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Wallstreet disagrees with argentina loan payoff Original Source Link: (May no longer be active)
http://today.reuters.com/news/newsArticle.aspx?type=reutersEdge&storyID=2005-12-16T220001Z_01_SPI679174_RTRUKOC_0_US-ECONOMY-ARGENTINA-WALLSTREET.xmlhttp://today.reuters.com/news/newsArticle.aspx?type=reutersEdge&storyID=2005-12-16T220001Z_01_SPI679174_RTRUKOC_0_US-ECONOMY-ARGENTINA-WALLSTREET.xml
Wall St torn on Argentina's debt payback to IMF
Fri Dec 16, 2005 5:00 PM ET
By Manuela Badawy
NEW YORK (Reuters) - Argentina's decision to pay back $9.9 billion in loans to the International Monetary Fund buys political independence but may raise the costs and risks of investing in the country, Wall Street analysts said.
President Nestor Kirchner announced on Thursday that Argentina would repay its debt to the IMF in the next two weeks, bringing to an end years of disputes with the IMF over Argentina's economic policies following the country's default on $82 billion debt in late 2001.
On Wall Street, some investors believe repayment to the IMF will damage Argentina's macroeconomic profile by drawing down its international reserves, while giving priority to the Fund instead of to international bondholders who hold 24 percent of the original defaulted debt.
There are others who are optimistic that the decision will strengthen the country's financial and political independence.
"Initially there is a polarization of how markets look at things," said Sarvjeev Sidhu, global head of emerging market debt at AEGON USA Investment Management, based in Iowa.
"What macroeconomic policies will Argentina pursue on the medium term is the key driver not only for investment decisions but also performance."
But most analysts agreed the move is mostly politically motivated because Argentina will be free from the IMF's pressure to satisfy those bondholders who did not accept Argentina's debt restructuring offer last year, and will feel less need to maintain good relations with the U.S. and other European countries which control IMF's policies.
The IMF lends to countries in financial distress, but in return, those governments must follow macroeconomic and structural reform programs designed by the Fund.
One sector that will lose from the pre-payment to the IMF are companies, such as power and phone utilities, which have had their prices regulated by the government and no longer will have as much IMF support for deregulation.
However, the economic and financial implications of paying the IMF for political autonomy are making some investors nervous. Some analysts say it could lead to compromising the central bank's independence, and risk resorting to price controls and foreign exchange intervention to curb inflation and rebuild reserves.
"The deterioration in the perception of the central bank's independence will hinder local markets from seeing the issuance of non-indexed paper in the foreseeable future, implying the stagnation in the recovery of the local capital markets," said Alberto Bernal, analyst at Bear Stearns.
Argentina said its decision was made possible by the strength of its economy which grew by 9.2 percent in the first nine months of 2005.
By paying the IMF earlier than scheduled, the government reduces the amount it will have to finance for 2006 and 2007, and still as foreign exchange reserves will fall to $17 billion from around $27 billion is not a concern, analysts said.
But in terms of liability management, Argentina is not doing a good deal, analysts said. It is paying back debt carrying a low interest rate instead of paying off higher cost commercial debt, such as the Boden maturing in 2012, analysts said.
"If Argentina had decided to prepay the Bodens it would have saved $950 million a year, but by paying the Fund, Argentina is saving a maximum of $400 million," Bernal said.
With Argentina's decision to repay the IMF, foreign investors who did not participate in the exchange of defaulted bonds for new paper valued at around 32 cents for every dollar are one of the two groups which have little hope to recovering any of their original investment.
"Now the holdouts lose one of their main anchors of support, because now the IMF no longer has a claim against Argentina," said Enrique Alvarez, emerging market strategist at IDEAglobal. Argentina decided to erase them from the map unilaterally."
The final judgment on Argentina's decision though will be made by foreign investors who may move their assets out of the country if the government's new economic policies fail to provide them with incentives to stay.
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