By Conrado Ramos
On Thursday, March 3, Argentinian Economy Minister Roberto Lavagna and president Néstor Kirchner announced the end of Argentina's default of its external, thanks to the success of a massive debt swap. The default on the debt was announced in December 21, 2001 by provisional president Rodríguez Saa and since then Argentina faced tough negotiations with private bond holders and the IMF.
In spite of all the pessimistic predictions, the resistance of foreign creditors and the lack of support from the Group of Seven (G7) and the International Monetary Fund (IMF) itself, the debt swap proposed by president Kirchner was closed with 76.07% acceptance of the bond holders, who received new papers for roughly one third of the value of the defaulted bonds.
The acceptance by more of three fourth of the bond holders was seen by most analists as a resounding success of the operation, even when the IMF abstained from commenting it. This is a sign that the pressure exerted by developed countries on the Argentinian government will continue in future negotiations about the multilateral debt and about the fate of the 24% of bond holders that, by not adhering to the swap, are now propietors of worthless papers.
The debt swap exchanged 152 different defaulted Argentinian bonds for three types of papers issued in euros, yens, dollars and pesos, with a nominal value of roughly one third of the previous bonds. It was the biggest such operation in world markets ever and it meant a saving of 67.328 millons dollars to Argentina, since the total debt fell from 191.224 millons to 125.000 millons.
Minister Lavagna sees a "promising future" for Argentina after the success of the debt swap operation, but there are still many uncertainties about how to face the pending challenges. The government of Argentina and the international financial institutions have a differnt diagnostic and different recipes on how to deal with a variety of pending subjects.
The IMF proposes an increase in the Argentinian fiscal surplus (the primary surplus, i.e. before debt payments, was estimated at 5% of the GDP, in 2004 ), and at the same time, a strong adjustment (which includes limiting salary increases) to cool the economy and avoid inflationary pressures. In turn, the Argentinian government maintains that before thinking about contracting the economy, it is necessary to achieve a strong investment growth, as a way to prevent bottlenecks in the area of production and, therefore, generalized price increases.
But, this is just one among the many challenges Argentina should face in its road towards economic recovery and the increase of its capacity in terms of autonomy and sovereign decision-making with regards to the development model to be followed. In an article published in Clarín, independet economist Ismael Bermúdez identified ten issues to be resolved following the debt swap: 1. the debt that still has to be paid; 2. the renegotiation of contracts with privatised companies; 3. the pressure exerted by the IMF in favour of structural reforms; 4. the need for a significant increase of investments volume; 5. the inflationary problem, which after the debt swap has very strong repercussions on the amount of the debt; 6. the need for a salary recovery, accompanied by an income redistribution policy; 7. the problem regarding exchange rate control as an essential variable in maintaining competitiveness; 8. the growing decrease in commercial surplus, to which increased capital outflows are added due to the financial regularisation of the country; 9. the need to redesign MERCOSUR (Common Market of the South) for the purpose of improving the position of Argentina with respect to Brazil in the field of industry; and 10. the challenge posed by a tax and pension reform.
Even if dramatically reduced by the swap, the Argentinian debt still ammounts to 125 billion dollars, the equivalent to 72% of its GDP. And that does not include the defaulted bonds that remained outside the swap, which would add another 10% of GDP if accounted for. This figure is smaller than the 145 billion owed by Argentina at the time of the default (the government has incurred in additional debt since then), but it is well above the proportion of 57% of the GDP in 2001.
However, the new debt is spread out over time (until 2046) and is placed at lower interest rates. Bermúdez points out that in order to face this debt, the government needs a minimum annual fiscal surplus of about 3% to 4% of the GDP, and even this would be insufficient to meet the needs of debt servicing within the first years. In 2005, for example, there are maturities equivalent to more than 7% of the GDP between interests and capital, and even if the international financial institutions were to refinance their maturities, the payments to be made should be equivalent to 4.4% of the GDP.
On the other hand, within an international context of strong pressure on the Argentinian government, it will have to renegotiate 49 contracts of privatised companies where tariffs, investments, debts and cross-claims are at stake. Thirty- five of these agreements are expected to be concluded this year, and according to Kirchner's own words at the announcement of the end of the debt-swap, the quality of public services and the investments businesspeople are willing to make in order to ensure a better service will depend on that. This was a central issue at a confidential meeting held on Tuesday, March 1, at the World Bank headquarters in Washington, where one of the European directors of this institution told a high official of the Argentinian delegation that they consider the swap issue as closed, but from now on they desire to see progress is in the renegotiation of contracts.
More than 30 privatised companies have sued Argentina at international courts for alleged violations of their contracts within the framework of treaties that protect foreign investments which were signed by Carlos Menem during the 1990s. While the G7 is of the opinion that these litigations should be resolved at the World Bank's International Centre for Settlement of Investment Disputes (ICSID), last March 1, at the opening of the Ordinary Sessions of Congress, Kirchner, publicly endorsed the proposal of Argentinian Minister of Justice, Horacio Rosatti, that Argentina should not be forced to abide by those rulings, but instead that the issues brought forward by privatised companies should be resolved in the country.
