ECONOMY-ARGENTINA: A Costly Attempt at Reactivation

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jun 5 2001 (IPS) - The Argentine government was able to defer foreign debt service payments worth 16 billion dollars until after 2005, but it remains unknown whether it will be enough to reactivate the economy before the impact of the debt exchange operation dissipates.

By swapping debt bonds for other longer term notes, and with higher interest rates, “the government bought time” against a possible halt in payments, Claudio Lozano, economist at the Congress of Argentine Workers (CTA) union, told IPS.

“This would be good if the costs were low and if the time were to be used to rectify the country’s neoliberal path, but in this case the cost is scandalous,” Lozano stated.

“This is an operation that allows us respite in facing the pressures of the debt amortizations in the coming years,” explained Daniel Marx, assistant minister of Economy, Monday. It is the “oxygen” the Argentine economy needed, but the long-term debt grew 2.225 billion dollars as a result of the high interest rates involved in the swap, he acknowledged.

The exchange of foreign debt titles was dubbed the “mega- swap” by the media, given the unprecedented volume of bonds that the government recovered in the debt-holders’ voluntary presentation of their titles.

Thus, the Argentine government freed itself from having to pay 3.289 billion dollars during the rest of the year, a sum that will rise to nearly 8.0 billion by the end of 2002. This year, Argentina would have had to pay a total of 11.4 billion dollars for the bonds issued.

Economy Minister Domingo Cavallo’s attempts to jump-start the economy and postpone debt maturity since he took office March 20 have not had the desired results. The financing costs kept rising and it was in this context of economic fragility that the government proposed the swap.

Lozano maintains that the bond exchange, more than serving as an in-depth solution, appears to be “crisis management so that the economy holds (without exploding) until the October (parliamentary) elections.”

The mega-swap is the second attempt in just six months to avoid defaulting on the foreign debt. The first was the so-called “financial shield”, 40 billion dollars in support that came six months ago from the International Monetary Fund (IMF), and other multilateral organisations and countries, to ensure that the state could finance itself.

At the time, the Fernando de la Rúa government presented the “shield” as the necessary guarantee to get the economy back on its feet after nearly three years of recession. But consumer and investor confidence evaporated within two months. Faced with the crisis that accelerated in March, two Economy ministers resigned within just 15 days.

The latest debt swap operation, the results of which were announced Sunday night, consisted in a million-dollar exchange of bonds that matured within the next four years for another series of papers with later maturities, between 2005 and 2031, and with an average interest rate of 15.2 percent, nearly four times more than the basic international rate.

Bondholders – institutions and individuals, from Argentina and abroad – offered more than 33 billion dollars worth of exchanges during last week’s five day operation. The government accepted 29.477 billion, and with the distribution of new bonds, the debt rose 2.225 billion dollars, or 0.7 percent of the country’s gross domestic product (GDP).

The high costs of the swap “heightens the risk of future insolvency and requires an enormous effort to spur growth in the short term – in a context in which it is evident that there will be no restructuring of our economic path,” Lozano said.

The total debt service that was postponed until after 2005 is little more than 16 billion dollars. Though it constitutes economic relief, the sum may seem paltry compared to the 80 billion dollars in foreign debt amortizations that will accumulate over the next four years.

Argentina’s public debt now surpasses 130 billion dollars, of which nearly 100 billion is in bonds. The rest are held in commitments with multilateral credit organisations.

De la Rúa and Cavallo celebrated the bond swap as a success, and the IMF seemed to express pleasant surprise, highlighting in a communiqué the unexpectedly high number of bondholders who took part in the exchange.

In fact, the operation was the only alternative to a debt default, which is what most of the bondholders seemed to assume when they called for increasingly higher interest rates with each new issuance of Treasury letters.

However, it is widely acknowledged that the interest rates promised in the swap were too high, and that now it is urgent to reactivate the economy, expand consumption and exports, increase tax collection and reduce the fiscal deficit.

Optimism is running high because now Cavallo can concentrate his energies on economic reactivation through a wide range of projects, which should seek to improve the competitive edge of local business and boost the purchasing power of Argentine consumers.

The country’s GDP has been sliding for the last three years, and unemployment, which stood at 14.7 percent, surpassed 16 percent in May, according to reports released in the last few days.

But there are more than a few who criticise the swap, which constituted a million-dollar deal for the private banks that organised it, and for the bondholders. The doubters say it will fail to relaunch Argentina’s feeble economy and that the costs of this “opportunity” will also come due.

According to some economists, the window of opportunity is just five months, after which the government will once again have to seek financial backing in the market, and with even higher interest rates – if the lack of confidence persists.