ECONOMY-ARGENTINA: What Comes Next, After the Debt Swap?

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Feb 24 2005 (IPS) - As Argentina’s unprecedented exchange of defaulted bonds for new ones reaches its Friday deadline, most economic analysts predict that a majority of the bondholders will accept the government’s offer, which is final.

Those investors who refuse to take part in the swap will be left with worthless bonds, under the new arrangement.

However, there are many questions as to what the future will hold for Argentina’s economy which, with eight percent growth last year, is pulling out of its worst crisis in history.

In January, the Argentine government launched a restructuring of 81.8 billion dollars in private debt that it defaulted on in December 2001 – the biggest debt swap ever, in which payments have been rescheduled, and investors will recoup less than half of their capital.

But even if projections that a majority of bondholders will accept these conditions hold true, this South American country’s total foreign debt amounts to 181 billion dollars (including what is owed to the multilateral lenders) and will continue to be a heavy burden, equivalent to 85 percent of gross domestic product (GDP).

Economist Eduardo Curia, who is close to Economy Minister Roberto Lavagna and serves as an adviser to the Economy Ministry, told IPS that Friday’s deadline marks the end of the first stage of recuperation of economic activity and the start of a phase of “consolidation” of Argentina’s economic policy – and new challenges.

Curia said it is not reasonable to expect “an immediate flood of investment,” but that the restructuring of the debt “removes a black mark” against Argentina that reduced investor confidence.

He added, however, that it would be necessary to come up with barriers to curb the inflow of short-term capital that is “chomping at the bit” to enter the country.

The Central Bank is studying various possible measures aimed at warding off the arrival of speculative capital that could trigger an unwanted appreciation of the Argentine peso.

The Economy Ministry’s strategy consists of maintaining a high exchange rate (nearly three pesos to the dollar), which boosts the competitiveness of exports.

After three years of recession, Buenos Aires defaulted on its debt to local and foreign private creditors in December 2001 in the midst of a profound economic, political and social collapse. A few days later, the peso was devalued from its decade-old dollar peg, and the crisis deepened.

Not until late 2002 did the economy begin to recover.

The crisis led to a major contraction of GDP and an unprecedented rise in poverty in this once-rich country of 37 million, with more than half of the population falling below the poverty line.

It was against that backdrop that President Néstor Kirchner, who took office in May 2003, proposed a restructuring of the defaulted debt.

Up to now, the government has only been meeting its debt servicing obligations to the multilateral financial institutions. But as of April, it will have to begin to make payments on the new securities accepted by bondholders in the current debt swap.

It will also have to renew negotiations on an agreement with the International Monetary Fund, which were put on hold until the debt exchange is over.

Economist Claudio Lozano with the Central de Trabajadores Argentinos (CTA) trade union confederation warned in a report titled “Reflections on the Post-Default Argentina” that the debt swap would be “presented as a success” by the authorities, even if “a genuine strategy for bolstering production has not yet been put into effect.”

For now, Kirchner “is staking his bets on maintaining an economic structure based on the exploitation of natural resources, a rise in exports, and a high exchange rate, but that model has exhausted itself,” Lozano told IPS.

“With a successful swap, the debt would be reduced 30 percent, but it would remain a heavy burden on GDP, which means we will pay more than before without any guarantees of increased foreign direct investment,” he argued.

In Lozano’s view, attracting long-term, productive investment would require conditions that the government has made no attempt to create.

“It wasn’t necessary to wait until we pulled out of the default to start deciding what kind of production the country should specialise in, adopting tariffs to protect local industry, or defining the role that the state-run banks should play in the country’s credit policy,” he asserted.

Lozano also said that measures were needed to improve the “regressive distribution of income,” in order to strengthen the domestic market.

The government “wasted the breathing room” it had during the time it was not making payments to private creditors, which coincided with the start of the economic recovery, high international prices of the commodities that make up the lion’s share of Argentina’s exports, and low interest rates – conditions that are subject to change from one moment to the next, said the economist.

“There is nothing to substantiate the argument that a successful debt swap…will open up a whole new stage for the Argentine economy,” said Lozano.

“At least not if by economic ‘success’ we mean the removal of structural problems and the implementation of a development strategy that includes society as a whole,” without excluding disadvantaged sectors, he added.