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IMF May Sign Unorthodox Deal With Argentina to Repay Debts

By Tony Smith

The New York Times -- SAO PAULO, Brazil

After the International Monetary Fund’s agreement to help Argentina raise itself from its economic sickbed without having to follow a full fiscal discipline regime, could other debtors in the region be tempted to adopt a tougher stance with the fund?

In neighboring Brazil, where orthodox policies have stifled inflation and stabilized markets, a debate has already started as to whether the country needs to renew its current $30 billion package with the fund that expires in December.

The administration of President Luiz Inacio Lula da Silva has indicated that he will want a new deal only on more favorable conditions, and the finance minister, Antonio Palocci, said last week that any new deal with the fund should allow the government to increase spending on social needs and infrastructure.

In Ecuador, meanwhile, the authorities could be forgiven for wondering why the fund is demanding more belt-tightening from them than from Argentina. Analysts said that the Argentine deal was probably a one-time thing.

Brazil has the clout -- it is a big enough debtor -- to play hardball with the fund, though it probably will not, analysts say. Smaller debtors like Ecuador, though, do not have the leverage to extract concessions from the IMF.

As the dust settled on Thursday, most analysts agreed that the pact announced on Wednesday night by President Nestor Kirchner of Argentina and the monetary fund’s managing director, Horst Kohler, was a victory for Argentina.

Argentina said on Thursday that it had repaid about $3 billion in defaulted debt to the International Monetary Fund, according to Reuters. That default on Tuesday was the biggest single missed payment in the monetary fund’s history.

After being abandoned by the fund as its economy collapsed in late 2001, Argentina felt justified in resolutely refusing to make a series of concessions that negotiators for the monetary fund wanted in exchange for refinancing $21.6 billion in debt that Argentina owes multilateral institutions over the next three years.

Argentina’s requirements, considered less than orthodox by Wall Street, included limiting its budget surplus to 3 percent of gross domestic product next year, while leaving goals for the following two years open to further negotiation. By contrast, Ecuador’s fund-set surplus goal this year is 5 percent, while Brazil is aiming for 4.25 percent.

The deal also failed to lock in, as the fund had wanted, compensation for banks and largely foreign-owned utilities operating in Argentina that were hard hit by last year’s sharp devaluation of the peso.

“Did the IMF cave in? Yes and no,” said John Welch, chief Latin American economist at WestLB in New York. “But on these issues it certainly did.”

Welch points out that a 3 percent surplus, by Argentine standards, is gargantuan. Before Argentina defaulted on its private debt in 2002, it had not ended the year with excess cash since 1993, and that surplus was a meager 1 percent, he said.

Welch said he doubted that other countries would follow Argentina’s lead because there were very few debtors of that magnitude.

Brazil’s left-leaning government is debating whether it needs another agreement, not out of any animosity to the fund -- although that does exist in some quarters of da Silva’s Workers Party -- but because it feels it has proven its economic credentials by putting prudent economic policies into effect.