[R-G] Argentina to Repay $6.7 Billion in Paris Club Debt

[Yoshie Furuhashi]

<http://online.wsj.com/article/SB122037221740591157.html?mod=googlenews_wsj>
Argentina to Repay $6.7 Billion in Paris Club Debt
Move Seeks to Allay
Investor Concerns
Of Another Default
By JOHN LYONS
September 3, 2008; Page A12

Argentina, which committed the world's biggest debt default in 2001,
said it will repay $6.7 billion it owes to foreign governments in an
attempt to allay investor fears that it is headed for another economic
meltdown.

Argentina's populist president, Cristina Kirchner, described the
payment as evidence that the South American nation was committed to
avoiding a second debt crash -- a commitment that some investors had
come to doubt in recent months.

The move highlights rising problems for Mrs. Kirchner, who succeeded
her husband, Nestor Kirchner, in power but has seen her approval
ratings drop after an attempt to raise taxes on soy exports caused a
farmers strike.

The country bounced back from its 2001 crash as it stiffed creditors,
instituted unorthodox policies such as price controls, and profited
from high global commodity prices. Recent commodity-price declines
could worsen Argentina's economic outlook, and moving to restore the
country's credibility with lenders could broaden Mrs. Kirchner's
options.

Argentina will use part of its $47 billion in foreign-currency
reserves to pay the debts, owed to a group of creditor nations
including France, the U.S. and Japan that are known together as the
Paris Club. Argentina defaulted on the debts during its last crisis
and the outstanding obligations have remained a sticking point for
other possible lenders. Clearing the marker may encourage private
companies and state-run lenders to extend credit to Argentina's energy
industry and other sectors, though not directly to the government,
observers said.

While investors said the announcement was a positive signal, market
reaction reflected a view that the payment won't fundamentally alter
Argentina's sovereign-debt predicament. Default insurance on Argentine
bonds in the credit-default swap market -- already among the world's
costliest to insure -- was essentially unchanged Tuesday after the
announcement.

To be sure, many analysts say Argentina can meet debt payments through
next year -- on paper anyway. But while Argentina has amassed big
international reserves as its commodity-rich economy has benefited
from an export-led expansion, its outlook is tricky. Credit-ratings
firm Standard & Poor's cut its Argentina rating last month, and
domestic confidence in the banking system has slipped amid concerns
Mrs. Kirchner will devalue the peso to energize the economy.

Even though Argentina lopped off around 70% of its debt load in a
hard-nosed restructuring following its 2001 default, the South
American country is once again facing a daunting pile of debt notices
coming due. Argentina's financing needs will double to at least $12
billion next year, according to the investment bank Morgan Stanley.

But while Argentina was a darling of the international lending
community the last time around, its list of willing lenders has shrunk
-- in large part because of skepticism about the policies of Mrs.
Kirchner and her husband.

Argentina is essentially shut out of the international bond markets
because of legal tangles with investors still trying to get money
returned from the 2001 default. Argentina's once-thriving domestic
market for inflation-linked bonds is also closed because bond
investors believe that Argentina's official inflation numbers are
fudged. Argentina claims its inflation rate is around 9%, while
economists believe that it is well over 20%. The Kirchners have
shunned the International Monetary Fund, which wouldn't lend to
Argentina until questions about its inflation data are cleared up.

Indeed, Argentina's main source of funding in recent years has been
Venezuela. But even Venezuelan President Hugo Chávez appears to be
growing wary. Venezuela charged Argentina a stiff 15% interest rate on
its last $1 billion bond purchase.

Write to John Lyons at john.lyons at wsj.com

<http://www.bloomberg.com/apps/news?pid=20601086&sid=aKJRlMAoFqTw&refer=news>
Argentina to Repay $6.7 Billion in Paris Club Debt (Update3)

By Eliana Raszewski and Bill Faries

Sept. 2 (Bloomberg) -- Argentina will repay its $6.7 billion of
defaulted debt with the Paris Club group of creditors, seeking to ease
companies' access to financing as growth slows in South America's
second-biggest economy.

