Below is a story from the Financial Times website detailing the Argentinian government's decision to default on an $805 million loan payment to the World Bank, followed by an analysis, prepared in advance of the decision, by the European Network on Debt & Development (EURODAD).

Argentina had last December defaulted on payments to private investors. It's a different matter altogether to default on a loan to a preferred lender, i.e. an international financial institution lkike the World Bank. Such a default is not unprecedented, but one of this significance is. Other governments that have defaulted — e.g. Sudan, Iraq, Somalia, Zimbabwe — have been politically marginalized and/or economically rather small. Argentina, whose slow-motion collapse accelerated last December into a truly desperate situation, is fully identified with the Western world, and a big trading partner (by comparison to previous defaults) of the G7 countries.

As the analyses below indicate, this could mean a cut-off of any further talks between the IMF and Argentina, thus any further injection of capital into the languishing economy. But what makes this more interesting is that the Argentinian government is not simply planning on walking away into disgrace; rather this default is a strategic decision. The WB has every reason to not want a default, as does the IMF. A high-profile default calls into question the institutions' own creditworthiness and reputation (especially the inevitability factor: governments accept their horribly damaging programs because they are convinced that "there is no alternative"). As the EURODAD report mentions (but none of today's reports, so far, go into), Standard & Poor's rating service is likely to downgrade World Bank bond ratings as a result of the default. That AAA rating is exceedingly important to the Bank, allowing it to sell its bonds to institutional investors as "blue chip" investments. Without the highest rating, its bonds may have very little appeal to investors. Coupled with the news that one of the biggest pension funds in the U.S., TIAA-CREF (for retired teachers) has sold off all its World Bank bonds, for what it calls economic reasons (i.e. there are better vehicles for their investments), this could signal a very worrisome development for the Bank.

In the short term, Argentineans benefit from this decision because the government will have more money on hand for social programs. If in the medium-term the government is indeed completely cut off from credit and capital, it could have a very damaging impact on the most vulnerable sectors of the Argentinian population.

In the long term, and for other countries, the impact could be very positive. This unique challenge to the power of the World Bank and IMF to dictate both macroeconomic policy and debt repayment terms could change the perception of their infallibility (or infinite power). That would give governments and civil society forces more room to maneuver, and begin to reduce the gross imbalance of power that has caused so much unnecessary death and suffering over the last 20+ years.

Soren Ambrose
50 Years Is Enough Network
Washington, DC

---

Argentina defaults on loan repayment
By Alan Beattie in Washington
Financial Times
Published: November 14 2002 19:58

The Argentine government on Thursday took the extraordinary step of defaulting on a loan repayment to the World Bank, in a sign of its intense frustration over negotiations with the bank's sister institution, the International Monetary Fund.

The decision not to make a due payment of $805m places Argentina in the company of countries such as Iraq, Zimbabwe and Liberia, that have defaulted to the international financial institutions.

It makes Argentina ineligible for any new lending from the bank or reductions in interest rates on outstanding loans. Disbursements from existing loans, around $2bn of which has yet to be paid out, will also be stopped if the country does not pay within 30 days.

Alfredo Atanasof, chief of the cabinet, said: "The country's level of reserves prevents it from paying the total of the quotas that expire today." Argentina would make only an interest payment of $79m, he said.

The World Bank confirmed it had received a partial payment, but said: "The World Bank welcomes statements by government officials that Argentina remains committed to rectifying the situation as soon as possible."

Economists said the decision showed Argentina's determination to raise the stakes in negotiations with the IMF. The government is seeking to have its $13bn debt to the fund rolled over until the end of next year, but talks have been held up by Argentina's inability to convince the IMF that it can carry through fiscal and banking systems reforms.

"The Argentines are playing harder and harder ball," said Lacey Gallagher, director of Latin American research at CSFB in New York.

Buenos Aires blamed the IMF for its decision to default, saying the fund insisted it kept foreign exchange reserves above $9bn.

Ms Gallagher said that the Argentines viewed the default as merely the latest stage in a bargaining game rather than a complete withdrawal from the international financial community. Roberto Lavagna, Argentine finance minister, has been in Washington over the past two weeks negotiating with the IMF.

At the end of last year, Argentina defaulted on more than $90bn of its government debt to private investors, the largest sovereign default in history.

The missed payment will make little immediate difference to the operations of the World Bank, which has substantial reserves.