Venezuela to Buy Argentine Bonds, Backs IMF Payoff

Caracas, Venezuela, December 21, 2005—Latin America takes another step away from the IMF and toward regional integration, with Argentine President Nestor Kirchner’s  statement to Argentine daily El Clarín that Venezuela was to buy $2.4 billion of Argentine debt in the next few months.

In late November, Kirchner along with Venezuela President Hugo Chávez had signed the Orinoco Declaration, which stated, “Venezuela declares its firm decision to increase its financial investments in Argentine public debt,” but the statement did not say the quantity of bonds Venezuela would buy.   

Kirchner’s announcement comes in the wake of another government announcement that it was to pay off its debt to the International Monetary Fund (IMF) early. Venezuelan president Hugo Chávez Frías praised the decision, and pledged to “help Argentina end its dependence on the IMF.”

Kirchner told Clarín that, though Argentina was using well over a third of its foreign reserves to pay off the IMF debt, it will quickly replenish its reserves, in part because of the $2.4 billion in bond purchases Venezuela will make before the end of the first half of 2006. This is almost two and a half times as much Argentine debt as Venezuela has bought thus far this year.

In the first of this set of bond purchases, Argentina announced the sale of almost half a billion seven-year dollar-denominated bonds to Venezuela at market rates.

Argentina’s decision to pay off the IMF is the latest in a series of Latin American moves rejecting Washington’s neoliberal economic policies. Brazil also recently announced its decision to pay off its IMF debt early, and presidents throughout the region, such as Argentina’s Kirchner, are increasingly winning elections based on platforms rejecting the economic policies of the past 20 years. Sunday, Bolivia’s Evo Morales became the latest presidential candidate to win on such a campaign.

Between 1980 and 2000, under the guidance of the IMF, the region saw an almost 8 fold decrease in economic growth over the previous 20 years, according to a study of the Washington-based Center for Economic and Policy Research. In late 2001 Argentina, once the poster-child of IMF success from good economic governance, suffered one of the region’s worst economic collapses. 

The decision to buy more Argentinean bonds is the latest in a series of moves the Chávez administration has made to increase economic ties between Venezuela and the rest of the region. Earlier this month, the government also bought $25 million, or about 4 percent, of the first Ecuadorian bonds issued since the country’s 1999 default. Also earlier this month, Venezuela was put on track to become a full voting member of MERCOSUR, a regional trade and economic integration agreement.

In another move, Chávez suggested that South American countries create an alternative IMF called the “Bank of the South” to enable the countries to borrow without being subject to economic policies determined in Washington. "Venezuela would contribute a part of its reserves, Brazil would contribute a part of its reserves, as well as Argentina and other countries,” he said.

This newest purchase of Argentinean bonds makes Venezuela the biggest buyer of Argentinean debt this year. Unlike Venezuela, the market had reacted negatively to Argentina’s decision to pay back the IMF, with argentine stocks, bonds and currency initially falling. Many US financial analysts have criticized Venezuela’s decision to buy Argentinean bonds as political rather than economic, pointing out that the Venezuela bought bonds in October at $22 million more than the market demanded, according to Bloomberg. Venezuela officials countered that, through sales of the bonds, they had already made $40 million profit, and that Ecuador’s bonds have also increased in value.

However, while Chávez has repeatedly called for a region free of IMF influence, Argentina is not cutting off all ties to the institution. "The IMF is in crisis, but it continues to be a reference for the economic universe," Kirchner told Argentina’s daily newspaper Clarin.

Corrections: The lead of the previous version of this article said, “Latin America takes another step away from the IMF and toward regional integration, with the Chávez administration’s agreement to buy $2.4 billion of Argentine debt in the next few months.” This, incorrectly, implies that Venezuela has publicly stated the $2.4 billion number, when the lead was fully based on an interview Argentine President Nestor Kirchner gave to El Clarín, where he announces the number. The Chávez administration had previously agreed to a buy more Argentine bonds, but had not stated a definitive number, this information is now included in the article. Also, bonds were seven year bonds, and not six year, as previously stated. Finally, the former version of the article stated that Brazil had paid off its debt to the IMF, instead of that, as is the case, Brazil had announced its intention to pay off its IMF debt early. The author regrets these mistakes.