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Argentina is not ready for a drop in commodities
Perfil
August 17, 2008

By Carmen Lopez Imizcoz

"Inflation is exacerbating political tensions and the lack of credibility in official figures raises doubts over the capacity and the will of the government to pay its debts." With this tough diagnosis, the risk agency Moody's on Thursday lowered its view of Argentine public debt from "positive" to "stable". PERFIL interviewed Gabriel Torres, senior analyst and vice-president of Moody's.

Why modify the view on Argentine public debt?

In January 2007, we put up the positive view because we'd seen an improvement in the economic numbers and believed that the next step would be to raise the rating. Since then, in economic terms, there have been some ups and downs. But what is clear is that the political situation has worsened. This carries with it certain doubts with respect to the capacity of the government to manage shocks that we don't believe will come to raise the rating.

Is the current rating a prediction of a default?

The next level is one which is usually for countries that are in default or on the verge of being so, like Argentina in 2001.

Are there doubts with respect to the will to pay by the government?

By all means.

Despite the repurchasing of bonds by the government?

The repurchase is very small. Argentina has some US$145 billion in debt. The buy-back is less than one percent. There is unresolved debt with the holdouts and with the Paris Club. This is more or less included. The more worrying issue is inflation because, from being badly reported, this means the government is not taking the problem seriously on the one hand, and on the other 40% of the debt is adjusted for inflation. To report a lower rate of inflation lowers what you have to pay.

But this phenomenon has gone on for a year and a half. What is the timing of the announcement owing to?

During the farm crisis, it became evident that, despite everything, the government was not disposed to form consensus policies. The capacity and will of the government to resolve a crisis is in doubt. If tomorrow the price of soy goes down further, it will begin to affect the economy and the resources of the State. Would the government have the capacity and will to adjust spending? From what I've seen in the past few months, it leads me to doubt it.

What are the "severe fiscal challenges" that are mentioned in the report?

The revenues of the National Public Sector went from 17% of GDP in 2002 to 25%, while spending went from 19% to 23%. The deficit changed to a surplus, but a large part of most of the resources were destined for spending. Argentina, different from other countries, is not financially ready for an eventual drop in commodity prices. It doesn't have a reserve fund. It would have to save more, and have a higher surplus.