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Argentina's costly move on debt
Financial Times
September 04, 2008

By Jude Webber in Buenos Aires

Published: September 4 2008 02:32 | Last updated: September 4 2008 02:32

Argentina's surprise decision to pay off its defaulted $6.7bn debt to the Paris Club of western creditors with central bank funds is a welcome step towards ending its international financial isolation, but does nothing to bring it closer to a return to global capital markets.

The timing of Tuesday's announcement appeared intended to allay fears sweeping Wall Street in recent weeks that with limited credit options, slowing growth, opaque policies on inflation and revenue for its key agricultural exports squeezed by falling commodities prices, Argentina was heading for another default.

"The government is changing course ... It's a step in the right direction, albeit a very expensive step," said Pablo Goldberg, an analyst at Merill Lynch in New York. "But I don't think this should be seen as the start of a serious, significant change in the direction of policy."

A leading producer of soya beans and vegetable oils, South America's second biggest economy has been cut off from capital markets since crashing into the largest sovereign debt default in history in a crisis in 2001-02. Lawsuits by the holders of defaulted bonds who refused a 2005 restructuring and are now owed $29bn ( 20bn, 16bn) including interest have blocked Argentina from tapping capital markets ever since.

Officials see plans by the Andean Development Corporation and Inter-American Development Bank to issue debt in pesos soon as a welcome way of deepening local markets, a key source of government financing. But the Argentine government has become ever more dependent on deep-pocketed ally Venezuela.

However, markets were unnerved last month after the government sold a seven-year bond to Caracas with an interest rate of nearly 15 per cent, only to see Hugo Ch vez, Venezuela's president, sell it immediately, sending bonds in Buenos Aires sinking and triggering an emergency Argentine government debt buyback to restore confidence.

On the face of it, Argentina should have no problems. Public spending remains high but it is running twin trade and budget surpluses, the central bank has $47bn in reserves and the government says the economy grew by 8 per cent in the first half of this year. There are signs of this slowing but solid growth is expected for the full year.

Nevertheless, investors have become concerned about its refusal to address problems, such as the near universal lack of faith in official inflation data, and fear it could struggle to meet 2009 financing obligations.

Michael Gavin, chief economist at Citadel Investment Group, a hedge fund, noted "an unwillingness to increase or roll over exposure to Argentine debt".

Speaking on condition of anonymity, a senior official told the Financial Times: "It's important for the government to have a financing strategy, which unfortunately it doesn't have so far. What put this in black and white was the placement to Venezuela which showed, to put it mildly, a lack of professionalism. It looked like improvisation."

Eduardo Blasco, at Argentine consultancy Maxinver, said Argentina had, at most, to find $15bn-$20bn next year about 5 per cent of gross domestic product. "In any normal country people would laugh at the notion that having to find 5 per cent of GDP would trigger a default ... but it's not about numbers the numbers are actually manageable."

President Cristina Fern ndez said the Paris Club decision demonstrated Argentina's "willingness to pay" its debts.

But its decision to pay off western creditors in one fell swoop will work out more expensive than renegotiating the debt, an option it refused because that would have meant submitting to scrutiny by the International Monetary Fund, which it blames for the policies that led it into the 2001-02 crisis.

It paid off its $9.5bn IMF debt in 2006 in a similar operation and wants never again to be beholden to the global lender.

Daniel Marx, a former Argentine finance secretary, said settling the Paris Club debt would have only limited impact on improving sentiment about Argentina's financial health. "Dealing with the statistics bureau would have much more impact," he said.