ARGENTINA: THE IMPACT OF RADICAL DEBT ACTIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00367R000100390001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: May 13, 2011
• Sequence Number: 1
• Publication Date: September 13, 1984
• Content Type: REPORT

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Central Intelligence Agency
Washingnon. Q c 20505
DIRECTORATE OF INTELLIGENCE
13 September 1984
Argentina: The Impact of Radical Debt Actions
Summary
Argentina is inching forward in talks with the IMF, but as
another US regulatory deadline approaches, the chances for a
confrontation between Buenos Aires and its creditors grow.
Even if Argentina reaches a last minute agreement with the IMF,
its financial crisis is far from over. The gap in perceptions
between Argentina and its'creditors.about the need for economic
austerity remains large and we have serious doubts about Buenos.
Aires' ability to maintain compliance with IMF conditionality
terms. With insufficient reserves, Argentina will be forced to
declare a moratorium or make only partial payments if an
accommodation with creditors is not reached. We consider-a
formal repudiation unlikely because of the availability of
these less drastic options.
If bankers decide to take action that would include a
formal declaration of default, our analysis suggests that
economically Argentina could survive bank-imposed sanctions.
We judge that even a serious cutback in foreign shipments could
be weathered initially, although some economic disruptions will
occur due to import reductions and the higher costs of doing
international business over the longer-term. Less certain is
whether Alfonsin could survive politically, especially if
inflation rocketed out of control causing the initial support
for such a nationalistic gesture to dissolve. We believe an
Argentine payments moratorium or repudiation would not set off
a chain reaction by the other major LDC debtors, but would
This memorandum was requested by the NIO for Economics. It was prepared
by Research Branch, South American Division, Office of
African and Latin American Analysis, with substantial input from analysts
of the Office of Global Issues. Comments and queries.are welcome and may
be directed to the Chief, South America Division
ALA M 84-10093
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strain bankers willinaness operate with the financial to-7
rescue programs.
Background
When President Raul Alfonsin took office in December 1983, he began
to follow through on campaign pledges to seek easier terms for repayment
of the $44 billion debt inherited from his military predecessors. He has
been critical of foreign bank and IMF insistence on austerity measures,
arguing that Argentina needs economic growth to raise living standards and
preserve democracy.
At the same time Buenos Aires has engaged in a series of negotiations
with the IMF and bank creditors. Alfons'in'.s chief financial.negotiator,
Economy Minister Bernardo Grinspun, has aggressively pushed the position
that Argentina is unwilling to sacrifice economic growth simply to meet
creditor demands, contributing to serious clashes with the banks and only
slight progress with the IMF over the past nine months.
the lack of notable progress in debt
negotiations has caused the Argentines several times to consider seriously
the repudiation option.
The US banks' required end-of-quarter regulatory reviews of the
status of Argentine loans have repeatedly provided the focal points for
confrontation.
Buenos Aires considered debt repudiation in the face of
heavy pressure from US banks to reconcile with the IMF. A confrontation
was avoided through the direct intercession of President Alfonsin and
support from a Latin lending consortium--Mexico, Brazil, Venezuela, and
Colombia--that provided a $300 million short-term loan to aid Argentina in
meeting interest arrearages on its public debt so that US banks did not
have to put their loans on a non-accrual status. Another stop-gap
solution was found on 30 June,.when Argentina paid $325 million and the
bank advisory committee provided a $125 million short-term loan to avoid a
.reclassification of loans by US regulators.
As the end of September approaches, the Argentines face a
particularly tough hurdle. Buenos Aires is obligated to repay a $750
million bridge loan by 15 September, as well as more than $900 million in
interest arrearages and another $100 million short-term loan by 30
September. With inadequate reserves, Buenos Aires requires new credit
from bankers to meet these obligations and prevent downgrading of its
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loans, a move that would jeopardize Buenos Aires' access to future credit
and reduce banks':profits. Bankers, however, are insisting that an
agreement first be reached with the IMF before new credit will be
extended. Although an Argentine Economy Ministry source told the press on
12 September that Argentina is about to reach an accommodation with IMF,
numerous claims of progress in the past several months have proven
If an IMF deal is. not worked out, we believe it is highly likely that
Argentina will have to declare, at a minimum, a temporary or partial
moratorium on debt service payments. Even if Argentina and the IMF can
come to terms we believe there is a high probability that Buenos Aires
will begin to fall out of compliance with the agreement by early next
year. In the interim, Argentina will face difficult banker negotiations
on rescheduling and new loans with confrontation always a possibility.
