This 2005 Article IV Consultation highlights that Argentina’s economy has rebounded strongly from the financial crisis in late 2001. Reflecting buoyant domestic demand, real GDP grew close to 9 percent in both 2003 and 2004, bringing real output level back to the peak level achieved prior to the crisis. Growth has continued in the first quarter, and consumer and business confidence indicators remain at high levels. Inflation, however, has accelerated amid rising demand, increased capacity constraints, growing wage pressures, and monetary accommodation.


This 2005 Article IV Consultation highlights that Argentina’s economy has rebounded strongly from the financial crisis in late 2001. Reflecting buoyant domestic demand, real GDP grew close to 9 percent in both 2003 and 2004, bringing real output level back to the peak level achieved prior to the crisis. Growth has continued in the first quarter, and consumer and business confidence indicators remain at high levels. Inflation, however, has accelerated amid rising demand, increased capacity constraints, growing wage pressures, and monetary accommodation.

  • 1. My authorities are grateful to the staff and management for the comprehensive and detailed discussions on the recent developments and outlook for the Argentine economy. They expect that this Art. IV Consultation will help to find a common ground on which constructive negotiations on a new Stand-By Arrangement could be soon started.

  • 2. Before addressing some specific points of the staff report, it is worthwhile to consider where the Argentine economy stands today vis-à-vis the peak of the crisis in April 2002. In the first place, during these three years real GDP grew by 28 percent with industrial production increasing 50 percent, which points to the re-industrialization process Argentina is undergoing. All demand components have contributed to this exceptional performance. The revamping of consumption played an important role in the wake of a strong recuperation of employment and a gradual increase in real wages. Today, GDP stands at a level similar to the record reached in the second semester of 1998.

  • 3. Another key variable has been investment, which, at 21 percent of GDP in current prices, has reached a historical record in the fourth quarter of 2004. In the external front, exports are also at a historical record growing at 20 percent annual rate while industrial goods exports are showing an annual growth rate of 43 percent. The whole process of strengthened economic activity has taken place while the fiscal front was subjected to a sharp and unprecedented adjustment with a consolidated primary surplus reaching over 5 percent of GDP in 2004. Inflation, in turn, has been subdue and, even after the recent spur, it is still within the band projected for this year. The exchange rate is at a competitive level and the business and banking community has welcomed the government policy of avoiding sharp nominal movements. Finally, and as a result of all these policies, 2.5 million new jobs have been created during this period, more than 80 percent of which were created by the private sector, in particular by small- and medium-size enterprises. This has led, in turn, to a substantial reduction in poverty, which is nonetheless hovering the 40 percent level, thus signaling the magnitude of the job that still lies ahead.

  • 4. Having stated these facts and before addressing the policy issues, I would like to raise some specific points on the report. The staff report alludes several times to the need to transform the recovery into sustainable growth and poverty reduction in the medium-term. Whereas we fully agree with these goals, it is important to highlight that the aforementioned “recovery”, that took place in a context of lack of external financing, substantial net repayments to the IFIs and a significant build up in international reserves, has already proven to be more than just a “recovery”. Indeed, from the “Indian summer” of the second half of 2002 until today, skeptical pundits have abounded and a few have even dared to call it “a dead-cat jump”. However, facts indicate that within twelve consecutive quarters of record fiscal performance, both at the central government and provincial government level, Argentina has featured exceptional growth rates and has reached already the peak level of real growth observed during the 90’s, at a time, it is only fair to remember, when the economy was artificially sustained by external flows. In short, the dead-cat has jumped at his highest level ever and remains comfortably there and we do not believe this is a miracle or just the result of the influence of external positive factors. It is possibly the best indicator that the government has been doing things well despite the staff’s lack of understanding for the government’s policy actions and difficulties in fully accomplishing some of the structural reforms envisaged in the latest arrangement with the Fund.

