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Last Updated: Sep 7, 2008 - 8:07:48 AM |
Argentine president Cristina Fernández de Kirchner marked a U-turn in
economic policy yesterday by announcing the payment of all outstanding
debt to the Paris Club, an informal group of international creditors.
She confirmed that a decree had been issued, authorising economy and
finance minister Carlos Fernández to tap into Central Bank reserves to
finance the expense. According to Fernández, total outstanding debt
with the Paris Club, including interest and arrears, stands at US$6.71
billion, of which 30% accounts for loans from Germany, 25% from Japan,
9% from the Netherlands, 8% from Italy, 8% from Spain, and 7% from the
United States. The president was keen to hail the move as evidence of
Argentina's willingness to meet its international obligations. The
United States was one of the first to praise the Argentine president
for her decision to finally address the defaulted Paris Club debt. The
investment community also reacted positively, with domestic investors
notably finally seeing a window of opportunity for wider access to
international financing and credits. Besides a Bloomberg report quoting
that Paris Club president Xavier Musca welcomed her decision, the
creditors' association has not yet formally commented on the move.
Outlook and Implications
Together with an overall initiative to buy back sovereign bonds in
circulation, the full repayment with the Paris Club is the authorities'
latest attempt to improve Argentina's standing in the financial
markets. Everything started with a bond sale to the Venezuelan
government in early August, when the authorities offered a high 16%
yield of return on a US$1-billion offer, which was badly accepted by
the local market. Country risk went up in August, reaching levels only
observed in early 2005—precisely when the government was trying to
complete its debt-restructuring process and was still in default.
Although further buybacks will improve repayment capacity in the near
term, they will also decrease the primary surplus for 2008 and 2009—a
bad precedent considering the aggressive expansion in public
expenditure. In addition, the Paris Club repayment further erodes the
previous level of foreign reserves, which suffered an approximate
US$6-billion loss during the last four months. The country's import
coverage ratio is set to decrease from 12.3 months of imports in April
to only 8.7 months in early September after the payment, although this
still remains a comfortable margin. However, it does raise questions
over the government's discretionary use of international reserves.
Although the repayment has been hailed as a positive step, notably by
local investors, there are also doubts on the manner in which the
policy switch was announced—unilaterally. The Paris Club had
conditioned any debt repayment process to a loan programme and economic
monitoring by the International Monetary Fund (IMF). The absence of the
IMF was notable in the president's speech yesterday, though it failed
to surprise per se given the Kirchners' distancing from the
institution. IMF influence over national economic policy is highly
unlikely to return to Argentina under Fernández's rule.
President Fernández is most likely seeking to revive support after a
critically poor start of her term (2007–11). The move is hoped to
restore some credibility at home and abroad and convey a more
responsible image. However, this is just one of many other measures
needed to boost economic credibility, with the manipulation of the
inflation figures being one of many other components undermining the
image of her administration as a conciliatory, transparent, and sound
economic manager.
Source:Ocnus.net 2008
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