Argentina and IMF in duel over $3.1bn loan

Argentina was last night on a collision course with the International Monetary Fund after the heavily indebted Latin American country signalled it was preparing to default on a $3.1bn (£1.7bn) payment to the Washington-based lender.

In the biggest trial of strength between the fund and a debtor country in the fifty-year history of the global lender, the crisis will come to a head today when Buenos Aires must decide whether to pay the fund.

The dispute is not really over the $3.1bn - the fund promised last October to rollover its outstanding loans to the country, so Argentina does not have to make any net repayments this year to Washington.

Argentina also owes $90bn to banks and private investors in Europe and North America. It has made no payments on these debts since December 2001, and the fund is insisting the country negotiates a fair deal with its private creditors before extending its credit line.

"I don't think Argentina is going to pay us without there being a commitment from us and the board will not give it that," an IMF source told Reuters last week.

"So, Argentina has a choice: to pay us and take their chances or continue playing hardball." Latin America's second largest economy is only just recovering from a slump caused by following the fund's advice throughout the 1990s, but is now being pressed by its private sector creditors to start making repayments on its enormous debt.

So seriously is Buenos Aires taking these threats that President Nestor Kirchner cancelled a trip to Europe earlier this year on his official jet, Tango One, afraid it could be seized as collateral by aggrieved bondholders.

Mr Kirchner is taking a huge gamble. His stance is winning applause from Argentina's hardpressed population, but the confrontation with the fund could end in the country becoming a financial pariah. "Argentina has been living in a false honeymoon, paying no interest, but the creditors are banging on the door," said Professor Marcus Miller of Warwick University.

Mr Kirchner and economy minister Roberto Lavagna have offered creditors 25¢ in the dollar. Any more, they argue, would force them to cut spending on schools and hospitals. The creditors are demanding 65¢ in the dollar and say Argentina can afford to pay them, now the country is enjoying healthy growth.

Discussions between the two sides have been deep frozen for months, but the departure last week of the IMF's managing director Horst Köhler is likely to bring the crisis to a head. Standing in as acting chief is Anne Krueger, the fund's deputy director, who is likely to take an uncompromising line over how much Argentina can afford to pay.

Ms Krueger's tough love stance is receiving backing from some of the fund's leading shareholders, the rich countries of the West. The issue has already split the group of seven industrialised countries: in a rare revolt against the rest of the G7, Britain, Italy and Japan all abstained from rolling over Argentina's lending programme last January.

There are three possible ways out of the current impasse: either Argentina capitulates and offers creditors a better deal; the fund backs down and continues its lending programme despite Buenos Aires's intransigence or a compromise is agreed.

Prof Miller says the impasse could be resolved without harming Argentina's recovery. Buenos Aires should float new bonds with returns linked to the performance of its economy to repay its creditors. If the economy grows strongly over the next few years, creditors will get a slice of the action without starving other parts of the economy.

Argentina likes the idea of growth linked bonds but Mr Kirchner has ratcheted up the rhetoric so it will be difficult give creditors a break. For the fund, however, Argentina's defiance raises the ultimate spectre: a domino effect of defaulters that could bankrupt it.