The U.S. Treasury Department is holding up completion of Argentina's debt-reduction agreement with creditor banks, banking and financial industry sources said last week.
The sticking point: The collateralization for bonds that Argentina will issue in lieu of $23 billion in loans.
Under Secretary of the Treasury David Mulford is balking at requests to change the conditions under which the International Monetary Fund and other agencies will provide funds for collateral.
The international agencies originally stipulated that no more than 50% of the funding could be used to back so-called par bonds, which would be issued by Argentina at full face value.
However, the lenders are demanding that Argentina issue a larger percentage.
Demand for Par Bonds
Efforts to conclude the deal, which was reached in April, first stalled when banks and other creditors opted overwhelmingly in favor of the par bonds, which require more collateral from Argentina in the form of zero coupon U.S. Treasury bonds.
The impasse was thought to have been broken last month when Argentina and leading bank creditors agreed to convert up to 65% of the debt into par bonds and 35% into "discount" bonds, which pay higher interest rates but have a lower face value. But some smaller banks and institutional investors have since declined to go along with the compromise, bankers said.
This, in turn, has left Argentina unable to meet the conditions set for collateralization.
Brady's Shadow
Mr. Mulford has played a key role in getting banks to go along with the debt-reduction program for Third World countries launched by U.S. Treasury Secretary Nicholas F. Brady three years ago, as well as help in obtaining International Monetary Fund support for the program.
"The real problem is the terms on the IMF funds, and the real problem behind that is David Mulford," said an industry source involved in talks with Argentina.
"It's becoming rather dramatic," said a senior U.S. banker in New York, who asked not to be named. "Mulford thinks the only way to reduce debt is to reduce principal."
Mr. Mulford was not available for comment on Friday, and a Treasury spokesman said he could not respond to the complaints.
Argentina plans to purchase about $4 billion of zero coupon bonds as collateral for the debt-reduction deal. About half the money will come from Argentina, with the rest from the IMF and other multilateral lending agencies.
Argentine officials and U.S. creditors are scheduled to meet on Thursday in New York to discuss the problem.
Impact on Brazil
Bankers and other sources said the U.S.'s strong influence virtually ensures that the IMF and other multilateral agencies will not change the conditions placed on the funding.
The administration is particularly concerned, they said, about setting a precedent that could complicate a yet to be completed accord on Brazil's $44 billion debt.
"Domingo Cavallo [Argentina's economy minister] made a determined effort, and we've all tried to talk to Mulford, but he's adamant about achieving large debt reduction," said one banker.
U.S. banks hold the largest block of loans to Argentina, which defaulted on its borrowings in April 1988 and has since resumed repayment on only a portion of them.
Big Steps by Some Banks
Though the agreement to accept at least 35% of the restructured debt in discount bonds was considered a major concession by the banks, some institutions have gone even further.
Two large Argentina-owned banks, Banco de la Nacion and Banco de la Provincia de Buenos Aires, will exchange their $1 billion in loans for discount bonds. Citicorp and Deutsche Bank of Germany have agreed to exchange 50% of their loans for discount bonds.
Argentine finance ministry officials declined to comment on the remarks by U.S. bankers but have repeatedly stressed that restrictions on the funding pose a major obstacle to the pact's completion.
