| BUENOS AIRES, June 1
BUENOS AIRES, June 1 Argentina is trying to
clean up lingering damage from its massive 2002 default and woo
back investors so it can sell debt on global markets and
finance brisk spending ahead of next year's presidential vote.
President Cristina Fernandez faces rising debt obligations,
but she will be reluctant to slow spending in the run-up to the
election even as inflation quickens to an annual rate estimated
at more than 20 percent. [ID:nN14105436]
She won her battle to use billions of dollars in central
bank reserves to pay debt after months of chaotic legal and
political wrangling earlier this year and attention has shifted
to an ongoing debt swap.
The euro zone crisis and soaring yields have complicated
Argentina's plans to issue a new global bond after the exchange
of bonds and cash for defaulted sovereign debt.
Here are some of the issues investors are watching:
The government has opened a swap to mop up as much as $18.3
billion in defaulted debt, but the acceptance rate was a
lower-than-expected 46 percent after the first phase amid
global market turmoil caused by Europe's debt woes.
A high rate of acceptance would reduce the threat of
lawsuits by holders of non-performing bonds, making it easier
for Latin America's No. 3 economy to return to international
credit markets eight years since a massive default.
Economy Minister Amado Boudou says 60 percent remains the
government's target for participation in the swap, but he has
acknowledged that heightened risk aversion means the government
will not issue a $1 billion bond as originally planned.
[ID:nN19262942] The government has also pushed back the debt
swap's closing date by two weeks to June 22. [ID:nN31256828]
It is increasingly unclear whether the government will be
able to sell new debt paying single-digit rates in the near
future due to rising yields and persistent investor concern
over Fernandez's unorthodox economic policies.
A decision not to issue a new bond could exacerbate a
financing crunch, forcing the government to borrow even more
from state agencies and cream off more central bank profits,
but it might encourage it to patch up ties with the
International Monetary Fund and settle its Paris Club debt.
What to watch:
-- Rate of acceptance by bondholders. Markets may see any
rate of less than 60 percent as disappointing, although the
government may claim success by citing adverse conditions.
-- Impact of swap outcome on debt yields and whether they
fall low enough to encourage a new bond sale. Much of this
depends on impact of European crisis on risk aversion.
-- Fresh lawsuits by bondholders who refuse to accept the
offer and reaction of courts.
-- A possible second debt swap to extend maturities coming
due in run-up to the October 2011 presidential election.
Argentina faces debt obligations of at least $13 billion in
2010, most of which come due in the second half of the year,
but economic analysts say use of central bank funds means the
government can manage without new bond sales. [ID:nN13268404]
Tax revenue is picking up quickly following last year's
slowdown, growing at rates of about 30 percent in recent months
year-on-year, but public spending is also growing rapidly and
is unlikely to ease as next year's election draws closer.
Fernandez has introduced new welfare measures, including a
child benefit payment, that play well among her support base in
the poor suburbs that circle Buenos Aires.
Rising debt payments mean the government could see a
deepening of the fiscal deficit, which reached $1.8 billion
What to watch:
-- Deepening of fiscal deficit as debt payments come due.
-- Creative government accounting as way to maintain the
primary budget surplus, which measures public accounts before
debt payments and which shrank 23 percent year-on-year in the
-- Further depreciation of the peso ARSB=, which would
raise income by boosting revenues from export taxes and boost
central bank profit, most of which comes from currency gains,
but it would also fuel rising consumer prices.
Inflation has surged during the last six months as the
economy rebounds from last year's sharp slowdown and private
forecasts put the annual rate at between 20 percent and 30
percent, still far above official estimates and fueling hefty
pay demands. [ID:nN22211064]
Private forecasts have registered a slight slowdown in
consumer price rises in recent weeks, according to local media,
but political analysts say inflation remains the government's
Achilles heel as it tries to bolster its support.
Brisk public spending is not expected to slow, stoking
inflation, and the use of central bank reserves would also
increase the money supply. [ID:nN05206411]
Controversy over consumer price data continues despite
Boudou's vows to restore credibility to the figures.
What to watch:
-- Any sudden surges that could hit poor and spark unrest
or an upswing in labor and social protests.
-- Public sector wage claims and any signs the government
is at odds with the powerful CGT umbrella federation as some
unions call for a second annual wage adjustment.
-- An increase in strikes could impede industry and exports
in certain sectors, such as the agricultural sector.
-- Depreciation of the peso, which would raises the cost of
imported goods. Some industry leaders are calling for a weaker
currency amid soaring pay claims. [ID:nN22211064]
-- Fresh government income-boosting measures that could
Fernandez lost control of both houses of Congress in last
year's mid-term election. However, the opposition has failed so
far to form a united front against the government, allowing the
president's congressional allies to block several key votes by
Opposition deputies and senators have used the same tactic
to avert impending defeat, deepening the gridlock in Congress
and heightening political tensions in the country as potential
candidates for the presidential election jostle for position.
Fernandez's approval ratings sank to about 20 percent after
last year's mid-term poll drubbing, but some pollsters say
Fernandez has clawed back as much as 10 percentage points in
recent months as the economy gathers steam.
What to watch for:
-- Signs of sustained rebound in the government's
popularity would boost former President Nestor Kirchner's
chances of returning to the presidency in the 2011 election.
-- The emerging field of candidates for the vote and signs
of front-runners for a primary race in Fernandez's fractured
Peronist party. [ID:nN05577111]
-- Any clear opposition alliances or anger over inflation
that could halt recovery in support for government.
(Editing by Kieran Murray)