1. If Argentina does not come to terms with the IMF this month, what
options are available in dealing with creditors?
Argentina probably would request the IMF--and the US
government--to signal the bank advisory committee that sufficient
progress has been achieved toward a stabilization plan and that
the bridge loan should be rolled over. Of greater concern to
creditors is the clearing up of interest arrearages by 30
September. In our judgment, Buenos Aires probably would choose to
make partial payments, indicating a willingness to continue debt
negotiations and an attempt to prevent downgrading of loans that
would jeopardize its future access to bank credit. Alternatively,
Argentina could make a deliberate political decision to declare a
payments moratorium or, at the extreme.
repudiation of its debt.
We believe a decision by President Alfonsin to stop debt service
would not be made in a fit of pique, but would come after a
careful consideration of the domestic and international
implications. Such a move is most likely if there is a complete
breakdown in talks with the IMF over austerity demands that he
views are politically unacceptable. Other events that could lead
Alfonsin to calculate that the tolerance limits for domestic
economic adjustments had been reached and lead him to withhold
debt service payments include a significant jump in foreign
interest rates or an imposition of new protectionist measures
against Argentine exports. He may calculate--similar to the
military's decision to invade the Falkland Islands in April 1982--
that Argentine nationalism could paper over internal differences
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over rising inflation and boost support for the government.
2. From the Argentine perspective, what immediate political and economic
fallout would. result from a payments moratorium?
Recent public opinion surveys indicate that few Argentines favor
meeting the debt obligations by imposing stringent austerity
measures, which suggests that most political factors would
initially work in Alfonsin's favor. Moreover, labor union and
political leaders, as well as some active and retired military
officers, strongly object to creditor-imposed recessionary
measures. Thus, many Argentines-would believe the disruption in
debt service had been brought on by Western intransigence and
indifference to Argentine political interests. The Argentines
would also expect moral support from many Third World countries,
especially those debtors--such as Bolivia and Peru--who are
seeking to gain substantial concessions from lenders. They would
probably seek to exploit their leadership role on the debt issue,
especially among the Latin American signatories of the Cartagena
Consensus. The Soviet Union has already expressed support for
Argentina on the debt issue and would probably offer at least
political backing and perhaps increased grain purchases.
By refusing to service its debt, Argentina probably would be able
to hold on to its foreign exchange reserves and retain the bulk of
its trade surplus. The current account surplus, exclusive of
interest payments, will average over $300 million per month this
year, although seasonally low agricultural exports during
October-December would mean a tighter foreign exchange
situation. Argentine liquidity would begin to improve by January,
allowing increased import purchases.
3. If Argentina did refuse to service its debts, what actions would be
taken by creditors?
Some US banks have told us they are prepared to take forceful
action and have detailed plans for attaching monetary and physical
assets, cutting off trade financing, and excluding Argentina from
the system of international transfer of funds. Some US bankers
would try to enlist the cooperation of European banks in these
efforts
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We believe most creditors hope that the
threats of countermeasures will be sufficient to deter the
Alfonsin government from repudiating,'and that if they have to be
taken, that strong countermeasures will cause enough of a pinch
that it spurs Buenos Aires to reopen financial negotiations. F
Banks are, not eager to take legal countermeasures that would be
costly in terms of time and money. The monetary gains involved
would be far less than the debts outstanding, or even the amount
of interest due this year. Argentine official liquid reserves are
probably under $1 billion, and only about $300 million of the
estimated total was being held at the Federal Reserve recently.
There are allegedly billions of dollars being held in safe havens
outside of Argentina, but we do not know how much of this would be
considered official assets.
