Argentina: Argentina’s Impressive Economic Recovery And The Debt Swap

Last Updated: 7 April 2005
Article by Carlos E. Alfaro

The Government of Argentina and particularly its Ministry of Economy could not be happier with not only the result of the debt swap of the Argentine debt but with the overall state of the economy. The bondholders that did not participate of the exchange could not be more disappointed.

But a long legal battle is awaiting them and Argentina. Likewise, the raise of the Federal Reserve interest rate in the United States is threatening emerging markets.

Nevertheless, for a country that only two years ago defaulted and fell into one of the most difficult crisis of its history the overall economic situation looks promising. Today, the situation has changed 180 degrees: a) the value of assets (real estate, industrial, farms, etc.) is higher than during the convertibility law in dollar terms; b) bank deposits are at record levels, c) vacation occupancy has been over the limit, d) consumption is booming, e) production is back to the best years during the economic growth in the 90’s, f) revenues from exports increased. By word of mouth Argentina has also become one of the most popular tourist points of destination in the world. Those that have visited the country in 2004 did not return disappointed, much to the contrary they came back impressed by the quality and pace of living that the country is presently offering, a quality of life that the Argentineans are also enjoying.

The pessimists and almost all analysts predicted that the offer that the Ministry of Economy of Argentina presented at the meeting of the IMF in Dubai more than a year ago was going to fail. The end result: 76.15 % of the bondholders accepted the largest discount exchange proposal ever in modern history. We may not like what happened or the Government’s attitude but it has been an impressive success.

Of course, there are many other issues that Argentina will have to resolve in addition to the debt. Those with experience in Argentine history know that crisis have been recurrent in the country every 10-12 years. But things may be different today.

The pessimists still have hopes that their predictions will come true. They argue that:

  1. consumption will slow down because the 2003 and 2004 recovery was not more than a revamp due to more than five years of recession,
  2. that Kirchner will fight with other leaders of the peronist party (particularly Duhalde) and will loose power with the unavoidable consequence of becoming a lame duck by the end of its third year as President,
  3. that Argentina still needs massive inflow of foreign capital and fresh money from the multilateral organizations to sustain growth, and that such money will not be available,
  4. that there are structural reforms very much needed to convert any plan in a sustainable program,
  5. the arrogant attitude of the Government will isolate Argentina from the IMF and the G7 and,
  6. inflow of genuine foreign capital necessary to sustain growth will not come.

Now, what will happen if they are wrong? Which will be the situation if: a) the IMF becomes more flexible and extend the payment terms of the debt to make it feasible for Argentina to meet its commitments, b) local credit becomes available at normal rates, c) consumption continues to grow as well as production, d) the value of the peso follows the fall of the dollar and therefore Argentine exports continue to benefit of its competitive advantage, e) commodities prices start rising again and f) by comparison the conditions of the financial world markets make of Argentina an attractive place for investments?

I believe that there are clear probabilities that Argentina will resolve successfully some of the pending issues that critics have enumerated as cornerstones for a true recovery because precisely international political and market conditions will favor Argentina.

Let me describe some of the structural issues that Argentina has to resolve and which are still pending:

1. Judicial and Security Reform:

The Government has already changed the composition of the Supreme Court. In general terms we may say that the new members are individuals with considerable judicial experience and honest track record, though certainly with a more liberal center left ideology than before.

The new composition of the Supreme Court will also play an important role in the Government objective of impeding the enforcement of potential negative awards in the International Center for Settlement of Investment Disputes (ICSID). See article published in Mondaq.com on 21 December, 2004, titled: "Argentina: ICSID Arbitration and BITs Challenged By the Argentine Government", by Carlos E. Alfaro.

Notwithstanding corruption at lower court level is still an issue, public scrutiny has become more intense and as a result several judges have been impeached. As to security issues public pressure has also triggered a profound reform in the police force and therefore a remarkable improvement in security.

2. Elections:

The main structural problem in Argentina is that the Peronist Party by far controls the political agenda and has no credible opposition. This outright control of the politics of the country by only one party is not healthy and is part of the structural problems for the future.

In the House of Representatives they control 129 seats out of 257. The second majority party, the Radical Party only has 44 seats followed by a new party ARI (center left) that has 10 seats.

In the Senate the Peronist Party has 41 seats out of 71 followed by the Radical Party with a distant 14 seats. The rest of the seats are divided among primarily 12 provincial parties. ARI has no representatives in the Senate.

These numbers reveal that with the exception of the Peronist and the Radical Party, there are no other parties with national presence, with an organization or credible leaders in the Provinces.

In October there will be elections for the renewal of one third of the House of Representatives and the seats in the Senate of eight provinces. Unfortunately, the political battle will be centered only within the peronist party which is divided among many sectors.

The election is crucial for President Kirchner and his followers because it will determine if he becomes a prisoner of his own party or succeed in placing his candidates in the ballots. The most likely move for the President will be to reach an agreement with the opposition within his party and avoid dividing the votes. As far as today he has tried to ally members of other political parties with his followers but has failed. If the peronist party presents a united list of candidates they will win most of the elections. Kirchner buoyant with the success of the debt swap will make of these elections a referendum of its policies.

3. Payment of the new debt and holdouts:

Argentina closed its $103 billion Private Debt restructuring offer on Feb. 25 and announced a final acceptance rate of 76.15% on March 18.

Argentina's $103 billion debt has been converted into $35.251 billion of restructured debt. Of that amount, $15 billion will be issued in par bonds, $11.909 billion in discount bonds and $8.342 billion in quasi-par bonds. Argentina will issue the new securities on April 1.

