ARGENTINA PAYS OFF ITS IMF DEBT

UNCLAS BUENOS AIRES 000022

SIPDIS

SIPDIS

WHA FOR AS TOM SHANNON, PDAS SHAPIRO AND DAS PATRICK DUFFY
NSC FOR DAN FISK AND SUE CRONIN
TREASURY FOR DORA DOUGLASS
USTR FOR LESLIE YANG
OPIC FOR RUTH ANN NICASTRI
SOUTHCOM FOR POLAD AND J5 FOR JUAN RENTA
USDOC FOR 4322/MAC/OLAC/BASTIAN/PEACHER

E.O. 12958: N/A
TAGS: EFIN ECON PREL EINV AR
SUBJECT: ARGENTINA PAYS OFF ITS IMF DEBT

REF: (05) BUENOS AIRES 3097


1. President Nestor Kirchner announced on December 15 that
the GOA would pay its remaining debt totalling nearly USD 10
billion to the International Monetary Fund shortly after the
new year (reftel). Economy Minister Felisa Miceli and
Central Bank President Martin Redrado announced on January 3
that the payment had been made. The transaction used USD
9.53 billion in Central Bank reserves to pay the remaining
IMF debt in full. Miceli said the debt payment would yield
improvements in the Argentine economy and would allow greater
economic autonomy. Redrado said the transaction, which
reduced Central Bank reserves by a third to USD 18.6 billion,
"was the most important and complex in the Central Bank's
70-year history." (Note: Reftel reported that the debt
payoff figure would be USD 9.81 billion. The discrepancy
results from the difference in the December 15 and January 3
exchange rates for the IMF's Special Drawing Rights (SDRs).
The SDR-USD exchange rate on the date of Kirchner's
announcement was USD 1/SDR 1.444. The exchange rate for the
January 3 payment was USD 1/SDR 1.432. End note.)


2. Miceli estimated that the payment would save the GOA more
than USD 840 million in interest payments in the course of
the coming 4 years. She also acknowledged that the payment
had "high political and symbolic value" since it "marks the
beginning of a new phase in which Argentines will decide on
the policies to be implemented without excessive
questioning." The January 3 payment does not signal a change
in monetary policy, according to Miceli. Accumulating dollar
reserves and maintaining a competitive exchange rate will
continue to be the strategy "as it has been up to the present
time," said Miceli.

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Comment
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3. Many pundits here say that eliminating the GOA's
remaining debt to the IMF is a victory for President
Kirchner. Argentine officials claim the payment frees
Argentina from the dictates of the IMF, the organization that
Kirchner has blamed in large part for the economic and
financial collapse in 2001-2002. On the economic side, the
payment is viewed by many as a tangible demonstration of
Argentina's economic recovery since the end of convertibility
in January 2002 when the country's IMF debt exceeded USD 14
billion and reserves had dwindled to USD 8 billion.


4. At present, there are two competing visions about the way
ahead for the Argentine economy. The first holds that,
although the Kirchner administration did not strictly abide
by IMF conditions, the absence of the IMF as a nominal check
on setting economic policy will encourage fiscal laxity.
This view contends that expenditures will rise and Kirchner
will abandon his apparent preference for fiscal surpluses.
The competing view argues that the loss of nearly USD 10
billion in reserves will force the GOA to be more prudent on
the fiscal side to improve its credibility with international
financial markets.


5. To see more Buenos Aires reporting, visit our classified
website at: http://www.state.sgov.gov/p/wha/buenosaires.< /a>
GUTIERREZ