-
such as Bolivia, Ecuador, and Peru-although Mexico
and Brazil would probably continue to resist radical
actions. In the worst case, Alfonsin would be success-
ful in forming a limited cartel embracing some Latin
American debtors to work in concert against lenders.
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