Whatever the Argentine government’s failings, real or imagined, the country’s economic problems are also caused partly by the volatility that gripped international markets for most of the first half of the year. The combination of the collapse in share prices on Nasdaq and rising US interest rates has hit emerging markets hard, and few more so than Argentina.

The spread on Argentina’s Global 2027 bond and 30-year Treasury bonds rose from 492 basis points on March 1 to 655 basis points by mid-May. And rising interest rates in the US are pushing up interest payments on the country’s dollar-linked floating rate debt.

Fortunately, the government can pretty much sit on the sidelines until the third quarter, since by mid-April it had covered half of its $17.5 billion financing need for the year. At the time, many complained the government was crowding out private sector borrowers by rushing into the international market.

Now, in retrospect, the decision to borrow while markets were open “looks like a pretty smart move,” says Roberto Guevara, a senior analyst at Merrill Lynch.

And although expectations are that international markets will remain volatile throughout the year, few local market watchers expect Argentina will have too much trouble meeting its financing needs. José McLoughlin, managing director of JP Morgan in Argentina, says: “the capacity of Argentina to access markets is better than many people think. You have to remember there is strong domestic demand from institutional investors and banks.”

Freddy Thomsen, director of equity markets at ING Barings, agrees: “you don’t see questions about the government’s capacity to meet its financing needs. That’s not the main question in investors’ minds.” He says markets are more concerned about “when will economic growth come back and genuine tax revenues, not borrowing, rise.’”

Regardless of whether investors are disposed to lend to Argentina, the country’s rising public-sector debt is seriously jeopardizing the government’s room for maneuver, argues the economist Pedro Lacoste. He estimates that interest payments on the national government’s $121.9 billion foreign debt at the end of 1999 are rising at the rate of $1.2 billion to $1.5 billion per year. This year, interest payments, now the second biggest item in the budget after social security payments, will be around $10 billion, compared to $3.5 billion in 1994.

“This snowball cannot keep rolling forever,” he says. The situation is further complicated, he adds, by the fact that billions of dollars of “compulsory and cheap debt” issued as part of the country’s debt restructuring in the early 1990s started coming due in 1997 and must now be replaced by market rate debt.

Poor Export Performance
Another major risk factor is Argentina’s poor export performance even though exports are up around 15% this year, and the trade balance is almost even. Exports, which should come to around $25 to $26 billion this year, are only equivalent to around 16% of the country’s total consolidated national and provincial public debt.


Lacoste says the country’s trade performance during last year’s recession was troubling. “Usually during recessions, imports would drop, the external sector would go up and the current account would improve. But even with a drop of 3% in GDP, the current account deficit of around $14 billion remains at 5% of GDP. What happened is that exports were going down because of the country’s competitiveness problem.”

For economist Manuel Solanet, increasing exports is as important as getting the budget deficit under control if the country is to achieve the much longed for investment-grade status. One of the tasks President de la Rúa set himself on after taking office was to ensure that Argentina attain an investment-grade rating as soon as possible.

However, Solanet says: “what the world is looking for is for us to improve the relationship between the fiscal deficit and GDP, as well as the relationship between external debt and exports. Until we improve on both those fronts, it will be difficult for us to get to an investment grade.”

Steven Darch, senior managing director of ING Barings, also says export growth is critical. He warns that “the reality is, Argentine exports need to keep growing and they have to be perceived to be growing. And the reality is that many Argentine goods are kept at bay by restrictions in the European Union and even in part by the US.”

EU and US Restrictions
Darch’s comment suggests that the challenge for Argentina is not just to increase its competitiveness abroad, but to get both the EU and the US to open their protected markets more to staple Argentine exports, mainly agricultural and food products.

Despite the volatility in world financial markets and the country’s weak export performance notwithstanding, the government should be able to continue borrowing, if only because the country can count on local banks and pension funds to go a long way towards meeting a growing portion of the government’s needs.

Darch comments: “the bank market and the local capital market are insurance for your large corporates and sovereigns.” If they cannot borrow on international markets, the local markets will always be open for business, even if at a steeper cost and less favorable maturities. And at times like these, a little insurance comes in handy.