We also judge that numerous banks, both here" and abroad, will be
looking for signals from their respective governments before
moving ahead. Multilateral lending agencies such as the IMF and
IBRD would probably emphasize to Buenos Aires their inability to
provide any lending under the circumstances and counsel the
government to reconsider its. actions and resume negotiations.
4. If creditors act, what will be the impact on imports?
A serious interruption of Argentine imports is unlikely. It would
require a degree of cooperation among creditor banks, other banks,
supplier firms, and governments not heretofore seen. Even during
the Iranian hostage situation, European banks continued to handle.
Iranian business, although they did uphold the freeze on Iranian
deposits in overseas branches of US banks. We doubt that many
foreign governments would want to be seen as part of an effort to
bring Argentina to its knees; their resolve would be further
reduced if the effort were portra ed in.th Third as having
been orchestrated in Washington.
Some supplier credits probably would not be completely cut off,
since Argentina is nearly current on the repayment of such
credits. We believe that the attempt to block the transfer of
Argentine payments to its suppliers would not be airtight, but
that the country would simply suffer financial inr( that,
would raise the cost of doing business.
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Banks' seizure of monetary assets and the cutoff of trade
financing would force Argentina to finance current imports on a
"cash-and-carry" basis. Although this might temporarily interrupt
the purchase of some "big-ticket" items, the level of export
earnings is high enough to support import purchases.
5. What impact would creditor. actions have on Argentine exports?
We doubt that creditors could deny to Argentina the level of
export earnings necessary to disrupt key imports. Although the
share of manufactured exports has been growing, agricultural
products still make up about four-fifths of the total. Over half
of Argentina's manufactured exports go to LDCs and are largely
invulnerable to boycott.
It would be very difficult physically to halt the movement of
Argentine food products. Most'of the important grain exports are
carried in foreign-owned ships. Moreover, under current practice,
the grain becomes the property of the purchaser at dockside.
Banks' ability to seize legally Argentine grain on the high seas
or in port is thus doubtful. If necessary, most Argentine
products could be processed or blended to disguise the country of
origin. Our assumption is that if Argentine products are properly
priced they will find .a market.
Despite US bank assertions, we expect that many non-US banks would
continue to handle the movement of Argentine export remittances.
For example, most of the European banks in Rotterdam that handle
letters of credit on behalf of grain buyers would probably
continue to transfer the funds to Argentine accounts upon receipt
of the proper shipping documents. If Argentina did run into some
financial transfer problems, increased resort to barter is
likely. Press and US Embassy reporting suggest that barter
between financially strapped South American countries is on the
rise, and regional discussions indicate interest in increasing its
Moreover, the Sovietswould'be likely to step up their Argentine
grain purchases, especially in view of their need to import in
excess of 45 million tons of grain during the next crop year. If
the Soviets paid cash they would probably expect to get the grain
at a discount; alternatively they could seek an explicit barter
arrangement or perhaps press the Argentines to accept the Soviet
proposal for expanding the port at Bahia Blanca. In 1983,
Argentina exported a total of 9.1 million tons of grain to the
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chooses to provide growers the financial incentives.
prospects for a few other products probably will hold export
losses to under $500 million, still leaving Argentina with $8
billion or more in total export earnings. Beyond 1985, the
diversity of Argentine products and the agricultural capacity
suggest that export earnings could be stepped up if Buenos Aires
For 1985, we do expect some drop in export earnings. Lower world
prices and erratic weather have caused farmers to reduce wheat
acreage by 15-percent. Increased soybean plantings and brighter
6. What would be the impact on the Argentine economy of trade
disruptions?
We do not expect any severe initial disruptions of the economy.
Earnings from the export'of goods and services would dwindle
somewhat in the short run because Argentina would probably have to
discount some products to find new markets. In addition, foreign
businesses would be reluctant to use Argentine ships or planes,
fearing delays or loss of cargoes through confiscation. Imports
.of goods and services would cost more as Argentina switched
suppliers, employed middlemen, and turned to foreign shippers and
airlines-to minimize the risk of cargo losses. The increased
costs, however, probably would be outweighed by the interest
savings on the foreign debt. .
