ECONOMY-ARGENTINA: Lack of Confidence Runs Deep

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Nov 3 2001 (IPS) - The Argentine government’s plan for restructuring the debt through a bond swap and reactivating the economy has not vanquished the lack of confidence dominating the financial markets, and on Friday the state-issued bonds took another plunge.

For many analysts, another day of uncertainty in the debt bond market is to be expected, given the confusion among traders about the numerous measures the government officially published Friday because they have not had a chance to fully digest the details.

In other words, there may be room for optimism because it will not be until early next week that investors understand and act on the measures announced Thursday by the Fernando de la Rúa government – and that economic tensions might begin to recede.

But sceptics say the country is heading towards a suspension of debt payments, though the government insists that it will honour all of its commitments. A default by Argentina would be the largest state insolvency in history.

De la Rúa offered new guarantees to encourage local holders of public debt bonds to voluntarily swap the papers, with 11 percent interest rates, for others with interest yields of seven percent backed by tax revenues.

The reduced interest paid by the state would mean lower public expenditures, and companies and individuals could see a decline in their credit costs, according to the local daily ‘La Nación’.

The president also announced measures aimed at boosting the purchasing power of Argentina’s wage-earners and assisting indebted companies.

The nation’s public debt reaches 132 billion dollars. But beyond its sheer size – equivalent to 45 percent of the gross domestic product (GDP) – the debt is particularly costly because of the high interest rates on the bonds that have been issued.

A year from now, interest payments worth 11 billion dollars come due. If local bondholders accept the government-proposed swap, four billion dollars would be subtracted from the debt service total and the offer of a swap could be extended to bondholders abroad.

Economy Minister Domingo Cavallo said that after the first appeal to local bondholders, there would be further offers for bondholders in other countries. For such an operation, Cavallo would need to seek authorisation from the International Monetary Fund (IMF) and the United States Treasury according to the agreements Argentina signed with those entities.

If successful, this restructuring of the debt would prevent a suspension of payments and would provide the government with financial relief it needs for its attempts to reactivate the economy – in recession for the last 40 months -, and to fight rising unemployment and poverty.

Luis Corsiglia, head of one of the leading brokerage firms trading on the Buenos Aires exchange, explained that stocks had recovered following the government’s announcements, but that bonds continue to suffer due to “very heavy sales outside Argentina.” These operations caused another drop in the value of the titles and a new jump in the “country risk index.”

In the case of Argentina, this financial indicator, which measures the surcharge paid on a country’s titles above the yields on US Treasury bonds, surged late last week to more than 1,800 points and kept on rising.

Argentina’s country risk Friday surpassed 2,500 points, similar to the level recorded as a consequence of the so-called “tequila effect” when Mexico’s economy took a nosedive in December 1994.

The threat of what has been dubbed the “tango effect” has hung over the region for months because all attempts to bail Argentina out of its economic crisis have fallen flat.

“When the measures are better understood, the results will be positive,” said a hopeful De la Rúa in Buenos Aires Friday.

Meanwhile, Nicolás Gallo, secretary of the presidency, noticeably less calm than the president, accused “external speculators of manoeuvring in favour of their own petty interests, to the detriment of ours.”

What the government’s announcements lacked was strong political backing, both from within Argentina and from abroad, according to editorials in Britain’s Financial Times and the US-based Washington Post.

The two newspapers were alluding to the clash in recent weeks between Argentina’s federal government and the provincial governors on the distribution of public funds, and to the failure of the US Treasury to express support for the De la Rúa administration’s economic proposals.

Shortly before the Thursday announcements, the governors – from the ruling coalition and the opposition parties alike – rejected the terms of an agreement tabled by De la Rúa.

The president had laid out a plan to cut the funds from the taxes shared with the 24 provinces by 13 percent, and to pay a large portion of the federal government’s debts to the provinces with newly issued titles.

Most local economists, business leaders, and even political leaders applauded the official decision to renegotiate the debt schedule. But the provinces protest that the adjustment weighs heavily on their budgets and they criticise measures that would forgive private company debt.

The government would allow companies to cancel their tax and social security debts with shares, and would hand over those titles to whoever agrees to repatriate capital currently in bank deposits outside Argentina. It is estimated that Argentines have more than 100 billion dollars in foreign banks.

In the hours following the presidential message, the public’s attention was focussed on its effects on the financial market. But there were other decisions made, beyond the proposed debt restructuring, that are intended to reactivate the economy and increase tax revenues in the short and middle terms.

One such measure is an 11-percent reduction of the obligatory contribution wage-earners must make to the private administrators of pension and retirement funds. The initiative would increase the purchasing power of more than three million workers employed within the country’s formal economy.

The president described further reforms of social expenditures as “revolutionary”. The announced changes would eliminate intermediaries so that social assistance is delivered directly to the unemployed, pensioners and the minor children of families with monthly incomes of less than 1,000 dollars.

This programme, which would involve some 16 million people – out of Argentina’s population of 37 million – is slated to enter into force Jan 1, 2002, and would pay the unemployed 175 dollars a month, the elderly and pensioners 100 dollars a month, and 30 dollars a month to low-income parents for each child under 14 who attends school.

Also announced Thursday was a reduction in the value-added tax on credit and debit card purchases of three and five percentage points, respectively.

De la Rúa reaffirmed his commitment to the country’s currency exchange regimen, which has pegged the Argentine peso to the dollar at one-to-one parity since 1991. His statements in this respect were intended to allay fears of currency devaluation.