Another Batch of Band-Aids

By John S. DeMott

Argentina makes a payment and borrows more time

When people cannot pay their debts, they go bankrupt. When countries cannot pay their debts, they go on public relations campaigns. That was again the case last week with Argentine President Raul Alfonsin, who faced overdue interest payments of $900 million on his country's foreign debt of $45 billion. In a televised speech, postponed for 48 hours because of the government's difficulties in agreeing to the details of a policy, Alfonsin lashed out at his countrymen's rampant tax evasion, calling it a "scandalous immorality." He promised stringent government austerity measures under a "longterm economic plan." But finally, Alfonsin said that Argentina would meet its foreign obligations and make payments on the country's loans.

Nevertheless, it was not until late in the week, with the deadline only hours away, that Argentina's plan became known. The country borrowed an additional $125 million from the banks and took $225 million from its foreign currency reserves to make the $350 million interest payment. The money was overdue on $8 billion worth of public-sector debt, much of it borrowed for government-sponsored enterprises like the national airline. Alfonsin also said that Argentina would work toward narrowing its differences with the International Monetary Fund, perhaps finally coming up with a belt-tightening program that would restore the confidence of the IMF and the banks in Argentina's ability to handle its internal economic affairs. Alfonsin, however, offered no specifics.

Currently, Argentina is at an impasse with the IMF over terms for a $3.2 billion loan package. The IMF wants hard pledges, but Argentina has as yet issued only a "letter of intent" that the IMF says does not go far enough. The banks last week offered Argentina enticements to come to a deal with the IMF. If it reaches an agreement with the organization by Aug. 15, Argentina can delay repayment of the new $125 million loan until Oct. 1. In announcing the new loan agreement, the bankers' committee applauded the "cordial atmosphere" of Argentina's talks with the IMF and its willingness to confront "the issues on which the Argentine authorities need to work."

Last week's accord came after meetings in New York City and Washington that included Argentine Economy Minister Bernardo Grinspun, American bankers, U.S. Treasury Secretary Donald Regan and IMF Managing Director Jacques de Larosiere. At one point, Grinspun met at Citicorp's Park Avenue headquarters with the eleven-bank advisory committee that watches over the interests of the 320 U.S. and foreign banks that hold Argentine loans.

Even as Grinspun arrived in New York early in the week, U.S. bankers made Argentina's troubles worse by raising the prime interest rate from 12.5% to 13%. The move was brought on by the higher borrowing costs that banks are paying in the U.S., but among the main victims were foreign debtors. At least half of all credit to Latin America is tied to the prime rate, and every percentage point rise adds $1.2 billion annually to the debtors' burden. Said Raymond Dalio of Bridgewater Associates, a Connecticut-based economic consultant: "The timing in the political sense could not have been worse." Alfonsin in his speech angrily attacked the "exorbitant and arbitrary interest rates."

Argentina, however, had little choice but to make a deal with the bankers. All the alternatives carried too high a price. One would have called for a 90-day moratorium on Argentina's debts, coupled with promises to meet the country's obligations eventually. That might have made the Alfonsin government more popular with Argentines, who like to see their President standing up to the Yankee banks. But a moratorium would have put Argentina into an even higher risk category for future loans, which would have crippled the country's ability to pay for necessary imports on credit and forced payments in cash from its foreign reserves of $1.63 billion.

Another choice would simply have been to accept the strict conditions the IMF had set for getting new loans, including no growth in wages and sharp slowdowns in government spending to cool off the country's hyperinflation of about 570% annually. That would have meant an immediate cash infusion of $1 billion and restored the country's reputation with the financial community. But politically the aftershock could have been devastating. Widespread strikes and rioting would probably have followed, threatening Alfonsin's young democratic government. Some union leaders, allied with the opposition Peronist party, predicted "social convulsion" if Alfonsin caved in to the IMF.

Last week's action was almost a replay of the one at the end of the March quarter, when Argentina faced another deadline on paying interest. At that time, four Latin American countries lent Argentina $300 million and commercial banks supplied an additional $100 million. Argentina has now been granted a postponement to the end of this month to pay back the $300 million and to Oct. 1 for the rest.

Pressure on the banks this time was not as intense. Several lenders had already written off some loans for the current quarter as "nonaccruing," official recognition that they are not bearing interest. Banks that have not taken that step will be forced to do so now by a ruling two weeks ago by the Comptroller of the Currency that loans must be declared nonaccruing if interest is not paid by the end of the current quarter. The new ruling means that even though Argentina made a big interest payment, the banks would still lose money in the quarter that ended last week. Reason: despite the payment, Argentina has caught up only on interest owed to April 2.

The long-anticipated losses did not stir panic in the vaults. Said one New York banker: "We will all have to take a hit, and we will all take it equally." Not quite. Citicorp has invested $1.2 billion in Argentina, but its drop in earnings will be 2% because of profits from other sources. New York's Manufacturers Hanover also has $1.2 billion at risk. Chairman John McGillicuddy said last week that the bank would have to increase its portfolio of no-interest loans from $46 million to $735 million. Profits for the second quarter will be 37% below projections.

Bankers are looking to the IMF and Argentina to reach some sort of deal during the summer, which would clear the way for still more loans. Alfonsin, referring to higher interest rates, complained that "Latin American countries can no longer depend on the fluctuations of the U.S. financial markets." But last week Argentina simply had no other place to turn.

-- By John S. DeMott.

-- Reported by Gavin Scott/Buenos Aires and Frederick Ungeheuer/New York

With reporting by Gavin Scott, Frederick Ungeheuer