BUENOS AIRES, July 1 (Reuters) - Argentina has moved to clean up lingering damage from its massive 2002 default and lure investors as President Cristina Fernandez works to stoke economic growth ahead of next year’s presidential election.
Fernandez faces rising debt obligations, but will be reluctant to slow spending in the run-up to the election even as inflation quickens to an annual rate estimated at more than 20 percent. [ID:nN14105436]
She won her battle to use billions of dollars in central bank reserves to pay debt after months of chaotic legal and political wrangling earlier this year.
The government last month completed a restructuring a large part of $18.3 billion in defaulted debt aimed at regaining access to global debt markets.
But the euro zone crisis and soaring debt yields complicated Argentina’s plans to issue a new global bond after the exchange of bonds and cash for defaulted sovereign debt.
Here are some of the issues investors are watching:
The government secured a 67 percent acceptance rate in the swap, but Argentina will continue to face legal challenges from investors holding some $4 billion in defaulted debt who did not take part in the exchange. [ID:nN24156323]
Economy Minister Amado Boudou said the country has now successfully restructured 92 percent of the country’s total non-performing debt and has “closed a chapter” on the default.
Lawsuits from “holdout” creditors have prevented Argentina from tapping international debt markets and could continue to pose difficulties.
Heightened investor risk aversion in recent months meant the government was unable to issue a $1 billion bond in conjunction with the exchange as planned.
The government sought to sell new debt paying single-digit rates, but yields remain high because of investor concerns about Europe’s debt crisis and Fernandez’s unorthodox economic policies.
Without access to credit markets, Fernandez has used financing from the country’s state-run pensions agency and other government agencies along with central bank foreign currency reserves. [ID:nN13268404]
What to watch:
-- Impact of swap outcome on debt yields and whether they fall low enough to encourage a new bond sale. Much of this depends on impact of European crisis on risk aversion.
-- Whether several provinces and some Argentine businesses issue new bonds in the coming months.
-- Fresh lawsuits by bondholders who refused to accept the offer and reaction of courts.
-- A possible second debt swap to extend maturities coming due in run-up to the October 2011 presidential election.
Argentina faces debt obligations of at least $13 billion in 2010, most of which come due in the second half of the year, but economic analysts say use of central bank funds means the government can manage without new bond sales. [ID:nN13268404]
Tax revenue is picking up quickly following last year’s slowdown, growing at rates of about 30 percent in recent months year-on-year, but public spending is also growing rapidly and is unlikely to ease as next year’s election draws closer.
Fernandez has introduced new welfare measures, including a child benefit payment, that play well among her support base in the poor suburbs that circle Buenos Aires.
Rising debt payments mean the government could see a deepening of the fiscal deficit, which reached $1.8 billion last year.
What to watch:
-- Deepening of fiscal deficit as debt payments come due.
-- Creative government accounting as way to maintain the primary budget surplus, which measures public accounts before debt payments and which shrank 23 percent year-on-year in the first quarter.
-- Further depreciation of the peso ARSB=, which would raise income by boosting revenues from export taxes and boost central bank profit, most of which comes from currency gains, but would also fuel rising consumer prices.
Inflation has surged during the last six months 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]
Private forecasts have registered a slight slowdown in consumer price rises in recent weeks, according to local media, but political analysts say inflation remains the government’s Achilles heel as it tries to bolster its support.
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:
-- Any sudden price surges that could hit the 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 federation as some labor unions call for a second annual wage adjustment.
-- An increase in strikes could impede industry and exports in certain sectors, such as the agricultural sector.
-- Depreciation of the peso, which would raises the cost of imported goods. Some industry leaders are calling for a weaker currency amid soaring pay claims. [ID:nN22211064]
-- Fresh government income-boosting measures that could prove inflationary.
Fernandez lost control of both houses of Congress in last year’s mid-term election. However, the opposition has failed so far to form a united front against the government, allowing the president’s congressional allies to block several key votes by preventing the required quorum.
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.
Fernandez’s approval ratings hovered around 20 percent after last year’s mid-term poll defeat, but a brisk economic recovery has lifted her popularity by as much as 10 percentage points in recent months, pollsters say. [ID:nN04144810]
What to watch for:
-- Signs of sustained rebound in the government’s popularity would boost former President Nestor Kirchner’s chances of returning to the presidency in the 2011 election.
-- The emerging field of candidates for the vote and signs of front-runners for a primary race in Fernandez’s fractured Peronist party. [ID:nN05577111]
-- Any clear opposition alliances or anger over inflation that could halt recovery in support for government.
Additional reporting by Kevin Gray, Editing by Frances Kerry