Argentina in new debt default

Nestor Kirchner has criticised the IMF

Argentina has defaulted on a $2.9bn (£1.8bn) debt payment due to the International Monetary Fund (IMF) after it failed to agree a last ditch loan deal.

"To avoid compromising 25% of (Central Bank) reserves, the government has decided to suspend the payment that was due today," the Cabinet Chief's office said in a statement.

The lack of agreement with the IMF was the reason the default was necessary, the statement said.

Argentina promised to keep working to sign off on a deal to pay just the interest on $12.5bn it owes the IMF over the next three years, in order to focus its resources on social programmes.

But president Nestor Kirchner's government has failed to agree to two demands from the IMF - that banks must be compensated for last year's collapse in the value of the peso, and that utility firms must be allowed to raise prices.

Both these measures are highly unpopular domestically and perceived to be helping out big business at the expense of the poor.

Little impact?

Argentina's economic collapse at the end of 2001 led to a currency devaluation, the closure of banks, widespread poverty and rioting.

Argentina has an internal debt that's more important than its debt with the IMF Jorge Ceballos, Leader of the jobless demonstrators' movement

The country needs to find a solution to its IMF debts before it can begin to restructure $90bn of debt it defaulted on in December 2001.

Observers worry a fresh default will damage investor's confidence.

"The day to day will not change, but a default is serious because it means that Argentina is refusing to deal with major economic issues that surged from last year's collapse and could eventually undermine the recovery," said Sebastian Rodrigo, a lawyer who advises local and foreign investors in Argentina.

But some economists said a default would have little immediate impact on the Argentine economy as it would take some time for any penalties to come into effect, and by then a new deal may have been reached.

IMF under fire

Thousands of unemployed Argentines demonstrated against the IMF in Buenos Aires on Tuesday.

"Argentina has an internal debt that's more important than its debt with the IMF," said Jorge Ceballos, a 43-year-old leader of the jobless demonstrators' movement.

"Instead of paying the IMF, we should pay to improve our public health system, boost teachers' salaries and end hunger in our devastated country," he said.

The Argentine government had received some backing on Monday from the US - by far the most influential member of the IMF - which called for flexibility.

"The US believes the conditions for reaching an agreement with the IMF are favourable and that Argentina enjoys terrific political support from the US and the G8 in general," said US Assistant Secretary of State Roger Noriega.