  • 5. In this regard, it is important to recall that the starting date of the recovery in confidence and growth was mid-2002 and not early 2003, as mentioned in paragraph 3 of the report. Thus we are finishing the third year of continued expansion. In addition, paragraph 4 makes a fair description of the diverse factors that supported such an expansion including political stability and sound macroeconomic policies. It also adds the favorable external environment as reflected by the improvement in the terms of trade and the robust economic activity in Brazil, one of Argentina’s main trading partner. Regarding the improvement in the terms of trade, this has been the case only during 2003, since during 2004 this impact has been slightly negative rather than positive and the projected impact for the current year is substantially negative. As to the impact of Brazil’s growth, the facts are that only during 2004 growth has picked up in Brazil while Argentina has been growing, as we have said, since mid-2002. Moreover, Argentina is holding a significant trade deficit with Brazil which in terms of macroeconomic consequences means that Argentina’s high growth is contributing to that of Brazil.

  • 6. In the same vein, I would like to take issue with the assertion contained in the heading of paragraph 6. It is there stated that the “recovery” has also been helped by “net financial support from the international community”. This is a seriously misleading assertion. Of course, while Argentina remained in default private creditors were forced by the circumstances to provide net financial support to Argentina and the same could be said as regards bilateral creditors. However, multilateral creditors have quite a different story to tell. As stated above, the sustained expansion of economic activity in Argentina took place while substantial net repayments to the IFIs was being done. These net repayments started from the beginning of the crisis and not just after the “failure to complete the third review of the three-year Stand-By Arrangement” in mid-2004 as stated by the staff in the same paragraph. Incidentally, it was not a “failure” but a decision of the Argentine government, in consultation with management and staff, to postpone that review for the reasons by all known. Thus, if we are going to measure the effort that Argentina has made to honor the “de facto” privileged creditor status of the IFIs after its most serious crisis in contemporary history, the meaningful figures should not be the ones reported in paragraph 6 but the following: from the beginning of the crisis in January 2002 up to date, Argentina has made net principal payments to the Fund of SDR 3 billion (about US$ 4.4 billion) and paid charges of SDR 1.4 billion (about US$ 2.1 billion), adding to total net payments to the Fund of SDR 4.4 billion (around US$ 6.5 billion). For the same period, net debt payments to all the IFIs amounted to more than US$ 12 billion.

  • 7. Paragraph 7 on political developments rightly links the high popularity ratings of President Kirchner with his willingness to take a tough line vis-à-vis multilateral institutions and the utility concessions. It is not right, however, when in the paragraph the same association is made with the attitude towards foreign investors and the debt exchange. Regarding foreign investors, President Kirchner and Minister Lavagna has repeatedly stated their desire to create a favorable climate for investment in general and for foreign investment in particular, a desire that has been followed by concrete commitments on the part of several foreign companies. In the second place, we do not believe to have taken a “tough line” with respect to the debt restructuring process but rather a “realistic and focused” approach since this was the only way to complete such a difficult task. Beyond this, it should be recalled that the restructuring was not aimed only at foreign creditors since a substantial part of that debt was held by Argentine nationals themselves, much of it through private pension funds.

  • 8. As to the popularity gained with the treatment to privatized utilities, the staff report fails to draw the proper conclusions by leaving the impression that this is the way the Argentine government will deal with foreign capital in general. The approach towards privatized utilities should not be construed as animosity towards foreign capital. It is, rather, a reaction against the perceived bias framework that these companies, in connivance with the government of the 90s, applied to the Argentine people. A more balanced view than the one presented by the staff regarding the renegotiation of contracts with privatized companies should also mention utility companies’ underperformance in terms of investment, their over-indebtedness (related to generous dividend policies), as well as inherited unsound regulations, which among other contentious elements established US dollar-denominated utility rates, indexed to the U.S. inflation, an unwarranted benefit which companies seek to preserve even after a currency devaluation of more than 50 percent. The staff report also expresses the concern that some of these companies are leaving the country, as if they were the innocent victims of an unruly government, with the logical consequences of affecting the investment climate and growth prospects. This is a distorted picture of what is going on. Moreover, the more significant fact is not that a few companies have decided to abandon the country but that so many of them, despite all the difficulties, have decided to stay. In fact, many of the companies that left the country, did so as part of a regional strategy. As to the rest of paragraph 7, starting with the second sentence, it could be disposed of and no relevant information would be lost. As it stands, it fails to give an accurate account of the complexity of the present-day political developments in Argentina and it risks creating confusion if it remains in the paper. Also, considering the ambiguity of the first sentence, the whole of paragraph 7 could be eliminated from the paper.

