Don't Cry for Argentina

By Charles P. Alexander

With a little help from friends, it meets a $500 million deadline

It was another cliffhanger in a long-running drama that has featured more narrow escapes than Raiders of the Lost Ark. Once again, the Latin American debt monster was terrifying bankers. Argentina was threatening to ignore a March 31 deadline for paying $500 million in interest to its creditors around the world.

For 25 U.S. banks that were owed $200 million, the implications were ominous. Because the money would be more than 90 days overdue, federal regulations dictate that banks would have to classify Argentine loans as "nonperforming" and deduct missing interest payments from profits. Banks faced losing as much as 40% of their first-quarter earnings. But the Argentines balked at paying unless they received easier terms on their $46 billion debt load. Said Bernardo Grinspun, Argentina's Economy Minister: "The problems of the creditor banks are not the problems of this government."

All week, representatives of the banks, the U.S. Treasury Department, the International Monetary Fund, Argentina and other Latin American countries were huddling in an effort to find a way out of the dilemma. At about 11 p.m. on Friday, 25 hours from the Saturday-midnight deadline, the U.S. Treasury announced a $500 million deal; it was the most unusual and complex rescue package put together since the debt crisis began in August 1982. Four Latin American countries provided $300 million to help Argentina meet its payments. The contributors included Mexico ($100 million), Venezuela ($100 million), Colombia ($50 million) and Brazil ($50 million). All except Colombia have big debt problems of their own. In addition, the major banks, led by New York City's Citicorp, offered $100 million in new loans, and Argentina agreed to kick in $100 million from its own reserves.

The deal assumed that Argentina would soon receive new credit from the International Monetary Fund. The country will have to satisfy the IMF that it will put in place an economic adjustment program to cut government spending and curb its 400% inflation rate. As soon as Argentina and the IMF sign a preliminary agreement, which may take a month, the U.S. Treasury will give Argentina a short-term $300 million loan; it will be used to repay the four other Latin American countries that took part in the bailout. The IMF'S executive board will then examine the Argentine economic plan. If it approves the program, new loans will be authorized, and the U.S. Treasury will get its money back.

For the U.S. banking community, it was a close call. Argentina's largest private creditors are several New York banks, including Manufacturers Hanover ($1.3 billion on loan), Citicorp ($1.1 billion) and Chase Manhattan ($775 million). According to estimates by the Keefe, Bruyette & Woods investment firm, the missed payments on Argentine loans could have cut Manufacturers Hanover's expected earnings in the first quarter 28%, while Chase would have suffered a 12% decline and Citicorp a 7% dip. Many smaller banks outside New York would also have felt the pinch. Crocker National of San Francisco ($440 million on loan) faced an estimated 41% drop in first-quarter profits, and First Wisconsin National of Milwaukee ($70 million) might have had a 12% earnings setback.

As the week began, the players in the debt poker game came together, appropriately enough, at the Hotel Casino San Rafael, the site of a meeting of the Inter-American Development Bank in the seaside resort of Punta del Este, Uruguay. Grinspun headed the Argentine delegation, while William Rhodes, representing Citicorp, led an eleven-member team of bankers. One banker joked that Punta del Este would witness its most explosive confrontation since three British cruisers challenged the German pocket battleship Admiral Graf Spee off the shores of the resort in December 1939.

The bankers argued that Argentina could pay at least part of its interest with some $400 million or more that the country has on hand from the sales of such exports as meat and grain. But Grinspun said the money was needed to pay for imports. He asked for new loans and suggested that Argentina be given 15 years to pay off its debt, nearly half of which comes due this year. "I must declare very clearly to you," the Minister warned, "that Argentina cannot continue to devote two-thirds of its export earnings and 8% of its national production to the payment of interest under existing terms and conditions."

