September 2, 2008 / 4:01 PM / 11 years ago

UPDATE 4-Argentina surprises with Paris Club debt plan

(Adds central bank president’s comment on reserves)

By Hilary Burke

BUENOS AIRES, Sept 2 (Reuters) - Argentina surprised investors on Tuesday by vowing to tap foreign reserves to repay its defaulted debt to foreign governments grouped together in the Paris Club, a move that pleased local business leaders but fanned concerns about the country’s finances.

President Cristina Fernandez said the government will use central bank reserves to pay the Paris Club $6.7 billion in debt in default since a 2001-2002 economic crisis.

Fernandez said 87 percent of the debt owed to the Paris Club of creditor nations is held by Japan, Germany, the Netherlands, Italy, Spain and the United States.

“I have signed a decree today instructing the economy minister to use available central bank reserves to pay off the Paris Club debt,” Fernandez said in a live televised speech, which was met with a standing ovation from industrial-sector executives.

“This reaffirms once again Argentina’s willingness to pay its international obligations,” she added.

The announcement comes as many economists question Argentina’s ability to meet growing financing needs next year, given high public spending. The announcement came after the government sold bonds maturing in 2015 to ally Venezuela at a yield of nearly 15 percent in recent weeks.

Argentina’s central bank has about $47 billion in foreign currency reserves, but the center-left government had previously refused to use these funds to pay off the debt.

Officials at the Paris Club in the French capital said they did not want to comment immediately on the announcement.

“It’s positive in that it shows a willingness to pay, to get rid of a problem, and because of the possibility that it could open up financing at better interest rates for Argentine companies,” said Christian Reos, an analyst at Allaria Ledesma brokerage in Buenos Aires.

“But the negative side is that this problem is not resolved in a friendly way. They are slamming the door, without negotiating,” he said.

Fernandez’s husband and predecessor, former President Nestor Kirchner, used central bank reserves to pay off the country’s nearly $10 billion debt to the International Monetary Fund in January 2006.

Under Paris Club rules, Argentina had to have a loan program with the IMF to reach a negotiated accord to restructure the debt in default.

But Kirchner said there was “no way in hell” Argentina would subject itself to the IMF’s conditional loans again, and Fernandez upheld his hard-line stance.

Unlike other IMF members, Argentina has refused to undergo annual economic reviews by the IMF, with the last one conducted in June 2006. Such reviews are customarily carried out in each of the fund’s 185 member countries, including countries like the United States, which have no loans from the Fund.

PROS & CONS

Fernandez announced the debt repayment to the Paris Club as part of a series of measures for local industry, whose access to credit overseas had been limited by the unresolved Paris Club debt. The payment is seen clearing the way for European companies to invest more in Argentine projects.

Opposition party the Civic Coalition criticized the payment plan as being too late in coming and poorly carried out. “This shows the government’s weakness in the sense it ends up paying in cash and with central bank reserves ... and not, as one would have liked, with funds from capital markets.”

Central Bank President Martin Redrado said the country’s foreign reserves would remain “above an optimal level” after the payment had been made.

Local markets reacted in a mixed manner to the news.

Stocks .MERV in Buenos Aires initially turned positive but ended up closing down 1.17 percent on lower oil prices. The Argentine peso ARSB= weakened against the dollar, and bonds changing hands in over-the-counter trade rose modestly in price.

Barclays Capital said in a research note that the move signaled a needed shift in approach to economic policy and financial markets.

But, it said, “the cash payment is a costly choice since it is unlikely to lower the elevated risk premium that the country will face to roll over short-dated debt and, as a result, to provide much relief for next year’s financing needs.”

The Economy Ministry estimates the country’s financing needs will double next year to nearly $12 billion.

But the country cannot issue debt under international legislation, due to lawsuits from private “holdout” creditors who rejected the government’s 2005 restructuring of some $100 billion in bonds, on which Argentina also defaulted in 2002.

Government officials reiterated last week that they have no plans to reopen the debt swap for the “holdouts”.

“Although the actions taken are positive, they are not part of or presented as part of an overall strategy. It would be better if they shared with us what that means. What does it mean for holdouts, spending, fiscal and debt management of the country?” said Benito Berber, Latin American strategist at RBS in Stamford, Connecticut. (Additional reporting by Kevin Gray and Karina Grazina in Buenos Aires, Daniel Bases and Manuela Badawy in New York and Tamora Vidaillet in Paris; Editing by Leslie Adler)

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