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Disparate reactions from economists about the diagnosis of default risk
La Nacion
August 15, 2008

Specialists consulted by lanacion.com agreed with various warnings from Wall Street; however, some put forward the view that an eventual cessation of payments is "exaggerated"; criticism for Cristina for her tirade against the ratings agencies.

By Lucrecia Bullrich

The tough diagnosis from Wall Street, which warns of the rise the Argentina would go back to a default, generated disparate reactions among national economists.

Specialists consulted by lanacion.com about the evaluation, which came from reports from investment banks and analysts, and were reported by LA NACION, showed diverging views over the level of agreement with the warning coming from the U.S. financial world.

"I believe that the data doesn't have much basis. The finances are in very good shape," said Orlando Ferreres. Then, the ex-Vice Minister of Economy and founding member of CEMA, clarified: "I'm not saying there aren't problems. There are delays in payments to providers but that always was there."

Looking at 2009. At the same time, he said that next year "will be difficult" in financial terms and the better part of the panorama will depend on the price of oil and of grains, also the capacity of Argentina to pay.

The economist calculated that the government "is short US$2.3 billion" to close its books and that the gap "could be filled." "It's not an unmanageable number," he pointed out. He said that in 2009, the government of Cristina Kirchner must face debt maturities of US$20 billion and that half of that number "is covered" by the primary surplus.

On the other hand, he agreed that "default is an always-possible threat" and warned that the markets where Argentina could find financing are closed. "Except for Venezuela, of course," he added.

Symptoms. Economist Manuel Solanet, in turn, enumerated the indicators that go along with Wall Street's evaluation. "That the government had placed debt for 15.5% (in Venezuela) is a key factor. Also, they are warning about late payments to providers, contractors and subsidy beneficiaries."

For Solanet, what he calls "symptoms of financial difficulties" don't stop there. "Add to this the drop in international agricultural prices that will affect the revenues on export taxes and the observation that they have not taken measures to reduce the growth in public spending. There isn't a course of action to sincere the pricing system nor for attending to the demands for subsidies," he said.

From this situation, according to the economist, "it's difficult to imagine how they are going to face the debt maturities coming due this year and in 2009."

However, Solanet asked: "I don't like to speak of default. I believe that using the words accentuated risk is more effective. I prefer to say that it's important to take corrective measures as soon as possible," he concluded.

"Voluntary exaggeration". Economist and federal Deputy Claudio Lozano, however, agreed that the economic panorama is a not encouraging, but speaking of default is "exaggerated."

"It's clear that Argentina has entered a new stage, after the easy growth stage of 2002 to 2007, dominated by the deficient and limited behavior of investment, the slowdown in growth and the lower threshold of fiscal comfort. Also there are evident signs of weakness in tax revenues and a rise in spending associated with inflation," he said.

"This no doubt puts new problems out there, above all for future payments, but to say that Argentina is at risk of default is an exaggeration," he said.

"Those reports are seeking political positioning before a weakened Argentina. They are seeking to orient an orthodox and recessive exit from the crisis," he said.

For Aldo Abram, the factor of greater weight in the financial crisis that is hitting Argentina is credibility, which he considers "seriously damaged by the crisis with the farm sector."

Insufficient. The director of the Center of Research of CIIMA-ESEADE said that, in strictly economic terms the biggest problem is the lack of foreign credit. "It's been years since we have foreign credit since the bond haircut, the hold outs, the unresolved default with the Paris Club and the swindling of bondholders whose holdings are attached to inflation," he said.

On the other hand, he assured: "With this I don't want to say that we are heading for a default, it doesn't reach that," and doesn't rule out that the government "ends up making use" of the reserves of the Central Bank. "Historically, the politicians believed and believe that the reserves are there to correct shortfalls and it wouldn't be a rarity for them to turn to this solution," he said.

Cristina against the ratings agencies. The economists also looked poorly upon the strong attack that President Cristina Kirchner launched against the risk ratings agencies, a few days after Standard & Poor's declared the country a less trustworthy debtor. "They don't see a recession in the United States and they want to convince us that we're in trouble," the head of state said.

"It's late to criticize the agencies, who measure reality. If we hit 1300 points in country-risk for taking out bonds with a friendly country, what does that show? The statements by the President don't go along with the facts," Ferreres said.

For Solanet, the statements by the head of state are "another show of escapism by the government and its tendency to appeal to conspiracy theories."

Abram agreed that "the agencies arrive late" but put forth that "this time they also came late", referring to the reports on Argentina. "For a short while the markets have been showing levels of risk perception that justify the lowering of the rating," he said.

Lozano showed himself more in line with official reasoning: "I share her statements completely. The rating agencies are not taking situations into account, only that intervention strategies are materializing. They don't diagnose in time, and they describe as good situations that end up going to hell, like what happened in the 90s. Their links to the banks is absolute, and from this one cannot expect any kind of objectivity on their part."