Another controversial point is the Public Services bill which is presently being discussed at Congress, which has been criticised by G7 countries since they consider this official project would make it possible for future contracts to be derogated by presidential decree. Until negotiations with the IMF are not started, the G7 has no way of putting pressure on Argentina, but whenever the economic team starts seeking to refinance the debt with the IMF, the regularisation of public services would very likely be one of the conditions. On the one hand, it is considered that negotiations with the IMF will be tense. But, on the other hand, it is acknowledged that Argentina is in a firmer position to negotiate, since it is not requesting fresh funds but paying for capital maturities. However, for some analysts, this argument is counterweighted by the fact that Argentina will not find it easy to obtain money from other source than the IMF, since the debt swap was so aggressive that it is hardly likely that any money would be brought back wilfully by international banks.
The IMF officially considered the meetings of Lavagna with Rodrigo Rato, and with the Fund's director for Latin America, Anoop Sing as "cordial and fruitful", yet the lack of comments on the debt swap by the IMF or the US Treasury Department has been seen in Buenos Aires as a strategy to keep pressing in order to reopen the swap offer for the bondholders that rejected the Argentinian proposal (something which the Argentinian government categorically refuses).
It is worth remembering that during the debt swap negotiation process, the relationships of the Argentinian government with the G7 and the IMF Chief, Rodrigo Rato, were very tense. In the last Paris Club meeting held at London last February, the G7 did not invite Lavagna while it did invite Brazil's Economy Minister, and when the case of Argentina was dealt with, the support was given to Rato, who had demanded an 80% minimum participation of creditors to consider Argentina's situation normalised (76% was the level of agreeemnt with the swap).
The attitude of the Inter-American Development Bank (IADB) regarding the debt swap operation of the Argentinian government seems to be different, since its president, Enrique Iglesias, after meeting with Lavagna on Tuesday 8, stated that the results of the debt swap open favourable perspectives for Argentina's economy. In the official communiqué issued by Iglesias, he gave explicit support to the operation by considering it as "successful".
Another pending problem after the debt swap is the low level of new investments in Argentina. According to some analysts, the swap is a necessary but not sufficient condition to disentangle investment, since nowadays and in spite of the growth being registered in the Argentinian economy (with good prices and yields), it is turning out to be insufficient (a 17% of the GDP, while it is estimated that it should reach a 23%). In order to achieve these figures it is necessary to promote foreign investment, which is being almost exclusively channelled towards Brazil (which takes 95%) in the MERCOSUR context. This is explained by Claudio Lozano in that "direct investment dominated by transnational corporations depends on the expected return rate, which is conditioned by the size of the domestic market - limited by unfair income distribution -, the lack of definitions in MERCOSUR and the lack of an explicit reindustrialisation project".
Within the recommendations made by international financial institutions aimed at increasing the volume of foreign investments, more room is made for deregulating and privatising approaches than for other an industrial policy without which manufacturing seems doomed in Argentina. But, investment could also be provided in the form of loans obtained by the government to be allocated to production. Kirchner has been insistently demanding that international financial institutions should modify their loan policies, since instead of providing credits for investments in infrastructure, they have been granting them to pay debt service, that is to say, to pay off the liabilities undertaken with those same institutions. The recent arrival in Argentina of a 350 million dollar loan from the World Bank to carry out public works projects in the province of Buenos Aires, and the IADB loan programme for the following 3 years related to social assistance, could be good signs to this effect.
Another key pending issue, which was recently brought before Lavagna by John Dodsworth, permanent IMF representative in Argentina, is that of inflation. The IMF is concerned about the results for December, January and February, with increases in the consumer price index of 0.8, 1.5 and 1.0 per cent, respectively. Dodsworth stated that the Central Bank should restrain from printing new money, even if this supposes a fall in the dollar exchange rate. The recipe seems to be always the same: to implement fiscal adjustment rather than expanding production, and incidentally, to generate higher surplus to keep paying off the debt. However, as stated by David Cufré in an article published on "Página 12", the government's economic team, while acknowledging that inflation should be controlled, is determined to maintain a competitive exchange rate. To such effect, the measure aimed at strengthening the control over the inflow of foreign currencies is being evaluated by the government, for the purpose of discouraging the massive inflow of speculative capital. It should also be evaluated whether this measure is applied to the dollars belonging to Argentinian residents, since the return of that capital could also sink the price of the dollar.
According to Cufré, the Central Bank would be forced in this case to increase issuance to compensate for the offer of foreign currencies, a measure which is rejected by the IMF. The concern for controlling inflation at moderate rates, is also related to the fact that since the country fell into debt default, a large part of the debt was issued in pesos, and after the swap, the debt converted to pesos amounts to 37% of the total debt. The implications of adjusting the exchange rate were analyzed by Clarín: "If official projections for this year - which by the way already run a serious risk of being overflowed - were to be met, inflation would end 2005 with an 8% price increase. In that case, the debt will grow by 4 billion dollars at the end of the year. Inflation, indeed, also ends up compensating the government, in some form or other, since if there is a price increase, tax collection also increases and, therefore, fiscal surplus is expected to widen. At the same time, if the peso continues to appreciate against the dollar, as it is taken for granted, with the same fiscal surplus, the government will manage to buy more dollars to pay for maturities of foreign currency debt, which belong mostly to international financial institutions".
It is then inferred that the Argentinian government not only faces the pressure exerted by the IMF with regards to inflation and the country's monetary policy, but is also facing a difficult evaluation of the pros and cons of the monetary policy to be set.
