High rates persist
According to Agustín Etchebarne, a partner at Delphos Investment, a Buenos Aires-based fund manager: “This country has defaulted on its international debt seven times since it gained independence in 1816. I think that after the latest default, Argentina will have higher interest rates for a generation.”
The country defaulted on $90bn of its total $175bn sovereign debt in December 2001 – the largest ever default by any country. In November 2004, it revealed the latest details of its settlement plan. The extent of the haircut will not be clear until the new bonds come on the market but it is estimated at around 70%, compared with Russia’s 65% after its 1998 default and Ecuador’s of 38%-67% after its 1999 default.
A major British private investor in South America, who does not want to be named, says: “It will take many years for institutional investors to forgive or forget how they have been treated. Argentinians are kidding themselves if they believe otherwise.”
Foreign direct investment was estimated at $840m in 2004, an increase on $699m in 2003 but a steep decrease from the level of $11bn in 2000.
Competitiveness hit
The economic crisis and the worsening reputation of contractual law and civic institutions in the country have also markedly reduced the country’s growth competitiveness. According to the World Economic Forum’s rankings of this measure, Argentina was placed 74th in 2004, compared with 64th in 2002. The productivity gap also dropped significantly during the crisis, although in 2004 it improved to 18% (compared with about 40% in China).
A top executive in the Argentine Bankers’ Association (the foreign banks group in Argentina), who does not want to be named, says: “There are two types of investor: opportunity and strategic. Opportunity funds can make very profitable investments in the country for the time it takes the economy to fully recover. However, I think it will take many years for strategic investors to return. The government is not creating enough confidence about the basis of contractual law.”
In November, Argentina was forced to delay the November 29 launch of the global restructuring of the debt until January 17 (it will close on February 25), after delays in getting approval from the US Securities and Exchange Commission, and warnings by the Bank of New York, which is leading the debt exchange, that it needed more time for a successful launch.
Change of heart
The government decided to remove the mandate from Bank of New York after the warning and to look for another, possibly JP Morgan, to manage the exchange. However, in December, as The Banker went to press, it was understood that economy minister Roberto Lavagna thought the government had acted too hastily and was looking to reinstate the bank.
A heated argument also took place between President Néstor Kirchner and Mr Lavagna about whether to go ahead with the separate offer for Argentine bondholders (which account for 40% of total creditors) on November 29. It is believed that Mr Lavagna threatened to resign if the local offer was not delayed as well. His future is looking uncertain.
Economy minister Roberto Lavagna: future uncertain after disagreement over restructuring
Authoritarian approach
Manuel Solanet, president of strategic consultancy Infupa in Buenos Aires, says: “What happened with the Bank of New York illustrates what Mr Kirchner is like. He is very authoritarian and ministers, including Mr Lavagna, are afraid of giving him bad news.”
At the end of November, Mr Kirchner also launched a scathing personal attack against Italy’s prime minister Silvio Berlusconi, after Italy’s main securities commission, Consob, told the Argentine authorities it would not approve the plans to restructure the debt before the middle of December.
Mr Kirchner was embittered because Mr Berlusconi had sided with 450,000 Italian bondholders of Argentine debt. He said: “What a different attitude the Italian government has shown towards Argentina’s debt-restructuring, compared with ours when we opened our hearts and arms to the Italians during their darkest hour.” Argentines regard Italy as a ‘patria matria’ because millions of Italian immigrants settled in the country in the 20th century.
The attack was a good example of his abrasive style but Mr Kirchner, who seeks re-election in April 2007, still enjoys public popularity after turning a dire budget deficit into a surplus.
The government has also been highly critical of the IMF for indicating that it might not support the country if 80% of bond-holders do not settle.
Frederico Thomsen, an economic and political consultant based in Buenos Aires, says: “The IMF is being too optimistic. I believe 70% is the level that the authorities should be aiming for.” He says that the IMF is in a powerful position because Argentina needs to roll-over IMF debt this year for fiscal reasons. He projects a fiscal surplus of 3% this year but total Argentine debt commitments amount to 8%.