Moreover, in our judgement, Argentina could initially weather even
a serious cutback in imports without major economic disruptions.
This is largely attributable to its low dependence on
imports--reflected in a 9 percent ratio of imports to GDP in
1983--and self-sufficieny in both food and petroleum.l Argentina
is, however, dependent on imports of iron ore,'metallurgical coal,
bauxite, alumina, chemicals, rubber, copper, and machine parts
(see appendix). A pinpointed cutoff of these imports would be
damaging to Argentine industry. Nonetheless, the suppliers of
most of these imports are LDCs, which are unlikely to terminate
deliveries. If finding alternative suppliers for some of the
higher technology products becomes necessary, Argentina's ability
to pay will probably be the most critical factor.
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1For purpose
to GDP is in Taiw
s of comparison, the ratio of imports of goods and services
an (55%). South Korea (43%)
Egypt (42%)
Mexico (14%)
and
in Brazil (11X).
,
,
,
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Chase Econometrics Forecasts for Argentina for 1985
(percent change over previous year)
Forecasts
using import cutbacks of:
Baseline Forecast
10%
25%
50%
Gross Domestic Product
1.9
0.8
-0.2
-2.0
Investment
0.0
-2.7
-5.0
-9.1
Output:
Industry
2.6
1.4
0.4
-1.3
Manufacturing
1.9
0.8
-0.1
-1.8
Construction
3.8
1.1
-1.3
-5.4
Utilities
4.5
4.1
3.9
3.4
Services
0.6
-1.0
-2.4-
-4.7
Imports of Goods, CIF
6.8
-10.0
-25.0
-50.0
Consumer Goods
-6.7
-15.4
-30.6
.-31.9
Raw Materials/Inte
Goods
rmediate
.9.4
-9.7
-28.7
-58.8
Capital Goods
4.8
16.4
-23.8
-50.7
Fuels & Lubricants
-5.5
-5.5
-5.5
-5.5
Employment
1.3
-0.3
-1.6
-4.0
Billions of US $
Current Account
-3.3
4.32
4.92
6.12
2Assumes no repudiation or trade shock.
2Includes improvement in trade account
and the assumption of no payment of interest on debt.
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TABLE II
Argentina: Composition of Imports, 1982
Million US$
% of Imports
Total
5337
100
Foodstuffs
235
Raw Materials
491
9.1
Iron Ore
76
1.4
Copper
64
1.2
Fuels
682
12.8
.Coal
68
1.3
Crude petroleum
162
3.0
Petroleum products
72
1.3
Gas/electric
379
7.1
Manufactured Goods
3927
73.6
Chemicals '
1047
19.6
Chemical elements
499
9.3
Fertilizer
30
0.6
Plastics
165
3.1
Semifinished
13.1
Textiles
81
1.5
Metals
312
5.8
Manufactured metals
122
2.3
Machinery
1542
29.0
Engines
149
2.8
Car engines
54
1.0
Jet engines
2
Power generation
92
1.7
Farm machinery
Tractors
19
Agricultural machinery.
13
Electric machinery
9.3
Electric power machinery
171
3.2
Telecommunications
159
3.0
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Transistors 61 1.1
Electrical apparatus 106 2.0
Industrial machinery 313 5.9
Metalwork machinery 48 0.9
Textile machinery 36 0.7
Mining machinery 24 0.4
Other industrial machinery 205 3.8
Business machinery 119 2.2
Computer 90 1.7
Office machinery 28 0.5
Transportation
Road vehicles
Trains
Aircraft
Ships
6.4
218 4.1
12 0.2
32 0.6
83 1.6
Consumer Goods
Consumer electric
Apparel
Leisure products
Other Consumer .
*Less than 1 percent.
5.5
.32 1.5
93 1.7
89 1.6
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TABLE III
ARGENTINA: MAJOR EXPORT COMMODITIES AND MARKETS
1983
(percent of total exports)
Commodities
Agricultural
78.2
Grains
36.9
Seeds, oilseeds
11.2
& vegetable oils
Beef
4.3
Animal & fish
4.8
products
Vegetable
10.7
products
Other
10.3
Fuels &
lubricants
4.5
Industrial
products
17.3
Markets
United States
9.3
EC 1
21.0
LAIR
10.9
USSR
21.8
China
6.9
Iran
5.1
Japan
4.8
Spain
2.4
Rest of world
17.8
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1Latin American Integration Association. .Includes Mexico and South
American countries excluding the Guianas.
