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International market conditions
deteriorate further.
Lingering concerns in domestic and international markets about the
government’s economic agenda continued to maintain interest rates at
highs throughout July. Rates are now at levels that indicate a severe
lack of confidence in the government’s creditworthiness. In fact, the
three major rating agencies downgraded Argentina’s foreign currency
rating in July, with Moody’s lowering twice to bring the Argentine
rating to just a notch above Ecuador’s, which defaulted on international
obligations two years ago. As a result, the cost of borrowing in
international markets has risen to prohibitively high levels – the
spread on Argentina’s benchmark sovereign bond (FRB) rose 1,544 basis
points to 2,847 basis points over the comparable US Treasury bond from
the end of June to the end of July. The FRB recovered lost territory at
the beginning of August dropping to 1,919 basis points on 10 August amid
hopes for additional help from the International Monetary Fund (IMF).
Domestic confidence undermined.
On the domestic front, the persistence of market volatility and the
increased lack of confidence in the sustainability of the current
currency regime prompted Argentines to withdraw their savings from the
banking system. Total deposits in the financial system declined by 7.3%
in July over June. As a result, total deposits have dropped 12.8% from
the beginning of the current crisis with the Machinea resignation in
March, while Peso denominated deposits were down 21.1%. Interest rates
on Peso denominated 30-59 day deposits rose by 946 basis points in July
over June and the spread of Peso to US$ denominated deposits for the
same maturity widened from 246 to 1,014 basis points. International
reserves declined a whopping 19.4% to US$ 18.3 billion.
Default concerns mount.
The prohibitively high borrowing conditions have raised fears about the
possibility of a debt default. These fears are fuelled by ever lower
tax revenues as the economy continues its slide. According to the
government, tax revenues declined 8.7% in July over the same month last
year. The July result was below market expectations and would have come
in even lower (-15.3%) if not for the additional revenue boost provided
by the 0.6% financial transactions tax adopted in April of this year.
Even though the government has secured financing through the end of
2001, a hostile international environment and the lower tax receipts
resulting from meagre economic activity will force the government to
rely on domestic markets or the IMF to finance its short-term liquidity
needs and roll over existing debt. The current market conditions,
however, render even domestic financing options very costly, if not
prohibitive. As a result, the government announced a drastic ‘zero
deficit’ fiscal policy for the second half this year, which institutes
an automatic mechanism to adjust the federal government’s primary
spending to actual monthly fiscal revenue inflows. According to the new
fiscal plan, the government will monitor monthly tax revenue inflows to
determine the need for cuts or room for spending increases. Current
primary spending cuts are targeted principally on public sector wages
and pensions, which have been slashed by 13% this month. The
implementation of the new law, which was approved by the Senate on 30
July, is expected to lower spending by US$ 1.4 billion this year and by
over US$ 4.2 billion in 2002. However, participants have maintained
this year’s fiscal deficit forecast but adjusted downward the deficit
for next year.
To address domestic debt servicing concerns and the
roll-over of existing debt, the government has announced plans to
negotiate a domestic debt swap to exchange short-term securities for
longer-term bonds and hopes to reach an agreement with domestic
institutional investors to purchase government obligations. However
market concerns persist. A survey of 30 emerging markets debt analysts
conducted by Reuters from 3 to 8 August indicates that a 45% probability
exists that Argentina will default on its debt this year. The figure
drops to 44% for the first half of next year and to 38% for the second
half of next year. Of the participants, only 45% believe that the
government will successfully implement its ‘zero deficit’ plan.
IMF may advance payment.
Currently, Argentina still has sufficient liquidity resources, which are
estimated to exceed US$ 17.3 billion, in the form of liquidity
requirements at the Central Bank, a contingent repurchase facility with
international banks and additional liquidity requirements in New York.
The IMF has nevertheless said that it intends to advance the September
US$ 1.2 billion loan payment in an effort to provide the government with
increased liquidity to address current resource scarcity. Moreover,
government officials hope to secure an additional US$ 6-9 billion loan (the
current IMF programme is a three-year, US$ 14 billion agreement) to
cover the government’s debt servicing needs through the end of the year
and further boost the financial system and international reserve levels.
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