Argentina will pay US$6 billion Paris Club debt

  • Business
  • Wednesday, 03 Sep 2008

BUENOS AIRES, Argentina (AP) - Argentina will pay its entire US$6.7 billion debt to the Paris Club of lending nations, President Cristina Fernandez said Tuesday, shoring up sagging investor confidence and opening the door to needed new capital as its economy slows.

The payment, which will tap about a sixth of the country's US$47.1 billion in foreign currency reserves, "confirms one more time Argentina's willingness to meet its international obligations,'' Fernandez told a news conference.

Markets reacted positively to the news and bond prices rallied. But some analysts warned that while the move may reassure local and foreign investors, it signals no shift in the fiscal policies they were most concerned about.

"The government believes this could open lines of credit and ease financing conditions for infrastructure projects and the private sector,'' wrote Daniel Kerner, Latin America analyst at the Eurasia Group in New York, in a note to investors. But, he added, "the risk is that the government feels this is all it needs to do.''

Argentina defaulted on about US$95 billion in bonds in 2001, the largest default by any nation in history. Former President Nestor Kirchner restructured most of that debt in 2005 and repaid a US$9.5 billion loan from the International Monetary Fund in 2006, but left the Paris Club debt outstanding, prompting criticism from international lenders.

That decision, and more recent concerns that a shrinking budget surplus may keep Argentina from servicing its current debt, have prompted analysts to question whether Argentina would actually cut public spending if necessary to keep paying investors.

Two top ratings agencies last month said investing in Argentina had become more risky: Moody's lowered its outlook on benchmark Argentine bonds from "positive'' to "stable,'' while Standard and Poor's cut its country rating to B, five levels below investment grade.

While the payment will drain currency from the central bank, which uses most of its reserves to back the peso and many domestically-sold debt, Argentina still has about US$14.5 billion in cash on hand _ plenty to avoid a run on banks, said Fausto Spotorno, an economist at the Orlando J. Ferreres y Associados consultancy in Buenos Aires.

Yet with about US$12 billion in bonds due in 2009, twice the amount expiring this year, the government will need more cash to meet its obligations. Analysts worry a slowing economy - along with a drought and potential farm strikes - may tank agricultural exports, export taxes and other tax income, shrinking Argentina's budget surplus and its top source of foreign currency.

Annual economic growth slowed to 6.5 percent in June, from 8.8 percent in the year-ago period.

To ease uncertainty, Argentina in recent weeks began buying back an unspecified amount of 2008 and 2009 bonds, whose prices had slipped following the government's early August sale of US$1.5 billion in debt to its left-leaning ally, Venezuela.

The sale to Venezuela of 2015 bonds at an unusually high 15-percent interest rate was interpreted by many as a sign that Argentina may be running short on cash.

Fernandez has tired of the criticism, dismissing ratings downgrades and other warnings as proof that the international financial establishment wants "to convince us that we have problems.''

"A country shouldn't have to kneel'' for loans, she said in August.

On Tuesday, she increased public spending, unveiling a series of government-backed, low-interest loans for small and mid-size businesses, and decreeing a set of measures to protect local industry against cheap imports.

The Paris Club is an umbrella group of wealthy creditor nations including the Germany, Japan, Italy, the Netherlands and the U.S.

U.S. State Department spokesman Sean McCormack welcomed news of the planned Paris Club payment, saying in a news release that it "represents an important first step in the consolidation of Argentina's position in international markets.''-AP

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