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I I
We used the.Chase Econometrics model of the Argentine economy to
examine the impact of import cutbacks on real growth, industrial
production, and employment under three scenarios. The import
cutbacks of 10-, 25-, and 50-percent are assumed to occur in
1985. Cuts in import categories were allocated so as to cause the
least damage to productive sectors of the economy. On the basis
of the Chase model, the reduction in imports affects the Argentine
economy as follows:
o With a 10-percent reduction in imports, real GDP would still
rise by 0.8 percent, industrial output would increase by 1.4
percent, but employment would drop 0.3 percent.
o With a 25-percent reduction in imports, real GDP would decline
0.2 percent, industrial output would rise 0.4 percent, and
employment would fall 1.6 percent.
With a 50-percent reduction in imports, real GDP would decline
2.0 percent, industrial output would drop by 1.3 percent, and
employment would fall by 4.0 percent.
The results indicate that imports must be cut in excess of 25
percent for significant economic disruptions to occur. Even with
a 50-percent reduction, the economic effects are not paralyzing.
The major danger Argentina would face, in our opinion, is that a
repudiation and subsequent creditor actions would feed the
inflationary psychology that currently exists. We believe that
importers and manufacturers heavily dependent on foreign inputs
would step up their already frequent price increases, and buyers
would not resist. With inflation accelerating, labor would demand
higher wage increases in exchange for their support for the
government, and inflation might spiral out of control.
7. If the Argentine economy would not suffer greatly, what has prevented
Alfonsin from refusing to service the debt?
Occasional Argentine rhetoric notwithstanding, several reports
over recent months indicate that neither a repudiation nor a debt
moratorium high are on Alfonsin's current list of options. He
still is pressing his economic team to advance the state of
negotiations with the IMF and holds out hopes for a compromise
solution. Alfonsin has been trying to build a domestic consensus
for some measure of austerity in the interim.
Risking quarantine by the industrialized West is no small
gamble. A key goal of Alfonsin's foreign policy is to improve
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Argentina's international reputation, which was tarnished by'the
Falklands debacle. The US Embassy also reports that Argentine
foreign policy is aimed. at increasing the country's regional and,
international influence and strengthening ties with industrial
countries. A payments moratorium or repudiation would gut most of
these objectives, although Alfonsin would probably expect
Argentina to maintain prestige among LDCs. It would also run
counter to his party's ideological belief that Argentina is
morally obligated to uphold international agreements.
Alfonsin also campaigned on pledges to reinvigorate the economy to
reestablish democratic institutions in Argentina. He may fear
that higher inflation and initial economic dislocations in the
wake of creditor actions would derail the current recovery,
leading to a breakdown in political support once the initial
nationalistic fervor ran its course. We judge that Peronist
political bosses would quickly begin to distance themselves from
Alfonsin if the economic situation turned sour, and workers would
strike for wage and other concessions. Rising social tension
would almost certainly clear the way for concerned senior
officers,
opposed to Alfonsin's policies, to reassert themselves.
8. What are the ramifications for other debtors?
Argentina would probably draw moral support from many LDCs--mainly
radical states--and the Soviet Bloc, and these countries probably
would help Buenos Aires circumvent economic sanctions. We see
little likelihood, however, that other debtors would follow the
Argentine lead. Mexico, Brazil, and Venezuela are making
considerable progress with creditors toward multi-year
reschedulings on easier terms, and we doubt these countries would
want to jeopardize access to future funds. Moreover, no other
debtor country is as economically self-sufficient as Argentina.
We judge that radical action by Argentine would set contradictory
forces in train in the banking community with regard to lending to
the LDCs. Regional banks would reduce or cease such lending to an
even greater extent than they have already. Because of their.
greater financial exposure, however, money center banks would
probably want to pursue the current rescue strategy in the hope
that continued financial cooperation with countries that are
making economic adjustments would show debtors an alternative to
repudiation.
