September 30, 2014
Argentine government, economists, cautious on Paris Club debt talks
Even if an accord is reached, the administration needs to tidy up the whole economy before foreign investment may start flowing, private pundits say
Crisis-ridden Argentina will start in a couple of months talks on the US$9.5 billion it owes to the Paris Club of creditor nations in an effort to lure back investments ahead of next year’s presidential vote but even the government and its supporters as well as its critics warn that even in the case of an agreement, there is much more to be done before the money starts flowing.
The 19-member informal Club of creditors who hold 60 percent of the International Monetary Fund’s voting power has just invited the country to hold talks as from May 26 and French President François Hollande last week told Argentine President Cristina Fernández de Kirchner in Paris that “France wants Argentina to overcome its financial problems” and that Buenos Aires “is managing to do so.”
Argentina halted payments to the Club in 2002 amid its worst meltdown in history, which led it to declare the world’s largest-ever debt default.
Repaying the debts to the Club is part of a wide-encompassing strategy of the Peronist administration to re-insert the nation — a close ally of the beleaguered Venezuelan government — into the international circuit.
That strategy includes a US$5-billion compensation — currently under debate in the Argentine Congress — after the government in 2012 expropriated 51 percent of the Spanish privately-owned Repsol-YPF oil firm, a new “reliable” inflation calculation method introduced in January after years of complaints from the IMF about “massaged” figures, and negotiations with the “holdouts” (or “vulture funds,” as the Argentine government calls them), a minor group of bondholders who rejected the debt rescheduling which the President’s predecessor and husband, the late Néstor Kirchner, forced them to swallow in 2005. Back then Argentina only paid them between 25 and 29 percent of their credits. In late 2001 the government defaulted on US$100 billion and the holdouts are suing the country for US$1.3 billion in a New York court which ruled in their favour.
However, Buenos Aires has appealed the ruling before the US Supreme Court. Compounding the scenario are an inflation estimated by private economists at over 30 percent, utility rates frozen since 2002, and a steep fall in foreign reserves to a seven-year low of US$27.5 billion — only enough for two years of energy imports — from US$52.7 billion in 2011.
Last Monday Moody’s Investors Service further cut Argentina’s government bond rating into junk territory, saying that the drop in Central Bank dollar reserves has raised concern about the country’s ability to pay its debt.
‘No great expectations’
The Paris Club website says that it met for the first time in 1956 at the request of the country, which was concerned about defaulting on its sovereign debt. Buenos Aires attempted repeatedly to resume talks with it. In 2008 the two sides were close to striking a deal but Argentina pulled out at the last minute, concerned about its foreign reserves amid the global crisis. Another attempt was made in 2011.
The Economy Ministry last week issued a statement reading: “The members of the Paris Club have invited us to start formal negotiations toward the end of May. Our proposal seeks to develop investment inflows with the objective of confronting new challenges after a period of 10 years of high and sustained economic growth.”
Paris Club Secretary-General Clotilde L’Angevin was quoted by Reuters as saying: “They discussed this proposal in January and February, asked for clarification and, based on a revised proposal, have invited the government of Argentina to come negotiate an arrears clearance agreement with the Paris Club creditors in May in Paris.”
If an agreement with the Club is crucial for Argentina, the government itself has struck a cautious note.
Economy Minister Axel Kicillof said that the debt negotiation may to take several months, considering that the Club makes decisions by consensus.
The Club’s permanent members are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Russia, Spain, Sweden, Switzerland, the US and the UK.
Argentina owes money to 15 of them. According to Reuters, 30 percent of the US$9.5 billion owed correspond to Germany and 25 percent to Japan.
For his part, Cabinet Chief Jorge Capitanich said that defining the amount of principal and interest owed will be “certainly complex.” He added that the country has huge short-term debt maturities and hinted that payments to the Club could begin in 2016 at the earliest. In 2002 Argentina ceased paying the Club over US$6 billion in commercial debt.
Foreign Minister Héctor Timmerman said that a possible accord with the Club will not have a negative effect on the country’s foreign reserves but rather “a positive effect for the development of Argentina. We will not negotiate on our knees.”
Adding to the cautious choir is Aldo Ferrer — until last year Argentina’s ambassador to France — who has said: “The Paris Club issue is just a minor one, although its is convenient to solve it. But one must not pin too many hopes on it. Even if there is a deal, investments will not be flowing.”
“There is a lot more Argentine money for possible investments than what can be brought from abroad,” Ferrer, of the pro-government Fénix Plan think Tank, told Nacional Rock radio.
“It is not a matter of going out to beg for investments or credits but luring back Argentine money into the circuit. After that, foreign money would flow as a consequence.
“It is one of the government’s huge dilemmas, to manage the scarcity of foreign currency. There is a lot more to do to reincorporate into the system the dollars under the mattress. If the government manages to convey the image that it has the dollar front under control, it would contribute to lower inflation and foreign exchange stability.”
Although some private economists are predicting that the nation could plunge into recession before year’s end, Ferrer said that the economy is fairly solid thanks to the country’s strong grain export income and that no “derailment” of the economy can be foreseen in the short term.
Aldo Abram, the Executive Director of the neo-conservative Libertad y Progreso consultancy, told the Herald: “Argentina should not expect any investment even in the event that it manages to reach an accord. It is not because of the lack of a deal with the Paris Club that investors don’t come. There are too many internal risk factors. With elections due next year this government is already a lame duck. Kirchnerism is ceasing to exist and investors will await until a new government takes office and makes the absolutely necessary changes. The policies of this administration have been absolutely adverse for an investment environment, among them, the foreign exchange restrictions whereby the official dollar rate is about two-thirds of its real value. Who will bring in a dollar to lose 30 percent from the very start.?”
The Paris Club usually demands that debtors strike a deal with the IMF (Chapter 4) before agreeing on any rescheduling. But Kicillof warned that Argentina was not ready to accept any such demand. Kirchner in 2005 used Central Bank reserves to repay the whole debt with the Fund to “free” the country from its control.
Abram said: “The Paris Clubs is dispensing Argentina from the requisite of the previous accord with the IMF simply because the country belongs to the G20 group of nations and it cannot expel it.”
However, he added, it would be not far-fetched to expect both the government and the IMF to agree on a visit of IMF experts to monitor Argentina’s “preliminary” economic figures.
Marcelo Lascano, a private economist and a former member of the Fénix Plan, told the Herald: “Even if there is an accord with the Paris Club, there are many things to be done before investments can start flowing. There is an absolute lack of confidence in the country. It must tidy up the fiscal, monetary and exchange sectors, adopt clear economic rules, ensure legal and judicial security and abide by international accords. It needs to show the world that it has no two-faced speech.”
“I think that Cristina is becoming aware that history is important for the name of her family and descendants. Her administration is suffering the erosion of many years and that plays into the hands of the opposition, but the opposition is almost non-existent. There are still two years to go and she has a good chance to redress policies which have proven unsuccessful, eliminate bureaucracy, create sound institutions and leave behind an orderly, democratic revolution.”