Argentina Ready to Pay Paris Club Debt

Sources:
Bloomberg.com: Argentina's Paris Club Debt to be Resolved by Early 2011, Lorenzino Says
Lanacion.com.ar: El Club de París quiere que la Argentina pague en el corto plazo
Lanacion.com.ar: La Argentina y el Club de París
Noticias.terra.com.ar: El FMI ve como una "cosa buena" el inicio de negociaciones de la Argentina y el Club de París
WSJ.com: UPDATE: Argentina Rules Out Quick Paris Club Repayment –Minister

Argentine President Christina Fernández de Kirchner announced earlier this week that Argentina would begin negotiations to pay off its debts to the Paris Club, a group of international creditors that includes the U.S., Japan, and Germany. Argentina has been in default with the Paris Club since its economy collapsed in 2001.

The Paris Club debt totals about $7.7 billion. The Argentine Government originally announced plans to pay the debt with foreign currency reserves in late 2008, but when Lehman Brothers failed and the global financial crisis ensued, the Government changed course and decided to hold on to those reserves through the lean times. Now that the country is back on track economically (its economy is projected to grow by around 9% this year), the Government has decided that it is financially capable of making the debt payments.

Normally the Paris Club will only negotiate debt repayment plans with the participation of the International Monetary Fund and its team of auditors. However, most Argentine politicians say the 2001 collapse was a direct result of the changes the International Monetary Fund required Argentina to make to qualify for loans, which has resulted in poor relations between the two over the last decade. This inspired Argentina to successfully insist that any negotiations with the Paris Club not include the IMF. This is a huge political victory for Argentina, where politicians claim victory in this “David versus Goliath” clash. The IMF has even made public statements saying that its exclusion is a “good thing.”

Though the IMF will not participate in the negotiations, the meetings will surely still be contentious. The Paris Club creditors want Argentina to pay the debt off as fast as possible to avoid another change of course by the Argentine Government. This fear has escalated with the recent passing of former President Néstor Kirchner who was widely expected to run for (and easily win) the presidency in 2011; with his death the race is now wide open.

Argentina, on the other hand, disagrees with any proposed payment schedule that might interfere with its growth. The Argentine Government has already made it clear that it will not pay the debt in one lump sum or in less than one year, but it is also anxious to receive the benefits that come with removing the stigma that comes with defaulting on national debt. The Government hopes that paying the debt will increase the amount of foreign capital flowing into the country, which would help build needed infrastructure and fund further economic expansion.

Discussion:
1) Some government critics have suggested that Argentina wants to keep the IMF out of the negotiations process because the Government fears that the IMF auditors will find flaws in the Government’s accounting that will expose an economic situation less favorable than the picture the Government currently projects. This is surely a situation the Paris Club recognizes, and yet it has agreed to negotiations without the IMF. Why?