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11. What signs should we look for to determine whether Buenos Aires might
be considering a repudiation?
o The ascendancy of elements within the Argentine
administration--such as Aldo Ferrer--who have advocated the most
aggressive posture toward creditors and the feasibility of radical
solutions to the debt problem.
o Frenzied diplomatic activity associated with the Cartagena
Consensus.
o Stockpiling of imported industrial components.
A highly critical speech by Alfonsin, claiming that the IMF,
creditor banks, and major industrial nations have failed to
understand Argentina's inability to impose austere economic
policies, and suggests the need for an alternative solution.
o Abrupt breakoff in talks with the IMF following large. labor
protests demanding that Argentina stop payment on its foreign
debt.
o An abrupt withdrawal of Argentine Central Bank reserves held at
the Federal Reserve and a transfer of official Argentine assets
out of the United States.
o Cancellation of scheduled flights of Aerolineas Argentinas to
major creditor countries accompanied by changes in the ports of
destination for Argentine ships away from creditor countries.
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APPENDIX
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APPENDIX
Argentina
Foreign Dependence on and Foreign Suppliers
of Key Industrial Imports.
Aluminum - The Argentine aluminum industry is totally dependent
on imports of alumina--chiefly from Australia, which accounts
for 79 percent of total foreign supplies--and bauxite--provided
in nearly equal amounts by Guyana, China and Brazil.
Chemicals - A full cutoff in chemical imports and
feedstocks--obtained about one-third each from the United
States, Western Europe, and non-OECD suppliers--would reduce
domestic supplies of lubricants, greases, detergents, and the
relatively small amount of fertilizer that is used.
Copper - All of Argentine's copper is imported from Chile.
Engines - The production of motor vehicle engines is critically
dependent on several imported parts. These parts are obtained
largely from Western Europe and non-OECD suppliers.
Plastics - Imports of plastics--important in a wide variety of
applications--are obtained in about equal proportion from the
United States and Western Europe.'
Rubber Products - All of Argentina's natural rubber supplies
are imported--87 percent through Singapore--as.is half of its
synthetic rubber, most notably from the US, Brazil and West
Germany.
Steel - The Argentine steel industry relies heavily on foreign
s pus ies of key ingredients for. its steel industry. Eighty
percent of iron ore is imported, mostly from Brazil; all of the
metallurgical coal is obtained abroad, largely from the United
States.
Telecommunications equipment - A cutback in these imports would
impair the-operation of the national telephone system,
especially-in Buenos Aires where foreign components are needed
.for the smooth functioning of its. new fiber optic system.
These products are imported primarily from Western Europe.
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SUBJECT: Argentina: The Impact of Radical Debt Actions
Distribution:
Original - DCI
1 - Douglas Mulholland, Treasury
1 Ciro Defalco, Treasury
1 - The Hon. R. T. McNamar, Treasury
1 - Byron L. Jackson, Dept. of Commerce
1 -.Hugh Montgomery, State Dept.
1 - Hon. Kenneth Dam, State Dept.
1 - Roger Robinson, NSC
1 - Edward Truman, Dir. Int. Finance, Federal Reserve
1 - Cynthia Sutton, Federal Reserve
1 - Dr. Leo Cherne, Vice President, PFIAB
1 -.Robert Bench, Dep. Controller Inter. Banking
1 - Hon. David C. Mulford, Treasury
1 - Hon. Harry Kopp
1 - DDCI
1 - Executive Director
1 - NIO/Latin America
1 - NIO/Economics
1 - NIC
1 - DDO/Latin
1-
1-ILS
1 - C/DDI/PES
1 - D/ALA
1 - D/OGI
1 - ALA Research Director
2 - ALA/PS
4 - .OCPAS/IMDL
2 - ALA/SAD/E
4 - ALA/SAD/R
1 - OGI/C/ECD
1 - OGI/ECD/CM
1 - OGI/ECD/IF
1 - OGI/ECD/IT
1 - G6i/GD/IT
OG=
Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00367R000100390001-0