  • 9. Moving now to the discussion of recent macroeconomic developments, the staff report raises three issues, the need to increase the primary surplus above the level projected in the budget for the current year, the need to contain inflationary pressures and the need to support a continued high volume growth of exports to sustain growth. Whereas these are sensible points raised by the staff my authorities have reservations with some of the rationale presented in the report to support them.

  • 10. On the level of the primary surplus, the staff argues for a considerable higher level than that proposed by the authorities not only for this year but also for the long-term. In the short-run, the staff’s position is supported by the need to avoid the procyclical impact of a looser fiscal stance vis-à-vis the one prevalent in 2004, and, in the long-run, so as to allow for a softening of the financing needs in a context where Fund financing is non-existent. Regarding the current year, is worth noting that notwithstanding the budgeted primary surplus level and the fact that this is an electoral year, the primary surplus obtained so far remains comparable to the one observed during the exceptional overperformance of 2004 which, as Argentina’s economy moves into more moderate rates of growth, should not be used as a yardstick to measure this year’s fiscal performance. During the first five months of the year the primary surplus reached already 60 percent of the budgeted amount for the year as a whole. Thus, for all practical purposes the staff’s warning as to the risks entailed by the budgeted fiscal stance has been so far fully avoided. If the staff wishes to make a meaningful comparison between the fiscal policy stance between 2004 and 2005, the actual fiscal performance of 2004 should have been compared with the one that is taking place so far, and not with that that is being budgeted.

  • 11. Regarding the long-term consequences of a primary surplus lower than the one suggested by the staff, we will comment further below when analyzing the DSA exercise. We will only note here the apparent inconsistency of staff’s advice that at the same time that calls for a permanently high primary surplus, demands the elimination of the so-called distortive taxes (that provide for some 4 percent of GDP in fiscal revenue) and the approval of a new revenue sharing law that would, as we will explain further on, necessarily reduce the central government’s stake in the overall fiscal revenue. It should also be noted that the Argentine tax rates are in general already at a relatively high level and that the notable improvements in fiscal administration will sooner or later find their natural limits. On the spending side, the staff suggest “a prioritization of capital spending” as a way to secure significant savings. It is indeed surprising that after the heightened conscience on the importance of infrastructure investment to consolidate growth, as exemplified by the many pilot projects on the preferential treatment that should be given to this type of expenditure, yet the staff did not hesitate to recommend in paragraph 20 of the report the same old policy advice that has led many emerging countries to the deplorable state in their countries’ infrastructure with serious negative consequences for growth. As an example, for the vast majority of agricultural firms, the efficiency loses due to poor infrastructure are higher than the impact of the export tax. On the whole, and in order to keep perspective we would like to point out that the overall public balance has been in permanent surplus since 2003, reaching 3.7 percent of GDP in 2004 and projected to be (under the authorities scenarios) 1.3%, 1.8% and 1.9% in 2005, 2006 and 2007 respectively.

  • 12. On the need to contain inflationary pressures, my authorities are fully committed to that goal and have taken the necessary fiscal and monetary measures conducive to that end. As repeatedly mentioned to the IMF mission, further tightening policies will be taken if needed to keep inflation in line with the target. Thus, acknowledging the presence of pressures on the general price level and not just transitory seasonal factors and changes in relative prices. My authorities are surprised that paragraph 21 gives a different impression on both accounts. On the fiscal front, we have already mentioned the exceptionally large primary surplus. On the monetary front, the Central Bank authorities have undertaken a forceful sterilization of the monetary consequences stemming from their policy to replenish Central Bank’s reserves. Sterilized interventions in the context of temporarily heightened inflation expectations have pushed up the interest rates of the 90-day bills issued by the Central Bank which have raised from 3.5 early this year to 6.2 in the latest public offering. Thus, the argument in the staff report that the acquisitions by the Central Bank of US dollars at the local foreign exchange market run the risk of excessively increasing money supply should be countered by the impact of the sterilization policy that is taking place. In addition to its sterilization policy, the Central Bank has increased its benchmark rate for short-term loans to the banks several times so far. Another important instrument to contract money supply has been the program offering incentives to banks to make anticipated cancellations of the rediscounts that were granted at the height of the crisis, which are carrying relatively high interest rates.

