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Argentina: Another Debt Crisis?

Can Argentina fulfill its debt obligations to avoid a crisis in 2009? Three experts share their insights.

Inter-American Dialogue 

Argentina last week opened a swap of new 2014 government bonds for so-called guaranteed loans held by foreign financial institutions in an effort to ease its debt obligations, which amount to approximately $18 billion in 2009. Can Argentina fulfill its debt obligations in 2009 and onward? How bad is the country's macroeconomic picture in comparison to other countries in the region and to Argentina's past crises?

Claudio Loser, Senior Fellow at the Inter-American Dialogue and former head of the Western Hemisphere Department at the International Monetary Fund: The Argentine debt refinancing situation is an unlikely combination of a mirror games, wishful thinking, and some serious work. Oxford Analytica on February 20 vividly characterizes Argentina's plight: 'Slowing growth and renewed agricultural strikes will put both the trade and fiscal surpluses under increased pressure. This coincides with a rise in public spending pressures this year in a context of economic slowdown and pending elections.' While Argentina has refinanced part of its local currency obligations through restructuring, this seems insufficient to cover all obligations falling due. The expropriation of the assets of the pension plans will cover some of the obligations falling due, although the government will need to cover increasing pension obligations, eroding the short term gains that the government thought it had. Foreign markets are closed due to the disputes with bond 'holdouts' and with the Paris Club, a much worse situation than that of most Latin American countries, save Ecuador and maybe Venezuela. This leaves open only the hard-to-accept windows of the IMF and other IFIs. More importantly, the Argentine economy is rapidly falling into recession that together with a sharp decline in exports will reduce revenues, even with the new pension contributions. With higher spending because of the new stimulus package and higher wages and transfers, financing difficulties will be mounting, with increasing chances that the IMF will return if the government wants to avoid the costly nightmare of a new default.

Miguel Kiguel, Executive Director of EconViews: While Argentina's five-year credit default swap has dropped 2,000 basis points (bps) in the last month, it remains at 2,500 bps, certainly far from comfort. Why did it fall so much so quickly and why does it remain so high? The main driver for the reduction has been a shift in investors' perception about Argentina's ability and willingness to pay. The completion of the domestic guaranteed loans exchange not only helped to alleviate by roughly $1.6 billion the financial requirements for this year, but also indicated that the government is ready to take steps in order to avoid a new default. Financial requirements for this year could be as low as $3 billion, an amount that the government can finance from international reserves and domestic public sector deposits. Next year the financial requirements are even lower. In addition, after the nationalization of the pension funds, the stock of net public sector debt has dropped to around 34 percent of GDP. These figures would suggest that the spreads could tighten further, especially if the government has some success with the external swap, and if it follows up these swaps with a new offer to the bondholders that did not participate in the 2005 debt restructuring. The main risks that stand in the way and could preclude this outcome are a deeper recession than the one most analysts have in mind (the consensus is for economic contraction of approximately 1 percent), which could greatly affect tax revenues, a sharp worsening in the external environment that significantly raises spreads across the board or the constant concern that the Fernandez administration could take another arbitrary measure (akin to the nationalization of the pension funds), a possibility that is difficult to fully rule out.

Erich Arispe. Director of the Sovereign Group at Fitch Ratings: Argentina is likely to have the capacity to service debt in 2009, and liability management operations such as the swap of guaranteed loans contribute to alleviating the government's funding requirements. Nevertheless, the need to rely solely on intra-public sector financing in the absence of additional Venezuelan support and no market access leaves little room for policy slippage. Although Argentina does not imminently face unsustainable fiscal deficits or large macroeconomic imbalances as it did in previous crises, the country has not reduced its fiscal and external vulnerabilities. Moreover, the global financial crisis' impact on the Argentine economy has been magnified by an inadequate policy response. Consumer and investor confidence suffered major blows through the 'farmers' strike' and the AFJP's nationalization, which resulted not only in lower growth but also in record capital outflows of $23 billion in 2008. The economy is likely to contract this year, and legislative elections and unresolved tensions between the government and farmers could introduce additional volatility. As in most of Latin America, Argentina does not have room to implement counter-cyclical fiscal policies. While some central banks have begun an easing cycle, domestic interest rates in Argentina will likely remain high to prevent a 'flight to the dollar.' Sustainable and coherent policy adjustments and improvements in the transparency of official data are key to boosting the confidence of economic actors in Argentina's debt servicing capacity and growth prospects.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.


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