ARGENTINA: Foreign Debt Growing but “Manageable”

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Feb 4 1998 (IPS) - During his term in government, Argentine president, Carlos Menem privatised public companies worth nearly 30 billion dollars, but the public debt doubled regardless.

This now constitutes the main economic weakness given the international financial crisis.

In conversation with IPS, economist Roberto Feletti said the Argentine debt, which already stands at more than 120 billion dollars, is “manageable” because most loans have long term expiration.

But, he added, it is still the Achilles heel of the model.

Feletti said the Argentine situation is “more comfortable” than that of Brazil, where the total public debt stands at around 265 billion dollars, with a large number of short term domestic debts needing payment this year.

Brazil must cancel 133 billion dollars in 1998.

Economist, Guillermo Calvo, who predicted the Mexican financial crisis of 1995, agreed Brazil already has a high level of short term debt in relation to its reserves, and that this is not the case in Argentina, which restructured its debt with longer deadlines.

However, explained Calvo, even though Argentina has managed to “considerably lengthen the maturing” of its public debt, it has accumulated “some sizeable expirations” for this year – not the best situation to be in when seeking loans.

Argentina must obtain some 18 billion dollars in 1998 in order to fulfil foreign commitments within an international framework of restricted and more expensive credit due to the financial crisis unleashed in Asia in mid 1997.

This amount appears even bigger considering the national budget for 1998 is only slightly over 48 billion dollars.

And the next few years will be little easier. Some 14 billion dollars will be needed for 1999, a similar figure in the year 2000 and more than 12 billion in 2001.

The Economy Ministry presented the International Monetary Fund with a letter of intent for a 2.8 billion dollar credit, of which 2 billion would be reserved to tackle any crisis that may arise.

In this agreement, the Argentine government committed itself to maintaining growth rates of around five percent in the next few years, reducing the trade and fiscal deficit, and cancelling interest on the debt.

However, forecasts by economic analysts are less optimistic than the government predictions. Some state the growth could be less than expected, tax income lower, and therefore the fiscal deficit to make up even bigger.

This state of affairs would mean the government having to raise more money than planned each year.

In fact, undersecretary of finance, Miguel Kiguel, admitted that since the beginning of the financial crisis in Asia, Argentina had spent an extra 65 million dollars in placing debt on the stock exchanges.

High market interest rates, lack of lender confidence, and the limits of Argentine capacity to issue local currency in order to neutralise its deficit, give the authorities an even harder time obtaining funds.

The fiscal deficit last year did not go beyond three percent of the Gross Domestic Product, and the government has promised even lower levels in future.

“It is a manageable deficit providing the flow of international funds is not stopped in the next few years,” said Feletti.

When Menem came to power, in 1989, the Argentine public debt stood at around 57 billion dollars. Most of this corresponded to the private banks. In 1992, the credit balance already reached 76.4 billion dollars due to the consolidation of internal debt.

According to Feletti, the growth of the debt is directly associated to the need to cover the imbalance in the public books, covered by the issuing of currency until 1991.

The Brady Plan came into action, in 1993, restructuring almost all the foreign debt with the private bank -30 billion dollars- for 30 years, with two billion dollar relief.

The debt bonds, which were sold at 30 percent of their nominal value on the financial market, are being revalued at 100 percent, and the deadline for interest payments is being regularised. Also, another effect of the Plan, Argentina is once again able to enter the world credit market.

With the revalued bonds, the banks intervened actively in the privatisation plans for public companies, which incorporated the mechanism of debt capitalisation – meaning part of the purchase can be carried out with the new stock going into the hands of creditors.

Nonetheless, since then the public foreign debt increased to nearly 90 billion dollars, and the private debt, which was eight billion dollars five years ago, soared to 33 billion.

The abundance of liquidity up until the crisis allowed companies and the public sector to go into debt cheaply. The same tendency occurred in Latin America countries which restructured their debt.

Between 1982 and 1997, the region’s debt more than doubled from 275 to 610 billion dollars.

Feletti said Argentine debt, unlike that of Brazil, is mostly restructured long term. But, as a flipside, from now on financial aid will be conditional on greater fiscal adjustment, higher tax collection, redundancies and adjustment in the provinces.