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IADB and Argentina: Friends Again

by on December 8, 2011

As one of the founders of the Inter-American Developmental Bank, Argentina has both had a long positive and contradictory role with this institution. Owning 10% of the bank, Argentina committed $11 billion in 2010 towards projects throughout the Americas. The majority owner is the United States, with 30% of shares.

After its historic 2001 debt default and 2005 exit from membership in the IMF, Argentina has tried to settle its foreign debt with investors by swapping out the debt. This means that negotiations take place between the government and debt-holders in groups or individually, in negotiating a fire-sale like price in recovering some of the money lost during the default. For awhile, Argentina had settled many of its debts at around 63 cents on the dollar, meaning they would pay that much at a fixed interest rate. This was appealing to many debt-holders as they could recoup some of their losses.

The major political liability of the IMF debt was paid off the quickest, with return rates at a 70% discount (so around 30 cents of each dollar invested). In 2005 and 2006, the Nestor Kirchner government paid back the majority of these debts at that agreed upon discounted rate, with help from Venezuela. This was at the same time the Argentine economy was booming, with soy exporting and the low-cost peso making foreigners flock to soak up the undervalued deals present in Argentina. Venezuela kept buying more of the Argentine debt though, lending financing officially and non-officially to the Argentine government. With 93% of the foreign debt paid, Argentina should have had easier access to credit.

But, it hasn’t. Besides being still rated B by most international ratings agencies, many of the unaccounted investors are trying to still settle their scores. Many of these investors have been to court (more on this in a future post) to recover investments. Because of Argentina putting some investors (two Texas groups most notably), the United States began voting to block all funds intended for Argentina.  Well, Argentina blinked first. The IADB is granting $400 million in infrastructure loans to Argentina after the Argentines agreed to settle their debt with these firms. The loan is matched by $45 million from the local government.

It was obvious that these two companies (which perform infrastructure improvements) had political support in Congress and government. While the terms of the deal are not yet reached, they probably got more than other investors, as Argentina wants these types of loans to cover some of the vast infrastructure projects they are creating.

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