Argentina

As Argentina is just grabbing hold of its external debts and is restoring from its financial crisis of 2001, it is faced with a new challenge : how to survive the global financial crisis?

Only last year Argentina was able to pay off its Paris Club debt, servicing of the public sector debts. This obviously caused a cash problem for the government. Analyst warned Argentina last year that paying debts would drain currency from the central bank, which uses its reserves to back the peso and domestically-sold debts. Nevertheless, Argentina still held $14,5 billion in cash. Yet $12 billion in bonds is due in 2009 and twice the amount expired in 2008. More cash is needed if Argentina wishes to solve its debts.

Argentina began buying back an unspecified amount of 2008 and 2009 bonds, whose prices had slipped following the government's early August 2008 sale of $1.5 billion in debt to its left-leaning ally, Venezuela. Many interpreted the sale to Venezuela of the 2015 bonds at an unusually high 15-percent interest rate as a sign that Argentina may be running short on cash. When a country is buying back its bonds prematurely before the due date, this means upcoming financial problems!

It was said that set-backs such as drought and potential strikes in the agricultural business, one of Argentine’s economic pillars, could cause the shrinking of export taxes and other tax income and thus its foreign currency. But, who would have thought that a global financial crisis would make Argentine’s financial restoration a very far dream in the future.

In a new attempt to get hold of cash, Argentine’s president Cristina Kirchner signed a bill last Month, October 22nd, envisaging the nationalisation of the private pension funds in Argentina.

The governments explanation for this decision however was to safeguard these funds from depreciation. It was said that the profitability of the AFJP (Administradora de Fondos de Pensión y Jubilación or Administration of Pension Allowances and Retirement Funds) had dropped 20% following the global crisis. It seems that the governmental initiative was rather precipitated by the economic situation than by a sincere concern about the value of the pension funds, protecting future pensioners and improving social security from the volatility of the financial markets where the funds are invested at this moment.

Following the opposition in Argentina, this operation is merely a confiscation by the State of 30 billion dollars.

The private pension fund system was created in 1994 by the conservative Peronist president Carlos Menem and grouped 10 privately-owned pension funds. It was a political move that split up the opposition. Since their creation in 1994, the funds have saved 96,000 million pesos for retirement accounts while pocketing 36,000 million in administration fees. The ratio of pension contributions to pensions paid, highly favours the funds, which currently have some 3 million contributors but only pay pensions to around 450,000 people. Nestor Kirchner, former president and Cristina’s husband modified the pension system allowing workers to freely move between the private pension scheme and the state scheme. Now Cristina Kirchner is changing it again and is using it for political gain, as she is not doing well on the present political scene. This decision, as it did in the past is splitting up again the opposition. Given the history of political patronage by Argentine governments, many say the funds will be used next year to win votes in the midterm elections.

As Rodrigo Orihuela of The Guardian said: “With these arguments going on, there is little space for talk of possible debt defaults, mainly because debt payments are due in the second half of 2009, light years away in Argentine political terms. Fiscal gaps are growing, and the government may need reserves to control the exchange rate, but had the administration really been concerned about obtaining cash to control a problematic market, it had other ways to do so. Currently, around 55% of all pension fund assets are Argentine government bonds, which proves that when the government wanted to get funding from AFPJs it knew how to. It could have done the same this time, and it could have also made AFPJs repatriate funds without nationalising them. Instead, it decided to make a political gambit whose results are yet to be seen.”

The above conclusion is heavily contested by Ms Marco del Pont, president of the Banco de la Nacion (Argentine’s national bank). She says that there is zero risk of default in spite of the current situation. She is concerned about the value of the bonds and the lack of objective reasons to value bonds and country risks. Although the Banco de la Nacion sold off 1 billion in currency markets to keep the peso from sinking, Ms Marco said that there is no devaluation scenario.

Thus, the pension takeover may not be explained an asset grab, but it may likely end up financing some government spending, including debt.

Some of the holdouts, being holders of defaulted debt and who are suing the Argentine government to recover their claims in full, have frozen pension funds’ assets in New York. The judge deciding on this injunction however, is asking whether these assets will be used to pay pensions. This shows that the holdouts have been too fast, as the Argentine government ordered the private pension funds to begin repatriating their foreign assets ahead of the planned nationalisation. Therefore, the holdouts are yet to freeze these assets as they are not yet governmental assets.

The moment of truth will be in 2009 when Argentina is to meet its debt servicing requirements. Argentina will get the money by issuing paper to the state pensioners’ healthcare provider (PAM), from the public sector deposits in the Banco de la Nacion, and by extending the loans from the Banco de la Nacion (USD 3 billion). Additionally USD 1.5 billion could be obtained from rolling over debt servicing on paper, held by private pension funds and if the calm returns in the international market Argentina hopes to raise an extra USD 3.5 billion from a swap of so-called guaranteed loans. In spite of all of this Argentina will still be USD 7.6 billion short.