President Cristina Fernandez de Kirchner said she signed a decree
allowing the central bank's international reserves to be used to pay
the Paris Club, an informal association of creditors that includes the
U.S., Germany, Italy and Japan.

``This reaffirms Argentina's willingness to pay its international
commitments,'' Fernandez said today at the presidential palace in
Buenos Aires. ``This payment puts companies that can get financing
abroad in the pole position, which they haven't had before this
decision.''

An accord with the Paris Club would help shore up investor confidence
in the country as economic growth slumps. Gross domestic product will
expand 6.8 percent this year and 3.2 percent in 2009, a slowdown from
more than 8.5 percent in each of the past five years amid a recovery
from a default and currency devaluation in 2001 and 2002, according to
a report today by Merrill Lynch & Co.

Xavier Musca, president of the Paris Club, said he welcomed
Argentina's decision.

Musca, speaking in a telephone interview, said the organization is
working out details of the decision with Argentine Finance Secretary
Hernan Lorenzino and plans to discuss the payment at its Sept. 15
meeting.

Corporate Credit

The move may smooth access to international investment credits for
companies in Argentina, Cristiano Rattazzi, president of Fiat
Argentina SA, told reporters at the presidential palace. Argentina
received just 5.4 percent of the $105.9 billion in foreign direct
investment in Latin America and the Caribbean last year. Brazil got 33
percent, Mexico 22 percent and Chile 14 percent, according to the
United Nations.

The central bank's foreign reserves swelled to $47.1 billion as of
Sept. 1, recovering from a low of $8.2 billion in January 2003. The
country has increased reserves thanks to a boom in agriculture
commodity prices that helped the government increase tax revenue.

``This will have some positive impacts, but it will also raise more
questions about how the government uses central bank reserves,'' said
Daniel Marx, a former finance secretary, in a telephone interview in
Buenos Aires.

Central bank President Martin Redrado said Argentina's foreign
reserves will remain ``robust'' after the debt payment.

Reserves

This is the second time since 2006 that Argentina has used central
bank reserves to pay off international lenders. In January 2006,
Fernandez's husband and predecessor Nestor Kirchner used central bank
reserves to pay the International Monetary Fund $9.5 billion in a move
he said would allow the country to reclaim its ``autonomy.''

Kirchner renegotiated $95 billion in defaulted debt in 2005, offering
investors 30 cents on the dollar. Since then, the government has
refused to open talks with the holders of about $20 billion in
defaulted debt who rejected the government's offer.

``This shows the government is trying to make amends with the
market,'' said Eduardo Levy-Yeyati, head of Latin American research at
Barclays Capital Inc. in New York. ``The negative side is that given
all the concerns about the country's financing needs, using reserves
to pay off this debt means they'll have fewer liquid reserves to meet
those future needs. It's not a zero-sum game, but it's not a big
positive either.''

Net borrowing needs will climb to at least $11.3 billion next year
from $6.1 billion, according to Barclays.

`First Step'

Robert Shapiro, co-chair of American Task Force Argentina, a group
that represents some of the bond holdouts, said via e-mail that the
Paris Club payoff should be a ``first step'' in efforts to repay all
defaulted debt.

Argentina's 8.28 percent dollar bonds due in December 2033 were
unchanged on the news. The country's main stock index, the Merval,
fell 1.1 percent to 1757.94. Shares of Argentine banks including Grupo
Financiero Galicia SA and Banco Hipotecario SA surged more than 3.8
percent.

``This decision doesn't change Argentina's global situation,'' said
Silvia Marengo, who manages about $130 million of emerging-market
bonds at Clariden Leu in London. ``The problems that the government
must face are not related to this debt. Those problems are high
inflation, the energy infrastructure and a possible new conflict with
farmers, and these problems remain.''

To contact the reporter on this story: Eliana Raszewski in Buenos
Aires eraszewski at bloomberg.net; Bill Faries in Buenos Aires
wfaries at bloomberg.net
Last Updated: September 2, 2008 18:49 EDT