Better fiscal shape
Argentina is in much better fiscal and monetary shape that it has been in a long time, with inflation estimated at 6.5% in 2004, the fiscal surplus at 5% and economic growth at 8%.
One of the country’s biggest problems, which led to the 2001 economic crisis, was the indebtedness of the 24 provinces. A high proportion of each province’s budget comes from central government and so they had little incentive to limit their spending. The government now has them on a tighter rein and will not allow them to borrow on the international markets.
However, it has not yet shown a strong commitment to enforce contractual law, backed by an independent judiciary. The 2001 default will have consequences for Argentina for the next generation but the government must begin the difficult process of institutional reform for major foreign investors to touch it ever again.
Local banks benefit from stability Argentine banks began to break even again in 2004 after two years of massive losses. The latest figures from the Argentine Bankers’ Association show that the return on equity (ROE) for private banks between April and September 2004 was 1.3%, compared with an annual loss of 19.1% in 2003 and an annual loss of 79% in 2002.
A top executive at the association, who does not want to be named, says: “The state of the banking system has improved markedly over the past 18 months. There is now much more financial stability, with inflation at a relatively low level of 5% or 6%.
“Argentine banks have benefited from a well-behaving international economy, including worldwide low interest rates. The rise in soya prices also helped the economy considerably and, of course, that had an impact on banks.”
Leonardo Bleger, general manager at Banco Credicoop, a co-operative with 225 branches countrywide, says: “All banks suffered a great deal in 2002 following the financial crisis at the end of 2001. We have a better portfolio than other banks because 30,000 of our clients are small and medium-sized enterprises. Our ROE in 2004 was 10% and 4% in 2003.”
Mr Bleger says that in the case of most private banks, their ordinary profits have been wiped out by the extraordinary losses – running into billions of US dollars – arising from amparos (judicial decisions allowing savings that were frozen during pesification of the dollar to be withdrawn). These involve 300,000 court cases in which judges have ruled that banks had to compensate people who lost out from the pesification in February 2002.
Jose Rodríguez, director of Banco Itaú Buen Ayre, the Brazilian bank with 78 branches in Argentina, says: “The amparos are the biggest problem for Argentine banks. Until their status is fully resolved, it is very difficult for the major banks to plan for the future. Our bank is 100% provisioned for them but they are really affecting the profitability of the big banks.”
Jose Rodríguez: the amparos ‘are really affecting the profitability of the big banks’
Another difficulty has been the level of non-performing loans, which accounted for 15% of total loans – 6% of total bank assets – in 2004.
Bank credit is slowly starting to return. Personal incomes collapsed after the crisis and people could not afford credit.
In Argentina, total bank deposits to GDP are 25% compared with 66% in the US and 70% in Brazil.
However, according to Delphos Investment, a Buenos Aires-based fund manager, bank credit was being to used to finance 40% of the capital investment and operating expenses of Argentine companies in December 2004 compared with just 26% in May. Although that was an improvement, the 2001 pre-crisis level was 60%.
A few months ago, the central bank forced Argentine banks to index deposits to the consumer price index – about 6% – and this has already encouraged a higher level of deposits and made more credit available.
Agustín Etchebarne, a partner at Delphos, says: “There is not much credit at the moment because the real interest rate is negative. The country does not have a typical yield curve but, in the long term, interest rates should be in line with Brazil’s at around 10%.
“Some 50% of bank assets are tied up in public debt, leaving little money for credit for Argentine companies or individuals,” he adds.
The international banks in Argentina – especially Citibank and HSBC – had to make huge provisions after the 2001 crisis.
Lloyds TSB sold its banking operations to Banco Patagonia this year. Banca Nazionale del Lavoro said at the start of 2004 that it would pull out of the country but recently indicated that it would stay.
However, foreign banks do not expect a quick recovery in their Argentine profits.