  • 13. The increase in money demand derived from the larger than expected growth of economic activity should also be factored in at the moment of assessing the risk of persistent monetary pressures. In this regard, the rise in the money multiplier is a welcome development to the extent that it comes associated with a revitalization of bank credit, a necessary condition to support investment and economic activity in general, particularly for the very large number of small and medium sized companies working in Argentina, particularly when the ratio of credit to GDP has fallen sharply after the crisis and is now only at 9 percent, compared to 23 percent during the late 1990s. Finally, regarding the dampening effect on growth of administrative controls and moral suasion alluded by the staff as an inappropriate means of containing inflationary pressures, is worth explaining that these encompass only a limited subset of goods pertaining to low-income consumption baskets for each category while the majority of goods remain fully free.

  • 14. Regarding the need to support a high volume of exports to sustain growth, it is a welcome development that export volumes in general and manufactured goods in particular are growing steadily, thus the government strategy of maintaining a competitive foreign exchange rate appears to be working. It is a well known fact that adjustments of exchange rates and the changes in relative prices entailed take time to produce the transformation of the productive structure necessary to generate more exports. In addition, the staff report asserts that export taxes are damaging the export performance without providing any supporting evidence. Export taxes not only contain the increase in prices of basic consumer products but they also provide the revenue to finance the social programs that were and still are much necessary to address the social consequences of the crisis.

  • 15. My authorities agree with the staff that the key variable to ensure a continued strength of exports over the medium-term is through the increase in productivity and in the efficiency of the economy. Thus, they are fully committed to create a favorable investment climate through market confidence in their sound macroeconomic and structural policies. The latter notwithstanding, my authorities are of the view that an appreciated currency, as experience during the 90s, will eventually become an insurmountable hindrance towards sustainable growth, hence they are bent to avoid this to happen again. Argentina has paid a high cost in the recent past in terms of employment and growth for neglecting the importance of the appropriate value of its currency. In any event, the present nominal value of the currency, which has found a widespread acceptance, particularly among the banking and businesses communities, represents a real appreciation rate for the peso of 16 percent vis a vis the US dollar, since early 2003. Incidentally, Box 2 suggests that the increase in the unemployment rate in Argentina was related to the higher labor market participation rate of women. This explanation hides more than it reveals the real factors at work. The unemployment in the 90s was generated in fact by the economic model in place, fully in line with the Washington Consensus. If more women wanted to work was out of the sheer need to support their unemployed husbands. This increase in female labor market participation can never be identified as a major explanation for an increase of 12 percentage points in the unemployment rate, as the one experienced between 1992 and 2001.

  • 16. On the structural front three issues are highlighted in the staff report: the intergovernmental fiscal relations, the soundness of the banking system, and the renegotiation of contracts with privatized utilities. Regarding intergovernmental fiscal relations the staff makes the point that whereas the post-crisis fiscal stance was disciplined, this has only occurred in a context of a lack of available financing. Thus, were the financing constraints to disappear, fiscal discipline would no longer be assured unless institutional changes were introduced. We find this to be an unfair remark. Firstly because it gives no credit to the authorities’ efforts to discipline provincial financial administration; efforts that have, as the staff should have said it, resulted in substantial provincial savings for the first time in decades. Secondly and beyond the authorities’ willingness to administrate fiscal resources with austerity, we feel that the staff makes no justice to the recently approved Fiscal Responsibility Law. This law may not be as un-realistically strict as wished by staff but it contains key improvements in relation with the past when no specific rules existed, except for the temporary arrangements of the post-crisis years through the orderly financing programs. More importantly, both the federal and the provincial level of government have a clear track record in slashing down the presently high levels of indebtedness and to avoid market financing of the budget..

  • 17. The federal organization of government in Argentina makes it very difficult to introduce policies that may be perceived as infringing on the provinces’ independence. The present FRL establishes clear limits to current spending and debt accumulation while increasing transparency. It is the best agreement under the present circumstances; it has already been ratified by 18 of the 24 provinces, representing more than 80 percent of total provincial spending and there is no political nor constitutional space left to attempt a comprehensive reform as requested by the staff. In the same vein, the staff’s suggested reforms of the current intergovernmental tax revenue sharing system do not have much of a chance of been agreed upon shortly, as proved by the failure of the government attempts to reform the coparticipation law during 2004 as well as in many other occasions. Moreover, the streamlining of the current revenue sharing system, despite its positive aspects, would have in the short run some serious shortcomings. In the current circumstances, a new coparticipation law can only be the result of a revenue loss by the Central Government. This, of course, is totally at odds with the need for the central government to sustain a high fiscal primary surplus in the coming years.