Another positive aspect is that the debt has been extended until the year 2046 at a lower interest rate and part of it in pesos. According to government figures, 37% of the country's total debt load will be in pesos after the new bonds are issued, compared with 3% in December 2001.

At the time of the restructuring, the Argentine government took actions to convince creditors that its offer was the final one, including passing a law prohibiting the re-opening of the deal. The closer we get to the October elections more difficult it will become for the Government to surrender to the pressure of reopening the swap opportunity.

Some of the funds with bond positions are seeking to attach the old bonds exchanged deposited with Bank of New York, the institution that acted as a trustee. Technically the bonds still belong to the private individuals or institutions that enter into the exchange. The trustee has immunity. But even if such a judicial action is not likely to proceeding it produces uncertainties and may be used to negotiate other judicial decisions.

4. Payments to the multilateral financial institutions:

The Government still has to make payments this year of 12 billion in principal and interest to international financial institutions and between 2005 and 2010 it will have to pay from $70 to 80 billions dollars.

Argentina must then renegotiate with the multilaterals its payment obligations and obtain better financial terms. The IMF in order to renegotiate has demanded:

  1. a higher fiscal surplus,
  2. closing of negotiations of the Concessions,
  3. the enactment of certain federal laws, such as the Federal Tax Co-participation, and other measures called "Structural Political Reforms".

Though some people predict tough negotiations Argentina is in a more solid position than it was a few years ago, after all, it has paid 100% of its debt with the IMF and it is not in an urgent need of fresh money.

Likewise, after the restructuring the World Bank has liberated substantial amounts of money for infrastructure development (roads, water sewage, etc.) that were suspended during the crisis. This is a sign that pessimists are ignoring.

5. Concessions:

The Government has to renegotiate 49 agreements. Some of them are already in advanced negotiations and it is expected that 35 will be concluded by the end of this year. The Government has required the concessionaires to withdraw their claims before ICSID as a condition for the renegotiation. Gas Natural Ban has already announced that as a result of the negotiations with the Government is withdrawing their claim before ICSID.

Tariffs, committed investments, debts, and judicial suits are all pending issues that must be renegotiated. In the already closed negotiations -about 12- the government has already authorized tariff increases, i.e.: in Gas, the Government offered a 15% increase, in Water between 16 and 20%. The impact of these increases in the inflation rate and salary adjustments remains to be seen.

6. Exchange rate and the dollar:

The exchange rate is a critical variable for the competitiveness of Argentine products but the Central Bank must print money to absorb the excess of dollars in the market and keep its value high. The Government wants -no matter what- a competitive low peso, and will intervene as necessary through institutions like Banco Nacion (a national owned bank) to maintain the present rate.

The inflationary effect of buying dollars with new printed money can be compensated with operations in the open market like the offering of new treasury bills (Lebacs) to withdraw pesos from the market creating an opportunity for the inflow of speculative short term investments.

Notwithstanding the low value of the peso, it is estimated that exports will grow only 4% and imports 20% as a result of the increase in consumption and in industrial activity.

7. Inflation:

Inflation will not only be closely associated with the increase in the M1 (by the printing of new money by the Central Bank) but also by:

  1. the increase in tariffs to be renegotiated with the Concessionaires,
  2. the salary pressures in an election year,
  3. the increase of prices as an undesired effect of tourism,
  4. It is also observed a strong pressure from the public service sector and the producers of consumer products to revalue its prices, which will take them to higher levels than those in the years 2003/04.

President Kirchner has adopted a tough stance against companies increasing prices (i.e. outright boycott against Shell gas stations) but on the other hand his Government has reached an agreement with meat producers and supermarkets to reduce prices. Other similar agreements will follow. These measures of course have only a temporary effect and have generally failed in the past but it will defuse a sudden spiral effect during 2005 and allow the Government time to study other measures.

8. Salary and redistribution of profits:

Some specialists says that the increase in real salary will come in hand with domestic productivity and internal economic activity, others, say that the salaries will revalue with investments that generate employment. This is the position adopted by the Ministry of Economy who has said that he opposes a system of adjustment of salaries by inflation rates proposed by the unions.

It remains to be seen if the Government resists the pressure of the unions in an election year.

9. Tax and Social Security reforms:

A sustainable recovery requires a tax reform to eliminate distortion in the tax system, increase Compliance and eliminate tax evasion as well as "employment not registered".

Argentina has a withholding tax on exports that ranges from 25% to 45% and an income tax of 35%. There is no withholding on the payment of dividends.

It is very unlikely that the Government will eliminate or reduce for example the withholding taxes on exports. A low peso value and the withholding go hand by hand. It is the corner stone of this economic program. The Government with the withholding is at the same time protecting the internal market and compensating the benefits of a low peso for the exporting sector, a benefit that other sectors of the society do not receive.

The withholding is also an important / crucial source of revenue for the Federal Government – The funds collected do not have to be shared with the Provinces, like the income tax.

Conclusion

Certainly the President of Argentina has a controversial style and its Ministry of Economy is a tough negotiator. But perhaps the circumstances in which Argentina is involved require this kind of leadership. Once the main issues have been resolved certainly such style will be counterproductive. But while the main political and economic issues are still unresolved, like the renegotiation of the concessions contracts, the medicine applied may prove to be successful. Likewise, Government revenues are at its highest level which will allow it to develop infrastructure projects and further reduce unemployment. Consumption will continue to grow as a result of this factor as well as the level of economic activity (GDP growth in January was of 9.1% and it is estimated to be above 7% in the whole year).

The success in the debt swap has consolidated the power of the President and has triggered a stabilizing effect on the economic program. The speculative changes in the bond market as a result of the Federal Reserve rate increases will not slow down this process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions