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The fiscal situation: the Government seeks more relief after announcing the payment to the Paris Club
La Nacion
September 07, 2008

They are renegotiating the refinancing of a further US$ 6 billion.

The aim is to postpone maturities due in 2009 and 2010; the holdouts situation under analysis.

By Mart n Rodr guez Yebra

With the greatest discretion, the Government has begun negotiating with investment banks and pension funds to refinance over 6 billion dollars' worth of debt which is due from now until 2010, official sources confirmed to La Nacion. This figure is similar to that which Argentina owes the Paris Club and which Cristina Kirchner announced on Tuesday would be paid from the reserves.

If the operation were to go through, the country would reduce its payment obligations over the next 2 years by 15% and could also limit its financial dependence on the government of Hugo Ch vez, whose recent maneuvers with Argentine bonds shook the Kirchner administration.

The strategy reflects also the Kirchner's concern with sending signals to the world that belie the suspicion that a new default could be more than just a melodramatic visions of the future. The negotiations under way executives from the Citibank and several pension funds have already been contacted by the President's office aim to swap Garanteed Loans (GL) for public papers, explained sources. In the financial sector, they calculate that banks and pension fund administrators would accept the offer, as they would be swapping papers with no liquidity (which they received in the failed mega-swap of 2001) for instruments that could be negotiated in the market.

The former Economy Minister Martin Lousteau had attempted a similar reprogramming but this was nipped in the bud by Nestor Kirchner. Now this is another country. The presidential couple decided to send urgent signals to the market after the crashing failure of the last operation to place bonds in Venezuela, when it agreed on an exorbitant rate 15% - and even so, the papers were liquidated in a matter of hours. Cristina Kirchner wants to be able to travel to New York at the end of the month with margin for maneuver, as she will be speaking before investors and meeting presidents from G7 countries.

Announcing the payment to the Paris Club was a first step towards making contact with the rest of the world, an issue which was supposed to be of primary importance in her administration which began 9 months ago. The payment was decided after a debate in the Government during which they also analyzed making an offer to the holdouts, the unpaid bondholders who didn't accept the 2005 swap. Sources from Economy added that the option that was studied included offering holdouts the discount bond with the same haircut and without paying the interest received by those since 2005 who did accept the original proposal. Until last week, there was a report by Barclay's bank circulating in the Casa Rosada and the Central Bank which explored a similar plan. A high-ranking source in the Casa Rosada said that this option was rejected: the reopening of the swap is blocked by law until 2010 and any change would have a very high political cost.

However, other official sources said that "signals" could be offered to the bondholders in arrears, which would help the stated presidential intention to "take up the challenge to return to the capital markets. But, for not, the official line is outright: "the holdouts are the limit", Sergio Massa, chief of staff, had said just a few days before the announcement of the payment to rich countries.

Now, in Economy, the Chief of Staff and Central Bank, the priority is to prepare the negotiations with the Paris Club. Although the President ordered the full amount to be paid, in the Govenrment they are working with the idea that they will only pay the debt which has matured with the reserves (some 4.7 billion dollars) and not the upcoming payments.

It will be necessary to agree on the figures. The Finance Secretary Hern n Lorenzino has already made contact at an informal level with the director of the Paris Club, Xavier Musca, to explore options for payment. The formal negotiations must wait until the member countries meet on September 15. At the Casa Rosada, they imagine that they will come up against a staunch resistance on the part of Italy and Japan, the countries most affected by the defaulted bonds.

It remains to be seen what position the group will take in response to the Argentine refusal to have the IMF audit the operation and thus, their economic data. The Kirchners are unmoveable on this one. On the list of signs to be sent to the financial world, the possibility of transparency over official statistics managed by the Secretary of Internal Trade Guillermo Moreno was crossed off.

Only once the negotiations have finalized can the Government think of developing a legal proposal to ensure that the payment which was ordained in a decree be validated by Congress, as both the Central Bank and the opposition are calling for.

By then perhaps the GL swap may be ready. In reducing the repayments burden, the Government is calculating that it will be reducing the impact of the fall in reserves implied by the Paris pay-off.