  • 18. Another important area of structural policy raised by the paper is the soundness of the banking system including with regard to the strengthening of its capital base and the strategic role of the public banks which obtained after the crisis a larger participation, in relation to the pre-crisis period. This has been the result of the decisions of individual banks’ customers that naturally found, at a time of crisis, that public banks offered a safer place to keep their savings. It has nothing to do with administrative decisions of the public sector to take over private banks. In this regard, it is important to clarify the statement in paragraph 33: “the share of the banking system in the hands of the state has increased sharply”. In fact, since 2002 public banks have only increased their share in total deposits marginally, mainly explained by a strong increase in public deposits. Moreover, since December 2003 to March 2005, the share of public banks in total deposits decreased from 47 percent to 46 percent, while deposits of the public sector in these banks increased by 11 percentage points. As to the strategic role for public banks my authorities believe that the financial system should operate in the service of sustainable, stable and equitable economic development. In this vein, we believe that public banks have an important role to play in particular to reach areas of the country and segments of the population and of the business community that private banks are not naturally inclined to reach. My authorities are committed to fulfill these tasks in a manner that does not resign efficiency nor profitability for the public banks while keeping a close regulatory oversight. The strategic review for Banco Provincia, already completed, and for the Banco Nación soon to be initiated, will provide important suggestions as to the best ways to increase productivity and efficiency of those banks. It is worth noting that the review for Banco Provincia has shown a picture much more encouraging than the one many skeptical pundits were expecting. The Banco Provincia is already implementing a medium-term action plan to further improve its operational performance.

  • 19. Paragraph 33 also states that “the share of public securities in bank’s portfolios has risen substantially”. It is important to indicate that even considering BCRA bills, the share of public securities in bank’s portfolios was slightly reduced from 50 percent by the end of 2003 to 47 percent in April, 2005. However, BCRA bills are not counted as part of the regulatory government bonds limit of 40 percent of assets. Considering this last definition, government bonds in banks’ portfolios represent on average 38 percent of assets, while their share has been reduced since the beginning of the year. My authorities are not retracting from any of the regulatory norms in place which allow for a temporary forbearance until international standards are fully applied.

  • 20. Regarding the strengthening of the capital base of the banking system, the gradual strategy of the authorities continues to be implemented successfully. The system has not only reduced its losses during 2004, as mentioned in paragraph 12 of the report, but it has also obtained operational profits during the first quarter of 2005 in the wake of a continued increase in total deposits and of the rapid growth of private sector credit that is taking place. Profits is the key variable that will allow for a progressive strengthening of the capital base of the system both directly through their capitalization and indirectly through the incentives they create for a voluntary recapitalization, which will certainly be reinforced by the overall positive economic environment present in the country. In any event, important progress in the balance-sheet of banks has already occurred through the reduction of external debt in many banks including through debt capitalization. The early repayment of rediscounts has also contributed to strengthening the banks’ capital base. In addition, fresh capitalization has also taken place in the recent months. Looking forward, all banks have completed their business plans for the current and coming years which incorporate an important improvement of their capital bases.

  • 21. Moreover, the staff highlights the need to complete the compensation for asymmetric pesoization and indexation of bank assets and liabilities. However, in my authorities view this has already been largely done. What is still pending is due to differences of opinion between the BCRA and the banks on the legality of a small proportion of the claims (around 10 percent of total claims). On the issue of court injunctions “amparos”, also raised by the staff, the position of the authorities has been quite clear all along. It was stated from the beginning that this was a problem that falls under the competence of the judges and that the government was not going to compensate banks for this motive. Some favorable decisions from the Supreme Court upholding the “pesoisation” has contributed to a dramatic halt of further judicial claims sharply reducing the amount of “amparos”. In the meantime, banks have been allowed to amortize the losses generated by “amparos” during a five year period.

