Argentine Debt Restructuring - Anticipated Payment

Anticipated Payment

On 15 December 2005 President Kirchner announced his intention of liquidating all the remaining debt to the IMF, in a single payment of $9.810 billion USD, initially planned to take place before the end of the year (a similar move had been announced by Brazil two days before, and it is understood that the two measures were to be coordinated).

Argentina made some minor payments beforehand, but the main one, for about $9.5348 billion, was delayed for accounting reasons and paperwork, and was finally made on 3 January 2006. The debt was in fact denominated in special drawing rights (a unit employed by the IMF and calculated over a basket of currencies). The Argentine Central Bank called on the Bank for International Settlements in Basel, Switzerland, where a part of its currency reserves were deposited, to act as its agent. The BIS bought 3.7817 billion SDR (equivalent to about $5.417 billion USD) from 16 central banks and ordered their transfer to the IMF. The rest (2.874 billion SDR or $4.117 billion USD) was transferred from Argentina's account in the IMF, deposited in the U.S. Federal Reserve.

The payment served to cancel the debt installments that were to be paid in 2006 ($5.082 billion), 2007 ($4.635 billion), and 2008 ($432 million). This disbursement represented 8.8% of the total Argentine public debt and decreased the Central Bank's reserves by one third (from $28.045 to $18.575 billion). According to the official announcement, it also saved about $1 billion in interest, though the actual savings amounted to $842 million (since the reserves that were in the BIS were until then receiving interest payments).

The initial announcement was made in a surprise press conference that quickly became crowded. President Kirchner said that, with this payment, "we bury an ignominious past of eternal, infinite indebtment." Many of those present later called the decision "historic". The head of the IMF, Rodrigo Rato, saluted it, though remarking that Argentina "faces important challenges ahead". United States Secretary of the Treasury John Snow said that this move "shows good faith" on the part of the Argentine government.

The day after the announcement, the price of the U.S. dollar in pesos jumped and then stabilized on 3.07 pesos (a 1.3% devaluation); the Central Bank was forced to sell $270 million in the market. The peso-denominated Argentine debt bonds declined by 3% and the Buenos Aires Stock Exchange lost 1.9%. After the initial surprise, reactions to the move were mixed, and the markets became quiet in a few days. Both President Kirchner and the Ex-Minister of Economy Felisa Miceli assured the public that the measure would have a "neutral effect" in the economy, since the Central Bank's dollar reserves were still enough to buy the whole monetary base.

Some analysts pointed out that the payment was more a political move than a thought-out economic strategy, but disagreed on their assessment of its long-term consequences. Minister Miceli said that the policy of accumulation of foreign currency reserves would continue and that the Central Bank would attempt to buy all the dollars that entered the market through international trade in 2006.

The Central Bank's reserves surpassed their pre-payment levels on 27 September 2006. As a result of its aggressive buying strategy, the exchange rate increased 8% in one year, reaching 3.12 pesos per dollar.