A Plan, at Long Last a Plan

By John S. DeMott

The IMF and Argentina reach agreement on new loans

How do you spell relief? Last week in Argentina they were spelling it IMF. After seven months of dickering, officials of the Argentine government and the International Monetary Fund reached an arrangement whereby Argentina would get IMF emergency loans to help put its economy on a sounder footing. The IMF aid will enable Argentina to get more loans from private banks so that it can meet interest payments on its $45.5 billion debt.

The accord ended a precarious situation that had bankers and politicians in both Washington and Buenos Aires holding their breath whenever interest payments came due. For months Argentine Economy Minister Bernardo Grinspun has been shuttling between New York City, Washington and Buenos Aires. Default was avoided twice this year by partial payments or assistance from Argentina's Latin American neighbors. Meanwhile, the country's economy kept deteriorating. Inflation reached an annual rate of 1,200%, and labor unions were pressing for ever higher wages.

The IMF had demanded stringent austerity measures by Argentina in return for its help, chiefly a reduction in public spending. But President Raul Alfonsin, installed in December after eight years of military rule, feared that too much austerity would cause civil unrest, possibly toppling his fragile democratic regime. The government drafted a letter of intent in June in which it said it would try to tighten its belt, but that was not enough for the IMF, which wanted more concrete austerity plans. It rejected Argentina's as inconsistent and unworkable.

In the arrangement announced last week by Grinspun at the joint annual meeting of the World Bank and the IMF, Argentina pledged to clamp down on its money supply and credit, push up interest rates (currently 15.5% for deposits) in order to encourage savings, slow inflation, and stem the outflow of money from the country. Argentina also said it would try to chop the deficit in the biggest areas of public-sector spending from its level of 11.4% of gross domestic product in 1983, to 8.1% this year and down to 5.4% in 1985. In addition, Argentina indicated that it will take action to hold down wage increases, but the deal's language was left intentionally vague to give Alfonsin flexibility.

In return for agreeing to the new measures, Argentina will get $1.4 billion in IMF loans during the next 15 months. But the money will not start flowing until December, assuming the IMF board gives final approval to the deal worked out last week. That will give Argentina time to begin putting the austerity program in place, thus demonstrating its good intentions to the IMF. The agreement, the government hopes, will lead to a flow of new loans from U.S. banks. Grinspun and Alfonsin have reportedly asked for $5.5 billion in fresh borrowing, but the banks so far have promised only $2.5 billion.

The day after Argentina worked out the arrangement with the IMF, Grinspun and Alfonsin were in New York City, pressing their case before a few powerful bankers at a luncheon given by former Secretary of State Henry Kissinger. IMF Managing Director Jacques de Larosiere has also been helping Argentina by telling the banks that the IMF will not come through with its money unless the banks come up with theirs.

There were doubts that Argentina will be able to live up to the terms it agreed to last week. The political situation in the country remains tense, and workers may rebel at the austerity. But the IMF seemed ready to give Alfonsin the benefit of the doubt. If Argentina fails to comply with the austerity program, however, both the IMF and the banks could turn off the money, leaving Argentina worse off than before.

Another issue of concern at last week's IMF-World Bank meeting was the continued rise in value of the U.S. dollar. The West German Bundesbank again intervened in world money markets to halt the volatile increase of the dollar against the mark; following the West German action the dollar declined slightly. -- By John S. DeMott.

Reported by Gisela Bolte/Washington

With reporting by Gisela Bolte