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Argentina Defaults on World Bank Payment, Worsens Credit Record

By Paul Blustein and Anthony Faiola

The Argentine government defaulted on all but a fraction of an $805 million payment due Thursday to the World Bank, deepening the country’s rift with the international financial establishment and stirring concern about a new deterioration in relations between Washington and Latin America.

Argentina has already severely damaged its creditworthiness, having defaulted early this year on some $100 billion owed to commercial banks, bondholders and other private creditors. But countries that fail to pay official multilateral institutions like the World Bank risk becoming full-fledged international financial pariahs; the list consists mostly of “failed states” such as Somalia, and left-wing governments that deliberately sought to thumb their noses at global capitalism such as Peru in the late 1980s.

Thursday’s announcement came after talks between Argentina and the International Monetary Fund, which have been dragging on for nearly 11 months, failed to reach an agreement on the terms for restarting international lending to Buenos Aires. Hopes for a last-minute deal were dashed when Economy Minister Roberto Lavagna, who flew to Washington Tuesday night, told the World Bank that Argentina would make a $79 million interest payment as a token of good faith but would not pay the remainder of the amount due because of the need to devote precious foreign exchange to propping up the peso and funding programs for the nation’s army of unemployed.

“Argentina fully intends to meet its obligations once an (IMF) agreement is reached,” said President Eduardo Duhalde, adding: “This does not close the door -- we are still ready to continue talks.” The World Bank said it “welcomes statements by government officials that Argentina remains committed to rectifying the situation as soon as possible.”

But despite the conciliatory rhetoric by both sides, Thursday’s move raises the prospect that Argentina could fall further into economic isolation. Privately, some officials in Washington also worry that if Argentina becomes more estranged from the IMF, the danger will increase that popular sentiment throughout Latin America will turn increasingly against the fund, its overseers in the U.S. government and the system of global capitalism that they champion. “This is crucial for the whole region,” one senior policy-maker said, noting that Brazil’s left-wing president-elect, Luiz Inacio Lula da Silva, may find it more difficult to hew to IMF-backed policies if neighboring Argentina is rejecting them.

In the short term, the default is likely to have only a modest impact on the Argentine economy. The World Bank will continue to disburse money to Buenos Aires under its existing loans for at least 30 days, although under the bank’s rules its board can’t consider a new loan program that it had been expected to approve later this month.

But after 30 days, unless Argentina has cleared up its arrears, the World Bank will suspend disbursements on projects that aid the country’s poor. Perhaps more important, Argentine businesses that are still receiving loans from abroad to finance exports and imports will probably find it much more difficult to do so, said Michael Mussa, the IMF’s former chief economist who is now a scholar at the Institute for International Economics.