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The specters of default
La Nacion
August 25, 2008

There is a fiscal and trade surplus, and the need to take loaned money is low; the situation ought to be comfortable, but the rise in spending, inflation and lower export prices have set off alarms

by Francisco Jueguen

Argentina, the country of the eternal return. Today, when political convenience still hasn't allowed for the crisis to completely dissipate, from the darkest area of the nation's past a renewed fear returns to form: the default.

The warning arrived from the vigilant eyes of the center of the financial world. The main investment banks on Wall Street counseled their clience to pull their positions out of the country. At the same time, the rumor that came out of the International Monetary Fund (IMF) was the same: "Argentina is heading straight for an iceberg."

The local view is more prudent, but doesn't exclude the possibility of a cessation of payments. Should it exist, a default would not be imminent. On the other hand, without mercy, the clock has begun to tick away at the life of the Kirchner's economic policies. As long as there isn't a sharp and sudden turn along the way until 2009, this is how long it will be.

The data doesn't lessen the real possibility that Argentina stops paying its debt. At least that's how the market feels. For example, the cost of insurance for the most sophisticated investors against a possible default (credit default swaps) placed the country at the top of Bloomberg's ranking at the end of July. The growth in the value of this insurance has been 66% annually.

Despite the fact that the local numbers are enviable when President Cristina Kirchner recites them at events, the economists consulted by LA NACION speak of a situation that is quite a bit more complicated.

The economy sends powerful signals: the fiscal surplus of Argentina, one of the pillars of the model, shows sign of fatigue. The financial markets, beyond the costly Chavista hand, appear closed to the country. Commodity prices have fallen. All of this with real inflation that is growing.

For the economists, both the question and the answer are political. Could the government put an end to what the experts call 'nonsense', bet on change and avoid a future but already imposed default? "In fiscal terms, 2008 is practically played out," said a report by the consulting firm Prefinex. It added that, at the end of last year, expectations on the primary fiscal surplus landed around 4% of GDP from growing international prices and the rise in export taxes decreed in November 2007. For 2008, the feeling is that the difference between revenue and spending, while still positive, will be more adjusted. "The cocktail between the farm conflict and an uncontained public spending will translate into a surplus that will be difficult to surpass 3% of GDP," the paper says.

The June surplus data was a reflection of the disguised problems of the Central Bank capital gains and for the slowdown in capital expenses and on transfers to the provinces. "The fiscal front is week despite the results that the government puts out every month," said the head of INFUPA, Manuel Solanet. "If in July there hadn't been the inclusion of 1.130 billion pesos in Central Bank capital gains, which was triple what was budgeted, and if you consider the rise in delayed payments, the primary surplus would not have come close to covering the interest on the debt. We are, in fact, in financial deficit, which is corroborated by the growth in the public debt," the economist added.

From Prefinex, they estimate: "It's necessary that the subsidies stop growing during the coming year," and for that they recommend ending the "decoupling" of local energy prices with international ones.

"The future dynamic of revenues appears complicated," predicted a paper by Ecolatina. "What's expected is a lower dynamism of activity and a stagnation in agricultural raw material prices. Tax pressure is elevated and it will be difficult to raise it," it concludes.

At the middle of this month, the questioned INDEC admitted that economic growth during June was 6.5%, the lowest in two years. "For them to dispel doubts over a possible default it will require a very prudent management of spending," said Miguel Kiguel, economist for Econviews, who also put an accent on the rampant growth of subsidies. "There isn't any fiscal comfort," says the conclusions of his last report.

The government spent 12.319 billion pesos in subsidies in the first half of the year. Despite the 30% updating of electrical rates, the current leadership invested almost 68 million pesos in subsidies each day, which means a 215% interannual rise. While the data is worrying, fiscal solidity is still not, by itself, a reason for the country to fall into cessation of payments.

"Before 2001, the deficit, the debt and the high country-risk were some of the causes of the anguishing economic situation. Now, some think that it could happen in reverse: if there are economic difficulties of another order, the State could have problems in financing despite the fact that the public accounts are, for now, in balance," said Lucas Llach, economist for the University Torcuato Di Tella (UTDT).

For him, the risks come on the side of spike in exacerbated revenues in a context of high inflation or growth and sharp deceleration in activity. For that, he believes that the government still has the chance of avoiding this type of situation.

The course of financing doesn't escape the diagnosis. Data from the Economy Ministry processed by the firm Bein & Associates show that the capital and interest coming due has risen to US$4.811 billion in the third trimester of this year and US$4.88 billion in the fourth, while in 2009 they will add up to US$19.104 billion. With dwindling resources from tax revenues, the government will have to face those payments with the financial markets closed due to the impossibility of arriving at an accord with the Paris Club and the creditors that fell outside the renegotiation of the debt in 2005. In that context, the only saving grace will be Venezuela's Hugo Ch vez .

The improbable CPI data from July, which should a drop in the value of food, added to the lowering of the rating from risk agencies that was assigned to local debt in the last weeks, which pushed up country risk and set off the bond repurchase program. The debt is less attractive for investors. For that, it's the Economy Minstry that is acquiring bonds as a plan to calm private sales. "The bond repurchase will not reduce the problems of inconsistency and of coordination in the area of economic policy, nor if inflation or relative prices," said a report by RSH Macroeconomia. The consulting firm indicated that the government will have to face a financial gap of between US$8.75 and US$10.75 billion between 2009 and 2011, if it continues being financed with sales of bond to Venezuela.

According to the report of the Financial Strategy and Program 2008, put together by the Economy Ministry, in the coming years they will face heavy maturities. The worst will be 2016, when the president will no longer be in office. Today, the total public balance is US$144 billion, some 56% of GDP, a much lower portion than in 2002 (166%) but above that of 2000 (46%) and 2001 (54%).

The warnings over the fiscal and financial situation are amplified in the inflationary context. "A coherent and convincing anti-inflationary program has to be made; from the contrary, that sincering could be chaotic and, also, could spiral," Solanet argued.

Some characterize the rise in prices as a strategy. "The transfers of resources via inflation to the national State, the last two years, through the liquidation of its assets via inflationary taxation and manipulation of the CPI, were not gratuitious for the government," said a report from Econometrica.

"In addition to the political cost and the generalized rejection of the public debt that limited access to financial markets even more, they also ended up burning the economic model put in place in 2002," said the report by Ramiro Casti eira.

Despite the economic signals, some are more positive. "There is a technical margin, for the macro- and micro-indicators, and from the international scenario to give consistency to the fiscal accounts and to the financial requirements, but what is needed is an integral plan of economic policy that takes on the new dilemmas of the country," said Bernardo Kosacoff, director of CEPAL's office in the country.

For the privileged views, those that see the problem up close, the risk of entering a cessation of payments is not imminent. But without a change in economic policies in the short term, the market of official maneuvering will get tighter. For now, the default continues to be that just a specter.