For Argentina, Crying Poor Won't Work Anymore

Kirchner wants to pay 25 cents on the dollar to bondholders. But its economy is red-hot

Don't cry anymore for Argentina. The oft-repeated sob story about an economy in ruins that government officials have been pitching to keep creditors at bay is falling apart under an embarrassment of riches.

True, the majority of Argentines are worse off than they were three years ago. But thanks to record soy exports and a booming industrial sector protected from imports by an undervalued peso, a surfeit of dollars has found its way into the government's coffers. The fiscal surplus surged 123% in the first quarter, to $1.4 billion, almost four times the target set with the International Monetary Fund. With gross domestic product likely to grow 8% this year, after an 8.7% increase in 2003, poverty and unemployment levels are coming down from their record levels. And consumers are spending again.

So now you can start crying for Argentina's bondholders instead. Despite the windfall, President Néstor Kirchner, whose populist policies have earned him a 75% approval rating, is sticking to his mantra -- that Argentina, which defaulted in 2001 on $90 billion in bonds, can't afford to pay more than 25 cents on the dollar. Economy Minister Roberto Lavagna repeated that message on Apr. 24 at the IMF spring meeting in Washington, D.C.

After more than two years of stalemate, bondholders have grown used to Argentina's hard line. But now it's Argentina that could pay dearly for not cleaning up the default mess sooner. From the outset, Lavagna has focused his negotiating strategy on the country's "debt sustainability," or ability to pay. In the light of the recent fiscal improvement, though, the government's line is getting less plausible just as the arm-twisting to get a deal done is intensifying. Under pressure from the Group of Seven nations and the IMF, Argentina in February hired three investment banks -- Merrill Lynch (MER ), Barclays, and UBS (UBS ) -- to work out a final restructuring offer by August.

If the deadline is missed or the government sticks to its current proposal's harsh terms, the IMF may refuse to roll over its own $13.3 billion in loans to the country when they expire in September. And the IMF is likely to demand that Argentina boost its fiscal savings rate, now a record 3% of GDP, to as much as 6.5%.

LOST CHANCE. The irony is that if Argentina had tried to negotiate during harder times, it might have won more favorable terms. "They've missed their golden opportunity to extract concessions," says Hans Humes, co-chairman of the Global Committee of Argentina Bondholders, which was formed in January but first met with Argentine officials on Apr. 16. Despite the seeming impasse, the markets are betting that the message is getting through, and that Kirchner and Lavagna will eventually raise their offer. Since the bondholders' meeting, bond prices have risen to levels not seen since the default.

Ultimately, analysts say Argentina will be swayed by a slowing economy. Protracted wrangling with creditors is discouraging foreign and local corporations from investing. Demand for credit remains weak even though Argentina's prime interest rate is at an historic low of 6.7%. Investment is still 31% below what it was in 1999, and since early last year, BellSouth, Verizon, France Télécom, National Grid Transco of Britain, and Banca Nazionale del Lavoro of Italy have all said they're pulling out.

The problems are compounded by some misguided government policies. For instance, industry is reeling from the nationwide rationing of electricity, a direct result of a two-year freeze on electricity rates that is holding back investment in the power industry. At the same time, Kirchner is keeping mum on how he intends to spend the big fiscal surplus. That's bringing some hard-to-ignore supplicants to his doorstep -- from pensioners and companies seeking tax relief to crowbar-wielding mobs demanding bigger unemployment checks. Note to El Presidente: Don't blow the jackpot just yet. You might just need it to pay off those bondholders.

By Joshua Goodman in Buenos Aires

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