(updates with IMF statement, adds details throughout)
WASHINGTON/BUENOS AIRES, Nov 14 (Reuters) - Argentina on Thursday defaulted on its World Bank debts, as last gasp talks to restart International Monetary Fund aid stalled over persistent fears that Buenos Aires cannot deliver on its promises.
Argentine Economy Minister Roberto Lavagna personally delivered the bad news in Washington to the World Bank that Buenos Aires would only make a token $79.2 million interest payment on an $805 million payment due on Thursday.
The default will effectively cut off one of Argentina's last sources of financing after it has already defaulted on $95 billion of its $115 billion commercial debts.
The default will have little initial effect on Argentina's real economy, but analysts said the resulting jolt to public confidence could shake recent stability gained after four years of devastating recession.
Cut off from the international cash Argentina needs to shore up its budget shortfall, unemployment has spiked to over 20 percent leaving one in two Argentines in poverty, unable to buy even basic food and clothing.
Argentina's peso and stocks fell on the news. Investors had thought Argentina would either reach an IMF aid deal or pay using its reserves.
Lavagna said Argentina would not pay the principal on its World Bank loans until a deal to restart IMF aid was reached -- something still elusive after 11 months of tortuous talks.
The minister told the World Bank payments would only resume, "once we close a program of financing" with the IMF.
"Negotiations are advancing slowly," Lavagna cautioned, adding that he hopes for an IMF deal, "in not much time more."
The IMF's No. 2 official, Anne Krueger, said some progress had been made with Argentina this week. But perhaps crucially, Krueger said, "The authorities have also agreed to seek the necessary consensus with the political leaders."
Caretaker President Eduardo Duhalde will canvas for some political support on Monday when he plans to meet with provincial governors and congressional leaders.
Lavagna led a delegation to the IMF here this week to try and hammer out a last-minute deal to avoid the World Bank default. But he headed home to Buenos Aires empty-handed on Thursday night after his latest efforts to restart IMF aid, cut off last December for broken promises, fell short.
DEBT DEADBEATS
Paying only the interest on the World Bank loan is not enough to avoid default -- a move that relegates Argentina to a club of debt deadbeats that includes Iraq and Zimbabwe.
The World Bank said in a statement it cannot now consider any new loans for Argentina, and further payments under existing loans will be cut off in mid-December unless Buenos Aires makes good on the payments that are now overdue.
In the IMF's statement, Krueger cited progress on how to resolve banking problems and a commitment from Argentina not to further delay implementing its bankruptcy law.
The IMF's top negotiator said talks would continue with much work ahead including what monetary anchor to use to keep the economy stable, the relationship between the federal and provincial budgets for 2003 and utility pricing.
With little political clout, the government is caught between a rock and a hard place as it seeks to appease the IMF without rekindling sporadic protest violence. Unemployed office workers have been reduced to slashing open garbage bags on street corners in search of scrap paper for recycling.
Some malnourished children in the poverty-ridden north have died while others have been found eating dirt. Widespread kidnappings, for ransoms of just a few hundred dollars, have sown widespread panic. Even Buenos Aires' prostitutes are feeling the pinch, accepting paper IOUs printed by cash-strapped provinces instead of cash for their services.
FRANTIC EFFORTS
Argentina had tried frantically to seal an IMF deal before the Thursday deadline but talks broke down again over the IMF's worries that Buenos Aires would not be able to deliver on its promises due to political infighting and legislative gridlock.
Duhalde said his team would persist in efforts to cobble together an IMF deal, saying, "Argentina ... is committed to facing its obligations once a deal is sealed." But then he announced the government would lower sales taxes -- a move the IMF has vocally opposed.
Argentina's inability to develop a credible plan to mend its economy, shattered by a massive crisis late last year, has weighed heavily on the IMF talks all year.
Krueger threw Lavagna a bone as he departed to the airport, saying she was ready to recommend that the lender's board approve an Argentine request to roll over a $141 million payment that comes due on Nov. 22 -- giving Buenos Aires some breathing room before it defaults on its IMF obligations.
Last month, senior IMF sources told Reuters it was unlikely the lender would sign a deal with the current Argentine government because of its inability to secure backing for its agenda. That sentiment was repeated again by IMF sources on Thursday even as both sides insist talks continue.
UBS Warburg economist Michael Gavin summed up Wall Street's reaction: "I guess this puts the IMF talks on hold, and it could be the next Argentine government's job to clean up this mess," he said, referring to March presidential elections.
The IMF's chief concern remains a fear that Duhalde cannot implement any promises he makes in return for aid, something underscored by his single-digit approval rating and exacerbated by tensions with fellow Peronist Carlos Menem -- a former president who hopes to run again in March.
(Additional reporting by Brian Winter in Buenos Aires and Pablo Bachelet in Washington)
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News Brief No. 02/114 November 14, 2002 International Monetary Fund 700 19th Street, NW Washington, D.C. 20431 USA
IMF Issues Press Statement on Argentina
Ms. Anne Krueger, First Deputy Managing Director of the International Monetary Fund (IMF), issued the following statement today:
"We have made further progress with Minister Lavagna and his team this week. In particular, we have broadly agreed on the sequencing of an initial banking strategy and that there will be no further mandatory stays to the application of the insolvency law. The authorities have also agreed to seek the necessary consensus with the political leaders. There are, in addition, still some issues that remain to be resolved for the emerging program, affecting the monetary anchor, the federal and provincial fiscal framework for 2003, and the pricing and regulatory framework of the utilities. We expect discussions will continue in the coming days. The authorities have requested an extension of the Supplemental Reserve Facility expectation falling due on November 22 and management is preparing to recommend such an extension for the approval of the Executive Board. IMF management continues to coordinate closely with the managements of the World Bank and the Inter-American Development Bank on the dialogue with Argentina."
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Argentina Makes Partial Payment, World Bank Confirms
Press Release No: 2002/140/LCR
Contact: Yanina Budkin (54-11)4316-9700 ybudkin at worldbank.org Christopher Neal (202) 473-7229 e-mail: Cneal1 at worldbank.org
WASHINGTON, November 14, 2002 - In response to statements by the Argentine authorities, the World Bank today confirmed that it has received a partial payment of US$79.2 million from the Government of Argentina against a scheduled payment of US$805 million that was due October 15, 2002. The World Bank welcomes statements by government officials that Argentina remains committed to rectifying the situation as soon as possible. In the meantime, however, the Bank's policies regarding late payments will apply.
According to World Bank policy, no penalties are assessed on loan payments made within 30 days of the scheduled due date. If a payment becomes 30 days overdue, no new loans to the borrower can be presented to the Bank's Board, and the borrower loses eligibility for reductions of interest charges falling due over the following six months. These interest charge waivers are granted only to countries making payments on time. Full payment by Argentina of amounts overdue by 30 days would result in the immediate lifting of the restriction against consideration of new loans. Meanwhile, the Bank will continue to disburse under existing loan arrangements previously approved, and can do so as long as no payment becomes 60 days overdue.
For more information on the World Bank debt payment policies, please consult the this information statement:
<http://www.worldbank.org/debtsecurities/assets/images/2002_Information_Statement.PDF>