  • 22. Finally, on the structural front there is the issue of the renegotiation of contracts with privatized utilities. In this regard, I would like to state in the first place that it is important not to downplay the progress that has been reached in several important areas such as ports and highway concessions, freight railways’ operators and electricity companies. In addition, only a few conflicting cases seem to gain press coverage and the analysis presented is in general simplistically reduced to the question of tariffs, as it transpires for example from the staff report. As a matter of fact, the most serious underlying issue is the balance sheet positions of the companies burdened by very high indebtedness in hard currency that needs to be restructured. The government is making utmost efforts to facilitate those restructurings. The question of investment commitments looking forward is also a critical aspect that is not duly considered when addressing the issue of the privatized utilities. In any event, the government is committed and is already implementing a progressive adjustment of tariffs that are progressively starting to impact family units. All these developments aim at ensuring a profitable business environment for companies while addressing the needs of the more vulnerable social groups.

  • 23. As to Argentina’s response to the recent decision against Argentina by the International Center for Settlement of Investment Disputes (ICSID) in favor of a company owning a minority stake in one of the two gas transportation companies, which is seeking compensation for the losses originated in the pesoification and freezing of utility rates since 2002, I am not aware as of yet of any formal reaction from the Argentine authorities. I can tell, however, that my authorities have questioned all along the legitimacy of those claims since the essential aspect of the international investment protection agreements signed by Argentina is to guarantee foreign investors that they will not be subjected to any discriminatory treatment and such a situation has not taken place. As to the argument that the devaluation of the currency, the pesoization and the freezing of tariffs could be assimilated to an indirect expropriation, my authorities consider that this is tantamount to say that the economic policy of a sovereign could be made subject to judicial judgment, which is obviously inappropriate. Moreover, it is noteworthy that the mentioned decision recognized that no expropriation has occurred as a result of the pesoization and tariff freeze; as such the finding in favor of the claimant appears inconsistent. It is revealing in this respect that the company holding the majority stake in the gas transportation company involved in this dispute has withdrawn its claims with the ICSID and there were recent public announcements, both from the company and the authorities, indicating that an agreement is soon to be reached.

  • 24. On the Argentine debt restructuring, the staff presents a biased description of the characteristics and consequences of the restructuring, regardless of the time and efforts that my authorities devoted to describe the process to the staff. For example, the staff conclude in Box 5 and paragraph 48 that Argentina has not complied with the lending into arrears policy (LIA). This comes as a surprise because it is not the result of a substantiated analysis, that should be based not only on the nature of the Argentine debt restructuring but also on the LIA policy itself. Moreover, the staff’s assertion is not only unsupported, but it brings a subject that does not pertain to this Art. IV discussion but rather to a specific analysis that should be, in due time, considered by the Board.

  • 25. Having said this I will, nevertheless, take issue with the aforementioned unsupported assertion made by the staff. The main purpose of the LIA policy, that is to normalize relations with creditors, has been advanced as recently ratified by the rating agencies. In this respect, Argentina has fully complied with the LOI dated March 10, 2004, as it had indeed “endeavour[ed] to avoid a piecemeal approach to the debt restructuring”. This was the overarching objective to which the Argentinean authorities were committed and it was, indeed, achieved with great success. At the time we were negotiating the LOI some were arguing that the only way in which a piecemeal approach could be avoided was by establishing a minimum participation threshold (a 75 percent of adherence to the offer was broadly regarded as appropriate). Argentina did not believe that it was necessary to set such a nominal minimum participation threshold but nevertheless committed to “endeavour” to avoid a piecemeal approach and agreed–in order to discharge that commitment—to “finaliz[e] with the assistance of the banks an appropriate minimum participation threshold necessary for a broadly supported restructuring”. In sum, finalizing an appropriate minimum participation threshold was subsidiary to the overarching objective of achieving a broadly supported restructuring. Argentina, after considering the matter with the banks decided that, given the complexity of the process, it was not convenient to include in the prospectus a nominal minimum participation threshold as by establishing a minimum participation threshold the ultimate objective could be hindered. This eventually proved to be the right approach since the debt offer was accepted by a vast majority of creditors; a number of creditors that, it is fair to say, goes beyond the minimum participation threshold that was considered appropriate at the time in which the LOI was negotiated.”

