The Next Economic Catastrophe is Here, Thanks Argentina

Impact

One of the largest transnational lending agencies in the world is treading carefully in a court case that could determine its future relations with developing countries. 

The International Monetary Fund announced on Wednesday that it is not prepared to back Argentina in its legal battle with investors pursuing collections on bonds rendered after the country's $100 billion default in 2001. The IMF is concerned the case could make it harder for other countries in financial distress to get relief on overwhelming debts.

IMF Managing Director Christine Lagarde decided to withdraw her recommendation that the agency file a brief with the United States Supreme Court supporting Argentina, a decision many say was influenced by the Treasury Department's disapproval of solidarity with the South American country's demands.

And Argentine President Cristina Fernández de Kirchner has mentioned that she would compensate the investors on the same economic terms they accepted in two previous exchanges, reaffirming her stance on protecting the national interests of Argentina from economic groups looking for higher interest rates. 

Fernández has also criticized the IMF in the past for skewing economic figures in Argentina in their favor and using soccer terminology in a warning. "I want to tell the head of the IMF that this is not a soccer game. The economic and political crisis is the most severe on record since the '30s," she mentioned in a speech to the United Nations General Assembly.

Now the IMF is closely monitoring Argentina's repayment method, which uses U.S. funds transfer systems to re-route the payments Argentina has faithfully made to all the other bondholders if it hasn't already paid the plaintiffs beforehand. 

Ultimately, the Supreme Court's decision on Argentina, which is likely to ask the Obama administration for a brief later this year if considered for a hearing, will have a great impact on the role of investors and lending agencies like the IMF in developing countries, because of the precedent created with Fernández's particular situation.

Fernández's threats against foreign privatization of Argentine resources, coupled with the Supreme Court's hesitance to allow the IMF to weigh in on the case, threatens the lending agency's future with other countries encountering similar situations. 

The Department of Justice has not yet filed a brief in the Supreme Court.