Ratings agency Standard & Poor’s has already downgraded its local currency sovereign credit ratings for Argentina from B/B to B-/C, reflecting the heightened concerns about the deteriorating economic and political environment in Argentina and the resulting increased fiscal stress.

What do you think: is Argentina going to make it? We do not think so or somebody will pay the bill. Question is: will it be the holdouts or the pension funds?

Subsequent crisis in Mexico, Asia, Russia and Brazil led to the Argentine economic fall back in 1999, a country, which was just recovering from its radical monetary reforms during the nineties. Argentine’s austerity policy and tax increases did not convince the internal and external investors and doubts rose about Argentine’s ability to pay back its government debts and to sustain the fixed exchange rate between the peso and the dollar.

In 2001 the situation deteriorated even more due to the growth of some bonds, massive redraws at banks and the lack of the consumers and producers trust. Argentina defaulted on about $95 billion in bonds in 2001, the largest default by any nation in history.

The expanding crisis was halted when the former president Eduardo Duhalde negotiated a loan of $20 billion with the IMF. Nevertheless the peso had to be detached from the dollar and only a laborious recovery of the economy was in view. Former President Nestor Kirchner restructured most of that debt in 2005 and repaid a $9.5 billion loan from the International Monetary Fund in 2006 but left the Paris Club debt outstanding, prompting criticism from international lenders.

Last year there was still a $6.3 billion Paris Club debt for Argentina to pay to. So long as Argentina is in arrears to the Paris Club creditors, these Club creditors would not allow their export credit agencies to guarantee any business dealings with companies in Argentina. The necessity to reach a deal was evident and Argentina tapped its foreign currency reserves to pay back the Paris Club creditors.

This was bad news for Argentina’s private sector creditors (such as bondholders) who did not accept the restructuring terms back in 2005. The doctrine of “comparability of treatment” says that similar Paris Club restructuring terms for a country should be demanded by that country from its private sector creditors (in this case Argentina). But this is only a one-way street, because a country’s private sector restructuring terms has no influence on the Paris Club dealings. A “reverse comparability”, as some may call it, has not yet been accepted in the public sector.

In the Argentina case, however, the difference in treatment between public-sector and private-sector creditors is truly extreme. Big official-sector creditors such as the World Bank and the IMF were paid off in full by Argentina. Smaller bilateral creditors are now going to get a good deal at the Paris Club. Most bondholders, by contrast, gave up 70% of their claims on the country, and just a minority of "holdout" bondholders held on to their paper and have so far received nothing at all. Argentina is not eager to deal with these minor creditors as they represent a scattered group, unable to have any impact on Argentina’s financial policies.

We have seen some action from the holdouts. But except from some stunts such as a group of AFTA (American Task Force Argentina) protestors dressed up in blue gowns and demonstrating outside the Waldorf hotel in New York, which did not prove particularly successful, nothing was accomplished. Clearly Argentina's fellow sovereign nations still have more power over recalcitrant debtors than any hedge fund.

The future on any possible pay back on private sector debts looks gloomy. Analysts today are questioning whether Argentina would cut public spending to keep paying investors now it is faced with a shrinking budget due to servicing of the public sector debts. It was even said that investing in Argentina had become more risky and Argentina’s outlooks are already lowered by the rating agencies. They say that paying debts will drain currency from the central bank, which uses its reserves to back the peso and domestically-sold debts.

Nevertheless, Argentina still holds $14,5 billion in cash. Yet $12 billion in bonds is due in 2009 and twice the amount is expiring this year. More cash will be needed if Argentina wishes to solve its debts. Drought and potential strikes in the agricultural business, one of Argentine’s economic pillars, may cause the shrinking of export taxes and other tax income and thus its foreign currency.

To ease uncertainty, Argentina began buying back an unspecified amount of 2008 and 2009 bonds, whose prices had slipped following the government's early August sale of $1.5 billion in debt to its left-leaning ally, Venezuela. The sale to Venezuela of 2015 bonds at an unusually high 15-percent interest rate was interpreted by many as a sign that Argentina may be running short on cash. The current President Cristina Fernandes de Kircher dismisses such comments as proof that the international financial establishement wishes to convince everyone that Argentina is having problems.

The big question is: what does it mean when a country is buying back its bonds prematurely before the due date? Mostly, this means upcoming financial problems. We say it is time to act, before it is too late. The private sector creditors mostly have the disadvantage to be an unorganised group of creditors amongst which individual actions is taken in total ignorance of the public sector debts. Except for those who are eligible for settlement through their own countries public authorities, whilst accepting the public conditions, a private creditor is mostly a lost patient shouting out in the dessert.

Luckily there companies such as East-West Debt that may offer relieve to such creditors.