BUENOS AIRES May 21 Argentina is trying to clean up lingering damage from its massive 2002 default and woo back investors so it can sell debt on global markets and ease a financing crunch.
President Cristina Fernandez faces rising debt obligations, but she will be reluctant to slow spending in the run-up to the 2011 presidential election even as inflation quickens.
She won her battle to use billions of dollars in central bank reserves to pay debt after months of chaotic legal and political wrangling.
Attention has now shifted to the government's offer to swap defaulted bonds and what else Fernandez might do as she seeks to patch up frayed ties with the country's creditors.
Here are some of the issues investors are watching:
The government has opened a swap to mop up as much as $18.3 billion in defaulted debt, but the acceptance rate was a lower-than-expected 46 percent after the first phase amid global market turmoil. [ID:nN20146532]
A high rate of acceptance is crucial if Latin America's No. 3 economy is to return to global credit markets for the first time in eight years.
If well over 60 percent of investors participate it could reduce the risk of lawsuits by holders of defaulted bonds and reduce Argentina's cost of borrowing.
Economy Minister Amado Boudou has said the swap should allow Argentina to issue bonds paying a single-digit coupon, although turbulence in global markets and investor concern over Fernandez's unorthodox economic policies might mean yields stay above 10 percent.
A decision not to issue a new bond could exacerbate a financing crunch, forcing the government to borrow even more from state agencies and cream off more central bank profits, but it might encourage it to patch up ties with the International Monetary Fund and settle its Paris Club debt. What to watch:
-- Rate of acceptance by bondholders. Markets will see any rate of less than 60 percent as disappointing. The swap is expected to close June 7 and the acceptance rate among retail investors will be key.
-- Impact of swap outcome on debt yields and whether they fall low enough to encourage a new bond sale. Global market turbulence could hinder Argentina's plans.
-- Threats of legal action by bondholders who refuse to accept the offer.
Argentina faces debt obligations of about $15 billion in 2010, most of which come due in the second half of the year.
Without new financing the government could see a deepening of the fiscal deficit, which reached $1.8 billion last year, and could force the government to find ever more creative ways to maintain the primary budget surplus, which measures how much money the government has to make debt payments.
After a lengthy political battle earlier this eyar, the courts have allowed Fernandez to tap billions of dollars in foreign currency reserves to pay debt.
Tax revenue is picking up quickly following last year's slowdown, but public spending is growing even faster and is unlikely to ease as next year's election draws closer.
What to watch:
-- Deepening of fiscal deficit as debt payments come due.
-- Further depreciation of the peso ARSB=, which would raise income by boosting revenues from export taxes and boost central bank profits, most of which come from currency gains, but it would also fuel rising consumer prices.
Fernandez lost control of both houses of Congress in last year's mid-term election, making it harder to push measures through Congress.
However, the opposition has failed so far to form a united front against the government, allowing Fernandez's congressional allies to block several key votes by refusing to take their seats and by forging alliances.
Opposition deputies and senators have used the same tactic to avert impending defeat, deepening the gridlock in Congress and heightening political tensions in the country as potential candidates for the presidential election jostle for position.
What to watch:
-- Increased use of presidential decrees as a way to rule, which would likely fuel political tensions and increase the involvement of the courts.
-- Any progress on center-left's proposal to tighten controls on banks by imposing lending quotas and maximum interest rates for small businesses and limiting market share.
Inflation is accelerating as the economy rebounds from last year's sharp slowdown and private forecasts put the annual rate at between 20 percent and 30 percent, still far above official estimates and fueling hefty pay demands. [ID:nN22211064]
Brisk public spending is not expected to slow, stoking inflation, and the use of central bank reserves would also increase the money supply. [ID:nN05206411]
Controversy over consumer price data continues despite Boudou's vows to restore credibility to the figures.
What to watch:
-- Government income-boosting measures that could prove inflationary.
-- Any sudden surges that could hit poor and spark unrest or an upswing in labor and social protests.
-- Public sector wage claims and any signs the government is at odds with the powerful CGT umbrella union. An increase in strikes could impede industry and exports in certain sectors.
-- Gap between official price data and private surveys.
-- Depreciation of the peso, which would raises the cost of imported goods. (Editing by Kieran Murray)