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Looking for deeper measures to be adopted
La Nacion
September 04, 2008

The support of the financial sector was timid, which now plans to find out if the government will move ahead with the fight against inflation

by Martin Kanenguiser

The unexpected announcement by President Cristina Kirchner on the payment of the debt with the Paris Club provoked at least some expressions of timid optimism among analysts and financial investors, who suspected that the government took this unilateral decision only to evade an integral and sincere fight against inflation.

Consulted by LA NACION, sources from the market didn't shake their astonishment over the sloppy start to this new exit from default, that to put it together would require a definitive conciliation of numbers with the creditors (despite that the President already gave her numbers) and that it will be done in secret in a few weeks to avoid embargo by the bondholders that didn't accept the swap of 2005.

"If the signal is that they don't want to negotiate, then it won't work. But in any case it's an official decision that at any time is positive," said an important source from one of the creditor countries. Elliptically, he made it understood that yesterday's gesture seemed too much like the payment of the debt with the International Monetary Fund (IMF) in 2005, while that gesture could have been justified for the political weight of the multilateral organization over local economic decisions.

In the case of the Paris Club, additionally, it's confusing because the government isn't paying only with cash the US$4.5 billion that already matured since the default of 2001, leaving to the future the compliance of the remaining US$2 billion that would have to be paid between this year and the next.

This option, official and private sources admit, neither would require the audit from the IMF that the Kirchners wanted to avoid.

Thus, while some analysts valued that the government showed the "will to pay", on the other side they believe that they'll be without US$6.7 billion that could be crucial to avoid a default next year if the voluntary debt markets remain closed for the country.

For this reason and because financial investors are even more convinced that the government won't do anything to recover the credibility of INDEC the credit default swaps lowered only from 780 to 775 basis points and remain the highest in the region. "There wasn't a single purchase order for Argentine bonds after the President's announcement, nor from the AFJP," lamented the executive.

In that respect, the chief economist of the Citadel Investment Group, Michael Gavin, said that "from the point of view of those
deciding policy, the announcement makes sense, but as a debt investor, to pay this sum raises doubts with respect to the pending items for re-establishing confidence in the markets."

"In every way, I don't believe that the investors are disillusioned, but they will hope for more about inflation and the INDEC," he said.

In this sense, the sovereign risk analyst for Moody's Gabriel Torres said that the announcement was considered "moderately positive, because the government is resolving a problem that has been dragging on for a while; it's not going to have any impact on the rating, but we will attentively follow future decisions."

For his part, analyst Alberto Bernal-Leon admitted from New York that the market "didn't expect this, as the government managed to stick to its goal of surprising everyone, but at the same time it runs the risk of suffering an embargo because, different from the IMF, in this case there are no precedents." And he thinks that U.S. Judge Thomas Griesa, who is in charge of the majority of the law suits against Argentine in Manhattan's courts, "must give the bondholders an opportunity" who also are suing for their unpaid debts since the end of 2001.

Bondholders waiting

Bernal said that "in logical terms, it could be that soon after this arrangement some announcement comes for the holdouts," a possibility that the government rejects in public despite analyzing it in secret.

Before leaving his office, the analyst clarified that the solution to the problem with the Paris Club "will open the door for projects from private banks, but the voluntary market will continue to be closed to Argentina."

As such, sources from a group of private creditors ready to arrive at an accord with the government indicated that "if this announcement is seen as a step toward returning to normality, soon after the rise in tariffs and before the INDEC, it could be a move closer to the market." If, on the contrary, it's only seen as a demonstration that there isn't money to pay for dubious projects like the bullet train, it will quickly deflate hopes, they said.