Talking Tough to the IMF

By Charles P. Alexander

Argentina tries to dictate the terms for its loans

Cold winter weather settled over Argentina last week, but for President Raul Alfonsin the heat was on. A team of negotiators from the International Monetary Fund was pressing Alfonsin to curb Argentine wages and government spending as part of an austerity program that would qualify the country for a new $2.1 billion package of loans. At the same time, Argentine labor unions were demanding hefty wage hikes, and about one-fifth of the country's work force was either on strike or threatening to walk off the job.

Seeing no easy way out of his bind, Alfonsin made an unorthodox move. Without reaching an agreement with the IMF negotiators in Buenos Aires, Alfonsin sent his own economic plan to IMF headquarters in Washington in a direct plea to Managing Director Jacques de Larosiere and the fund's 22-member executive board. The plan calls for Argentine workers to receive 6% to 8% wage hikes this year on top of whatever increases they need to keep pace with inflation. IMF economists have argued that such a policy could cause Argentina's 568% inflation rate to spiral even higher. But Alfonsin hopes that the IMF board, which is controlled by the governments of the major industrial countries, will be sympathetic to the political plight of Argentina's six-month-old democratic regime.

While Alfonsin haggles with the IMF, a crucial deadline is drawing perilously close. If Argentina does not pay $500 million in interest on its $43.6 billion debt by June 30, U.S. banks will have to subtract the missing payments from second-quarter profits. Faced with a similar dilemma in March, the banks got their money when the U.S. Treasury helped put together a $400 million bailout plan for Argentina. Unless another rescue materializes this time, such banks as Manufacturers Hanover Trust, Citicorp and Chase Manhattan could suffer painful losses.

How painful they would be has been the subject of nervous speculation and dispute. Early last week the First Boston investment-banking firm provided the Wall Street Journal with estimates that, at worst, Manufacturers Hanover would lose 60% of its expected second-quarter earnings if Argentina missed its payments, while Chase would suffer a 25% drop and Citicorp a 15% decline. Some of the banks admitted that their profits would dip but said the losses would be modest. Maintained Citicorp Vice President John Maloney: "The First Boston projections are completely off the wall." Nonetheless, jittery investors dumped bank stocks. On the day the First Boston figures came out, the already depressed price of Chase shares fell by 2 1/8 points, to 37 1/8 and Manufacturers Hanover stock dropped by 1 1/4 to 25.

A day later First Boston released revised figures for Argentina-related second-quarter profit declines that were not as gloomy: 36% for Manufacturers Hanover, 17% for Chase and 9% for Citicorp. In addition, Federal Reserve Chairman Paul Volcker down-played the June 30 deadline: "I don't think it's terribly significant. What is at issue here is a fairly limited number of interest payments." Chase shares stabilized and finished the week at 31 1/8, but Manufacturers Hanover stock slipped another 5/8, to close at 24 3/8.

Chances that the IMF will approve the Argentine economic program and authorize new loans before June 30 seem remote. Alfonsin's plan is internally inconsistent and probably unworkable. He promises, for example, to slash his government's budget deficit this year from 16.6% of Argentina's national output to 9.6%. But that feat will be virtually impossible if he raises real wages of government workers by up to 8%.

The IMF is reluctant to give Argentina special concessions because other debtor countries might ask for the same kid-glove treatment. Latin American leaders are already showing signs that they may try to form a united front to demand easier loan terms from their creditors. Representatives from several nations, including Brazil, Mexico and Argentina, are meeting next week in Cartagena, Colombia, for what is being billed as a "debtors' summit."

The impasse between Argentina and the IMF had U.S. policymakers in a quandary last week. As part of the March bailout, the Treasury promised to lend Argentina $300 million, which would be used to repay loans that the country received in the rescue package from Mexico, Brazil, Venezuela and Colombia. The U.S. said, however, that it would not make the loan until Argentina reached an agreement with the IMF, and the American offer was scheduled to expire last Friday. When the deadline came, the Treasury announced that it was withdrawing its loan commitment. That put new financial pressure on Argentina, which may now have to reach into its own pocket to pay back the $300 million to the four other Latin American countries.

In Argentina, businessmen and bankers are generally supporting Alfonsin's exercise in financial brinksmanship. Says Julio Werthein, first vice president of the Banco Mercantil in Buenos Aires: "I think that the government is handling things well. The situation it inherited is not a comfortable one." Some Argentines, though, think that their President is playing a dangerous game. Warns Alvaro Alsogaray, an economist and a member of the Argentine Congress: "If the government decides to confront the entire international financial world, it will be like kicking the chessboard and making a grand nationalistic gesture." A few Argentines even compare the face-off with the IMF to their confrontation with the British over the Falkland Islands.

In Washington, financial officials think that Alfonsin will have to retreat from his hard line and compromise with the IMF. But at a press conference last week, he sounded unshakable. "We believe," Alfonsin declared, "that the possibility of negotiation with the IMF is not closed. What is closed is the possibility that Argentina will change its mind." Alfonsin and the world's bankers are eye to eye, and someone will have to blink before June 30.

--By Charles P. Alexander.

Reported by Gisela Bolte/Washington and Gavin Scott/Buenos Aires

With reporting by Gisela Bolte/Washington and Gavin Scott/Buenos Aires