Former French Finance Minister Dominique Strauss-Kahn, who is widely expected to become the next head of the International Monetary Fund, said in a television interview late Wednesday that Argentina must either pay its outstanding debt or comply with Paris Club rules that it submit to an IMF monitoring program.

Argentina has been trying to get member nations of the Paris Club to bend the rules to permit a restructuring without entering a close relationship with the IMF. One of the government's proposals has been for the Club to accept the IMF's routine Article IV reports as a sufficient prerequisite rather than more comprehensive IMF accord with strict monitoring of macroeconomic and fiscal targets.

But Strauss-Kahn, who is in Argentina to seek support for his bid to become managing director of the IMF, offered no leeway, making public a stance that Paris Club negotiators have been saying privately for almost two years.

"One solution is that Argentina remit the money (it owes); the other would be to follow the rules of the Paris Club," said Strauss-Kahn in the interview with local cable channel Todo Noticias. Paris Club rules "must be complied with," he added.

The fact that the former French official drew this line in the sand while seeking votes and moral support for his IMF nomination is seen as an indication of how unbudging the large nations that make up the Club are on this issue.

There's good reason for this, say people close to discussions: any favoritism for Argentina would set a precedent and could prompt dozens of far more financially challenged, indebted nations to seek the same.

No Choice But To Pay

While Strauss-Kahn spoke of two options, political and economic realities suggest that only one exists for Argentina, and it's the costly one. If the government truly wants to "normalize relations" with the Paris Club, as Economy Minister Miguel Peirano recently affirmed, it will have to pay the full amount it owes, including arrears.

The other one, entering another IMF program, is not a near-term option, either on political or economic grounds.

Argentina abruptly ended its last IMF program in December 2005 when it made a surprise, one-off payment out of reserves worth $9.5 billion to clear its debt to the Fund. When he did so, President Nestor Kirchner, a vociferous critic of the IMF, said he did so to restore Argentine sovereignty and end dependency on an institution he blames for the crisis of 2001 and 2002.

Cristina Fernandez de Kirchner, the president's wife and the clear frontrunner in October presidential elections, is equally critical of the IMF and is thought to be just as unwilling to submit to its oversight.

Aside from this political barrier, however, a new IMF arrangement would defy economic facts.

An economy that has seen five years of growth averaging 8% per year and a quadrupling in reserves to a record $43.3 billion is far from a natural candidate for the IMF.

Typically, such an agreement is built around a loan facility aimed at either staving off or alleviating a financial crisis. The periodic disbursements of the funds are then made contingent upon the borrowing country's compliance with pre-established macroeconomic, fiscal and other targets.

But Argentina has solid surpluses in both its fiscal and its current accounts. By definition, there is no need for IMF engagement. And by the same logic, the basic standards do not exist for the Paris Club to agree to a friendly restructuring in the terms of its debt.

Indeed, from the Club's perspective, when Argentina paid back the Fund in one fell swoop it effectively declared itself free from its crisis and no longer in need of further debt relief.

Cart Before The Horse

Argentine officials had always said they intended to normalize relations with the Paris Club, on whose debt it defaulted along with all other foreign debt in December 2001 and early 2002. And after completing a difficult exchange with holders of $80 billion in defaulted bonds in mid-2005, they repeatedly said the Club's debt would be next.

The problem is that Kirchner painted himself into a corner with the sudden IMF repayment.

"It might have made more sense to deal with the Paris Club prior to paying the IMF," said a person familiar with the negotiations.

Argentina currently owes between $3.5 billion and $4 billion in arrears to the Paris Club with the remainder falling due over the next two years.

In theory, it could pay those amounts, as it did the IMF, out of Central Bank reserves. The problem is this would contravene local law, which only permits such transactions for repayments to multilateral lenders like the IMF or the World Bank. Unlike multilateral debt, which appears on the Central Bank's books, bilateral loans go directly to the Federal Government.

The government could change the law, just as it did to facilitate the $9.5 billion payment in 2005, but this could raise further concerns about Central Bank independence and the security of its balance sheet at a time when inflation and exchange rate volatility are looming as major threats.

The other alternative is the market. But since Argentina also has some $20 billion in defaulted debt owed to "holdout" bondholders who refused to accept the tough restructuring offer of 2005 and who constantly threatened to freeze Argentine assets and payment flows, its access to international markets is limited.

Until recently, that didn't matter because local markets were very liquid and because petrodollar-rich Venezuela had stepped up as a buyer of Argentine bonds. But the recent global turmoil produced a sharp spike in yields on Argentine paper, raising the government's borrowing costs and making it harder for Venezuela to on-sell the Argentine bonds into a once-eager domestic market.

The final option would be to maintain the status quo: indefinite nonpayment. But aside from further angering and testing the patience of the international community, this would also come with a heavy cost for the country.

Most importantly, many creditor countries' internal rules prohibit their state-owned export-import, development finance and project insurance institutions from aiding companies that invest in other countries that remain in default on bilateral debt.

Without such aid, the project costs for the foreign investors that Argentina wants to have build some badly needed energy infrastructure will rise. And so too will the rates and prices that Argentines pay on their power and gas bills to cover those costs.