  • 26. In Box 5 it is stated that “negotiations with private creditors were not constructive for the most part”. This is viewed by my authorities as an unfair statement to the extent that the Argentine authorities traveled the world over to meet all types of creditors explaining to them the real limitations Argentina faces, including the fact that it did not have net financing from the IFIs, and listening to their desires and concerns. In fact, the final exchange offer, in terms of the characteristics of the new debt instruments, was shaped by the several suggestions gathered in those meetings (i.e. the incorporation of GDP-linked bonds, the Most Favored Lender Clause, and the Law 26.017, precluding the executive branch to re-opening the debt exchange offer). As to the fact that there were no formal “negotiations” around a table with all creditors, I have to recall that this is exactly what has occurred in all the previous debt restructurings where the majority of the debt was in the hand of a multiplicity of bond holders1. It is worth noting that the LIA policy does not demand negotiations with creditors in all cases.

  • 27. From the authorities and the Staff’s DSA analyses it is quite clear that even with the substantial hair cut obtained, the fiscal effort required over the medium-term will be totally unprecedented for the Argentina economy. Of course, as we will see below, the staff finally manages to make its point, but in our view at a serious cost to its credibility. It is indeed a challenge for the authorities and for the whole of the Argentine people to be able to meet the commitments created by the exchange offer and those associated with the consequences of the crisis, i.e. to compensate losses to the banking system and address the manifold social needs. The Argentine exchange offer embeds the maximum effort the Argentine economy was able to make without jeopardizing growth prospects. Going beyond that would have represented indeed a bad faith negotiation to the extent that most likely it would lead to another default in the future.

  • 28. Regarding the treatment of the holdout creditors, is important to reaffirm that this was the result of a free choice by those creditors perhaps ill-advised by the ones that were supposed to defend their interests. The government of Argentina went to extremes to make clear that the exchange offer was the only one that was going to be put forward and that not sweeteners to the offer should be expected. In the end, a minority of creditors, opted for rejecting the offer. The Argentine authorities have made clear that they acknowledge the existence of such a contingent liability and have indicated their intention to formulate in due time a forward looking strategy to address, within the legal framework and in consistency with the prospectus for the exchange offer, any remaining arrears with private creditors.

  • 29. In discussing the Argentine debt sustainability analysis, the staff characterize as unrealistic the authorities scenario, called scenario A. It is somewhat startling that under the assumption that current policies are maintained, policies that as we have seen have yielded exceptional results, the staff considers that growth will decline to 2 percent a year whereas inflation and borrowing costs would increase. The staff do not attempt to explain the authorities underlying assumptions of the DSA (scenario A), which are consistent with the actual developments of the Argentine economy and the objectives of the Argentine government: sustainable output growth, employment creation and poverty reduction. In my authorities’ view, the main variable to achieve those objectives is a strong macroeconomic framework. Only in this context structural reforms could be effective, since the main factor behind the sluggish GDP growth rates and its large volatility, particularly during the last three decades, has been the absence of a consistent macro framework and not the lack of structural reforms. In this respect, it is fair to recall that during the 1990s Argentina was considered a star performer by the IMF basically because of its widespread structural reform agenda while downplaying the lack of a consistent macroeconomic framework. In the aftermath of the crisis, the authorities shifted emphasis and, as a result, now the Argentine economy shows an impressive fiscal primary surplus matched with trade and current account surpluses, a competitive exchange rate, as well as a “dedollarization” of financial assets and liabilities. All this within a flexible and stable macroeconomic framework. The IMF’s emphasis on structural reforms seems to be fixed in the past by giving such a key role to structural reforms that should be sequenced only in a social and political responsible manner. In spite of all the economy’s favorable developments, the authorities conservatively assume that GDP growth will converge to 3 percent, consistent with an investment to GDP ratio of 21 percent, higher than the maximum ratio achieved during the Convertibility period (20.4 percent in 1998 at current prices)2. Consistent with this growth rates, employment creation and poverty reduction, the authorities estimate a moderate long run real exchange rate appreciation and prudent interest rates. There is a sharp difference between the economic logic implied in the staff report and the authorities analysis, as my authorities consider that the staff is drawing the simplistic assumption that just by implementing structural reforms and by achieving an unrealistic primary surplus higher growth will be accomplished.

