Argentina's IMF move spooks investors
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Argentina's IMF move spooks investors

Latin nation's bid to cut ties with multilateral plays badly in markets

Investors dumped Argentina's bonds yesterday (Thursday) afternoon on news that President Nestor Kirchner had decided to sever the country's 22 year ties with the IMF and pay back the entire $9.8bn it owes.

Although Brazil's bonds soared on news earlier this week that it intended to prepay its $15.5bn of IMF loans, investors were alarmed by the prospect of Argentina essentially kicking the IMF out of the country.

"It was bad enough that [former economy minister Roberto] Lavagna has gone, but now there's zero chance of the IMF having any influence in the country," said one syndicate manager. Lavagna had advocated working with the IMF.

Argentine bonds fell about a percentage point on what investors took to be a political rather than an economic move by President Kirchner.

The decision was seen as another critical shift in the country's macro-economic policy towards a more left wing, populist approach.

Kirchner's first move to take the economic reins of the country came several weeks ago when he ousted Lavagna, who had overseen the country's debt restructuring and proposed a re-opening of the deal to bondholders owning about $20bn of defaulted bonds, who had refused to participate in the exchange earlier this year.

Lavagna hoped re-opening the exchange would go some way to normalising Argentina's relationship with the international capital markets.

Lavagna's replacement, Felisa Miceli, is considered to have little sway over Kirchner. The president recently spooked investors by calling on retailers to cap their prices, rather than tightening monetary policy to rein in inflation.

Argentine inflation has jumped from 6% a year ago to 12%.

Announcing the prepayment, Kirchner made no secret of his animosity toward the IMF. He said the IMF had "acted towards our country as a promoter and a vehicle of policies that caused poverty and pain among the Argentine people".

The government will dip into its $27bn of foreign exchange reserves to make the payment.

There was also a report last night that Miceli and central bank chief Martin Redrado had told local reporters Argentina had obtained enough commitments to issue up to $3bn of bonds in the international markets.

The IMF's managing director, Rodrigo Rato, said: "I welcome Argentina's repayment of its outstanding obligations to the Fund. The decision has been taken by the government in accordance with its rights as any normal member of the Fund and reflects their confidence that their external position is sufficiently strong to warrant early repayment."

Argentina has made a strong economic recovery during the last several years with growth of around 9% a year since 2003. Exports have risen to record levels, giving the government a healthy primary surplus of an estimated 3.7% by the end of this year.

Analysts warn, however, that unless Argentina brings down inflation it will not attract much-needed foreign direct investment into industries already running at full capacity. That would lead to lower growth in the year ahead.

New crop of lawsuits

Argentina's bonds had already plunged earlier in the week on news that fund managers had filed four lawsuits against the republic, demanding $242.5m of unpaid principal and interest on defaulted bonds.

Fears that the complainants could intercept and seize the December 31 coupon payment on Argentina's Discount bond sent the price of the bond down two points by Wednesday to 82.20 bid.

Although the fears were unfounded because Argentina has 60 days — until well after December 31 — to respond to the lawsuits, market participants took the news as an omen that Argentine bond payments may come under increasing attack from bitter holdout creditors in the year ahead.

"Their next payment is on the dollar Par bonds in March and an attachment of that payment could always happen," said one analyst in New York. "The probability of that happening will never be zero, as long as so much debt remains in default."

The investment management firms suing Argentina are Grantham Mayo Van Otterloo and Cayman Islands-incorporated Los Angeles Capital, respectively claiming $236m and $6.5m of unpaid principal and interest on defaulted bonds.

They are among the large group of international investors that hold about $20bn of defaulted bonds, which refused to take part in Argentina's debt restructuring because the government would only pay 32¢ on every dollar of bonds.

Argentina defaulted on more than $102bn of principal and past due interest, but managed to have 76% of that exchanged earlier this year for a series of Par, Discount and Quasi-par bonds in a variety of currencies.

None of the many bondholders suing Argentina has tried to attach claims to two previous coupon payments on dollar Par and Discount bonds this year.

However, that might have been because Lavagna had promoted re-opening the exchange to the holdouts in the new year. With Lavagna's departure, the chances of a re-opening have dwindled.

Brazil prepayment lauded

Brazil has decided to rid itself once and for all of the stigma of having sought help from the IMF, by repaying all $15.5bn it still owes the Fund.

The debt, scheduled to amortise in 2006 and 2007, will be paid off before the end of this year from the Brazilian central bank's foreign exchange reserves, currently around $67bn.

Because the loans are booked by the central bank as an asset, in the sense that they are money available to the country, but also as debt, because they have to be paid off, the transaction will cancel out on the liability and the asset sides of the central bank's balance sheet, leaving net foreign exchange reserves unchanged, at around $53.6bn.

The deal will help reduce any risk for Brazil of having to refinance its bonds in the international or local capital markets around the time of its presidential election in October 2006 and the possible change of administrations in 2007.

The liability management exercise will also save Brazil around $900m of interest by prepaying the IMF debt.

"This is a positive move which reflects the comfortable external position of the credit and the positive outlook for the external accounts over the next few years," said Goldman Sachs in a research report this week.

Brazilian bond prices surged on the news, with its 2040s trading at around 127.50 on Wednesday, about two points higher than Monday's levels.

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