LEADER: Time to say no to Argentina
Financial Times; Feb 02, 2004

A cheer apiece is due to the UK, Italy and Japan. Last week, they broke ranks with the rest of the Group of Seven nations, joined the brave band of existing dissenters on the board of the International Monetary Fund and said to Argentina: enough is enough.

The vote in the IMF's board, on the latest tranche of lending to the fund's most troublesome borrower, went through anyway. That was a pity. When the next disbursement comes up for consideration, the fund's management and the rest of its shareholder countries must insist first on real progress with restructuring Argentina's defaulted sovereign debt.

This is not to take the side of Argentina's foreign bondholders, who made an ambitious opening bid that the face value of their bonds should be cut by just 35 per cent. No-one buying bonds from a government that operated a currency board but repeatedly failed to balance its budget should complain when that bet goes sour. Investors will take big losses, and they deserve it.

The vital principle is that Argentina must negotiate fairly and openly with all the players whose co-operation is needed to turn the economy's dead-cat bounce into a sustained recovery: international and domestic bondholders, foreign-owned utility companies whose prices have been frozen by government decree, and the IMF itself.

Instead, the Argentines have chosen to cling to their initial bid to foreign bondholders of a reduction of more than 90 per cent in net present value, and to deny the legitimacy of bondholders' groups attempting to negotiate. They have also refused to allow utility prices to rise. The habit of flinging personal insults from Buenos Aires when such tactics meet inevitable resistance does not give the impression of a government negotiating, as IMF rules require, in good faith.

The US must also stand up to Argentina. It has not done so yet. For whatever motive - probably a mix of strategic expediency and election-year politics - it is sitting idly by while moral hazard is being created. Any crisis-hit country of sufficient size and importance could conclude from this episode that it should choose foot-stamping defiance to the IMF over painful but necessary reform.

Small wonder dissent is rising within the G7. Along with applauding itself for stabilising currencies in Iraq and Afghanistan, the US should put Argentina high up the agenda of next weekend's G7 meeting in Florida.

Saying no to Argentina will not be easy. If the Argentines respond by defaulting to the IMF itself, the costs for other, blameless borrowers will go up. The G7 must think of a way to offset this. Standing up to a blackmailer means being prepared to call its bluff, and the G7 needs a credible financing plan for offsetting a potential Argentine default to the fund.

That will not be cheap. But it is better than bumbling on in the forlorn hope that a recidivist government will choose suddenly to go straight.