Article summary by Nick Smallwood

For months Argentina has refused to pay interest on its debts and international bankers have refused to lend Argentina more money unless it signs an agreement with the IMF. An ingenious plan devised by Mexican Treasury Secretary Jesus Silva Herzog and engineered by the US treasury and Federal Reserve – and further tweaked by many bankers and international bankers – has been the world’s response to the Argentine crisis. Many have been touting this plan as a constructive development within the international debt situation, involving cooperation between the countries of Latin America, the American government and private banks. Others fear that relationships made through the deal could later be turned against the very banks and system of debt repayments the agreements were originally made for.

The points of this plan are as follows:

• Mexico, Venezuela, Brazil and Colombia lend Argentina a combined $300 million
• 11 banks lend Argentina $100 million at very low interest rates
• The US agrees to lend $300 million to Argentina, through which it can repay the other Latin American countries, once Argentina signs with the IMF
• By signing with the IMF, Argentina receives new funds, in exchange for the imposition of an economic austerity program
• A typical IMF austerity program includes:
• Reduction of the budget deficit
• Tighter control of monetary supply
• Currency devaluations

With the $400 million from the loans, and a further $100 million in reserves, Argentina paid back some of the back interest owed to the banks – had they not received these payments, the banks would have no choice but to reclassify the loans as nonaccrual. Banks do not record as income the interest due from nonaccrual loans, and they subtract from current profit any previous interest recorded but not collected. This would have been detrimental to their income statements.

Another reason given for such a plan comes from the Latin American countries involved. Some officials claim that international banks lump all Latin American countries in one group, and it is therefore in their interest to help each other out – some Mexican officials were already blaming Argentina for a delay in putting together a $3.8 billion loan this year

While banking officials have been skeptical of any possible cartels forming amid the international debt crisis, some people believe that the Argentine Pact is just a way for Latin American countries to form a cartel of sorts, in order to have more control over the repayment of their debts.

For one thing, this whole package only amounts to a little bit of breathing room for the banks. Argentina still has about $2 billion in back interest to pay, and the creditors will likely face the same problems soon. More importantly, while Latin American countries are joining forces to help repay debt this time, next time they may join forces to seek more lenient repayment terms for debtors.