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Argentina to Repay $6.7 Billion in Paris Club Debt
Bloomberg
September 02, 2008

Sept. 2 (Bloomberg) -- Argentina will repay its $6.7 billion of defaulted debt with the Paris Club group of creditors, seeking to ease companies' access to financing as growth slows in South America's second-biggest economy.

President Cristina Fernandez de Kirchner said she signed a decree allowing the central bank's international reserves to be used to pay the Paris Club, an informal association of creditors that includes the U.S., Germany, Italy and Japan.

``This reaffirms Argentina's willingness to pay its international commitments,'' Fernandez said today at the presidential palace in Buenos Aires. ``This payment puts companies that can get financing abroad in the pole position, which they haven't had before this decision.''

An accord with the Paris Club would help shore up investor confidence in the country as economic growth slumps. Gross domestic product will expand 6.8 percent this year and 3.2 percent in 2009, a slowdown from more than 8.5 percent in each of the past five years amid a recovery from a default and currency devaluation in 2001 and 2002, according to a report today by Merrill Lynch & Co.

Xavier Musca, president of the Paris Club, said he welcomed Argentina's decision.

Musca, speaking in a telephone interview, said the organization is working out details of the decision with Argentine Finance Secretary Hernan Lorenzino and plans to discuss the payment at its Sept. 15 meeting.

Corporate Credit

The move may smooth access to international investment credits for companies in Argentina, Cristiano Rattazzi, president of Fiat Argentina SA, told reporters at the presidential palace. Argentina received just 5.4 percent of the $105.9 billion in foreign direct investment in Latin America and the Caribbean last year. Brazil got 33 percent, Mexico 22 percent and Chile 14 percent, according to the United Nations.

The central bank's foreign reserves swelled to $47.1 billion as of Sept. 1, recovering from a low of $8.2 billion in January 2003. The country has increased reserves thanks to a boom in agriculture commodity prices that helped the government increase tax revenue.

``This will have some positive impacts, but it will also raise more questions about how the government uses central bank reserves,'' said Daniel Marx, a former finance secretary, in a telephone interview in Buenos Aires.

Central bank President Martin Redrado said Argentina's foreign reserves will remain ``robust'' after the debt payment.

Reserves

This is the second time since 2006 that Argentina has used central bank reserves to pay off international lenders. In January 2006, Fernandez's husband and predecessor Nestor Kirchner used central bank reserves to pay the International Monetary Fund $9.5 billion in a move he said would allow the country to reclaim its ``autonomy.''

Kirchner renegotiated $95 billion in defaulted debt in 2005, offering investors 30 cents on the dollar. Since then, the government has refused to open talks with the holders of about $20 billion in defaulted debt who rejected the government's offer.

``This shows the government is trying to make amends with the market,'' said Eduardo Levy-Yeyati, head of Latin American research at Barclays Capital Inc. in New York. ``The negative side is that given all the concerns about the country's financing needs, using reserves to pay off this debt means they'll have fewer liquid reserves to meet those future needs. It's not a zero-sum game, but it's not a big positive either.''

Net borrowing needs will climb to at least $11.3 billion next year from $6.1 billion, according to Barclays.

`First Step'

Robert Shapiro, co-chair of American Task Force Argentina, a group that represents some of the bond holdouts, said via e-mail that the Paris Club payoff should be a ``first step'' in efforts to repay all defaulted debt.

Argentina's 8.28 percent dollar bonds due in December 2033 were unchanged on the news. The country's main stock index, the Merval, fell 1.1 percent to 1757.94. Shares of Argentine banks including Grupo Financiero Galicia SA and Banco Hipotecario SA surged more than 3.8 percent.

``This decision doesn't change Argentina's global situation,'' said Silvia Marengo, who manages about $130 million of emerging-market bonds at Clariden Leu in London. ``The problems that the government must face are not related to this debt. Those problems are high inflation, the energy infrastructure and a possible new conflict with farmers, and these problems remain.''

To contact the reporter on this story: Eliana Raszewski in Buenos Aires eraszewski@bloomberg.net; Bill Faries in Buenos Aires wfaries@bloomberg.net