The talks went nowhere until Jesuus Silva Herzog, Mexico's Finance Secretary, suddenly suggested a multinational loan for Argentina. Everyone liked the idea, and by the time the Punta del Este conference broke up on Wednesday, the U.S. Treasury was taking the lead in hammering out the details of a rescue plan. For the next 48 hours, negotiators and financial technicians worked almost round the clock in both Buenos Aires and Washington. Representatives of Mexico, Brazil, Venezuela and Colombia joined in by telephone.

By Friday night everything was set except for a nod from the IMF. Just after 10 p.m., an exhausted group of negotiators were munching on pastrami sandwiches at the Treasury Building in Washington when word came that IMF Managing Director Jacques de Larosiere reported "satisfactory progress" in talks with the Argentines.

The focus of attention will now shift to the bargaining between Argentina and the IMF. Last year the IMF and the banks negotiated a $1.5 billion loan for Argentina, of which the country has drawn $500 million. The IMF suspended the rest of the credit line, however, when Argentina failed to stick to agreed-upon targets for cutting government spending and slowing inflation. After Raul Alfonsin became President in December, the new civilian government gradually began working on an economic program that would satisfy the IMF.

Argentina promised last week that it would slash its government deficit from 14% of national output to 9% as a way of curbing inflation. But Alfonsin may have trouble getting Argentine labor unions to accept wage restraint. The opposition Peronist party tightly controls many of the unions. Alfonsin has tried unsuccessfully to push a bill through Congress that would have made unions more democratic.

In talks with the IMF, the Argentines have made it clear that they would not agree to a stringent belt-tightening program that might slow growth. Their economy expanded only 2.8% in 1983, following two years of decline. "We will pay the foreign debt, but without recessive conditions," Alfonsin declared. "We will not negotiate the hunger of the people."

Alfonsin resents being asked to pay a debt that piled up primarily during nearly eight years of despotic military rule. His defiant stance is immensely popular with the Argentine public. Buenos Aires newspapers last week were sporting such headlines as ENOUGH OF YANKEE MONEYLENDERS and GRINSPUN FACED UP TO THE BANKS. The debt negotiations were the talk of the town. Cab drivers asked their passengers, "What do you think the banks will do to us?"

Argentina's $46 billion debt is only a fraction of the $335 billion that is on loan to more than two dozen Latin American countries. The biggest debtors are Brazil ($96 billion) and Mexico ($85 billion). Both are chafing under IMF-imposed austerity programs that have slowed down their economies. Mexico reported last week that its national output fell 4.7% in 1983, the worst performance in more than 50 years. Brazil's production dropped 3.3% in 1983.

Mexican President Miguel de la Madrid Hurtado visited Brasilia last week to confer with his Brazilian counterpart, Jo`ao Figueiredo. The two leaders had some blunt words for their creditors. Figueiredo complained of high interest rates that "threaten to perpetuate our foreign debt problems." De la Madrid said, with much justification, that Latin America could not boost exports enough to pay its debts if creditor countries erected "ever increasing protectionist measures" against imports from the developing nations. The day before De la Madrid spoke, the Reagan Administration announced a cutback in the number of products allowed to enter the U.S. duty free. Among the countries hit will be Mexico and Brazil.

Like Argentina, Venezuela has fallen behind in paying interest on its $34 billion debt. The country has refused to accept an IMF austerity program to get new loans, and the Venezuelans are relying on oil revenues to pay for vital imports. Jaime Lusinchi, who became Venezuela's President in February, vowed that his government "will pay back every cent it owes," but said that he would not submit to repayment terms that "impede the progress of the country."

Latin America can pay back loans only if its economies become healthy again. That may be impossible as long as interest burdens remain staggering. Eventually, Western banks and governments will probably have to work out a plan for giving the Latin Americans lower interest rates and much longer repayment periods. Last week's Argentina rescue bought some time, but it only postponed the day when bankers and governments will have to deal with the debt crisis in a more fundamental way. --By Charles P. Alexander. Reported by Gisela Bolts/Washington and Nina Lindley/Buenos Aires

With reporting by Gisela Bolte, Nina Lindley