  • 30. Stated in paragraph 42 of the report is that “Fund purchases should not be relied upon as a source of budgetary financing”. However, maintaining its stock of debt to the Fund constant cannot be construed as representing budgetary financing strictly speaking. It should be rather seen as a way to cover its overall financing gap since in that case Fund financing would not be used to support current or capital expenditures. The staff reassert its view in paragraph 44 stating that “since the currency board regime, the central bank has onlent Fund resources to the federal government to help finance its budget deficit”. This statement fails to say that this has only been the case up until 2001, or to be more precise until the demise of the currency board. Since 2002 onwards, the budget accounts began rendering an overall surplus which was used to substantially reduce the exposure of the Fund and other IFIs with Argentina.

  • 31. The staff’s logic is further undermined by the fact that by excluding Fund financing altogether, as in scenario B, the debt ratio would follow an unsustainable level. Even the rosier staff scenario C, without Fund financing and higher primary surplus plus structural reforms, would require a roll over rate of private sector debt during 2005-2008 higher than the possible market access estimated by the staff itself. It is only under scenario D that the debt profile becomes sustainable and that there would even be a financing surplus indicating a higher capacity to pay than the projected debt obligations. It seems that, at last, the staff has proven that by maintaining over the medium-term a primary surplus of 4.5 percent a year and by appropriating Central Bank reserves (equivalent to 6.9 percent of GDP between 2005 and 2008) to pay the Fund, Argentina could pay more to the private creditors. This scenario looks particularly unconvincing, specially when less than a month ago Argentina’s external position was characterized as vulnerable. Indeed, Argentina’s extension of repurchase expectations was based on the fact that “Argentina’s balance of payments outlook remains vulnerable in particular from the following factors: the relatively low level of reserve coverage, the unclear prospects for reaccessing international capital markets, and the large debt service payments falling due over the next 12 months—including US$8.1 billion to the IFIs.” All together, it appears as if the whole purpose of this preposterous exercise would have been to reach the conclusion that Argentina does not need any assistance. Likewise, it seems as if the only objective of the present and future Argentine governments should be to pay the Fund as soon as possible and to content creditors while risking growth prospects and postponing in the meantime the alleviation of the pressing social needs that besiege much of the country’s population.

  • 32. As stated, scenario D is predicated on the authorities resorting to the foreign exchange reserves of the Central Bank to finance repurchases to the institution. The staff argue that this is a common practice among the membership. This came as a surprise to my authorities, in fact, at least within our constituency this is not common practice. It would be interesting if the staff could provide more evidence on this practice. In my authorities’ view the reduction of the stock of debt with the Fund should not call into question the Central Bank’s independence, nor hinder its capacity to exert an effective monetary policy and defend the national currency’s value. Consequently, it is our view that repurchases to the Fund should be based on fiscal surpluses or, when reasonable interest rates make it appropriate, on market based financing. The staff becomes more specific in Annex 1 when it suggests that the government should give the Central Bank 15-year bonds, with a five-year grace period, to preserve the financial integrity of the BCRA. The fact is, however, that the foreign exchange reserves are there to support the money supply and government bonds cannot do that and therefore the value of the currency, once a transaction of this type is done, would be affected by an immediate weakening pressure that could intensify inflationary pressures.

  • 33. Finally, my authorities are somewhat baffled by the assertion in footnote 9 that “Fund purchases and repurchases were not generally relevant to the government financing framework”, if that were indeed the case it would beg the question as to why governments would want to enter into the usually difficult negotiations required to agree on a Fund program. Moreover, this assertion is contradicted by the same report in paragraph 42 when trying to justify that the debt sustainability analysis DSA should not assume access to Fund financial support since as the report affirms “Fund purchases should not be relied upon as a source of budgetary financing even though this has been the practice in Argentina”. As we have already stated, my authorities are not envisaging any budgetary financing from the Fund. This has been indeed the case only during the 1990s and it is precisely the consequences of that irresponsible behavior, including on the part of the Fund, which my authorities are trying to overcome.


“The Successful End of the Argentine Debt Restructuring Saga”, March 2, 2005 by Nouriel Roubini.


Nonetheless, my authorities are bent to pursue through their policies higher investment flows, since this investment ratio is just enough to sustain 3 to 3.5 percent GDP growth.