OT argentina about ot be downgraded by moodys

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http://www.ft.com/hippocampus/q140c62.htm ARGENTINA: Government faces tough fiscal challenge By Ken Warn in Buenos Aires The Argentine government that will take office on December 10 was never expected to have much of a honeymoon. A deep recession and mounting fiscal deficit were always going to constrain its room for manoeuvre. But the pleasures of political victory are going to be even more short-lived, according to economist Ricardo Lspez Murphy. "Not only will the next government not have a honeymoon, it will not even have a wedding night. It's worse. The [fiscal] adjustment is going to have to be launched during the stag party." The stark warning, made at a Central Bank conference on economic policy last week, came the day before the credit rating agency Moody's announced it had placed Argentina's debt ceilings under review for a possible downgrade. Mr Lspez Murphy is a senior adviser to Fernando de la Rza, the opposition Alliance presidential candidate, who holds a 12-point poll lead over his Peronist rival Eduardo Duhalde ahead of the October 24 election. Mr De la Rza recently warned that the country required a "fiscal shock", while several prominent local economists have been pushing for radical measures to help restore market confidence. It is not that the outgoing government has been spending as if there was no tomorrow. The economy ministry believes it has done a good job in restraining spending in an election year and a steep recession. But tax revenues have fallen sharply because of the economic slowdown. Last year's Russian debt crisis, January's Brazilian devaluation and investors' mounting concerns over Argentina have added to financing costs, worsening the fiscal burden. The government has set a revised $5.1bn (#3.2bn) fiscal deficit limit with the International Monetary Fund for this year, a target many analysts believe will be missed. The incoming government will face heavy financing needs. Debt amortisations will be about $13bn next year, with the heaviest commitments in the third quarter. In addition, next year's fiscal deficit could balloon to about $9bn, or 3.1 per cent of GDP, unless there are radical policy changes, said Adolfo Sturzenegger, an economist and ally of the third-party presidential candidate, Domingo Cavallo. "Fiscal deficits, when combined with significant government amortisation payments due in coming years, may imply a somewhat higher credit risk," Moody's warned on Friday. "It's hard to see a strong improvement on the fiscal side without a strong economic recovery," said Mauro Leos, analyst at Moody's. "There could be a danger of Argentina getting locked into a cycle of low growth and low tax revenues, but with high debt-servicing costs." However, Moody's move could strengthen the hands of the economists in the presidential candidates' teams, and reinforce the argument that measures are needed before December 10, said Freddy Thomsen, economist at ING Barings. "Perversely enough, the Moody's review sounds like good news. It's always good for Argentina when events manage to instil fear into our politicians." What are the options for the incoming government? "If anything can convince the markets, it's a good fiscal programme," said Mr Sturzenegger. Fiscal adjustment must be pushed through "quickly and with force", said Mr Lspez Murphy. The government-elect will probably also push to resolve its relations with the IMF quickly. Argentina's existing three-year $2.8bn extended fund facility with the IMF is coming to an end. A new accord should ideally be in place before the administration comes to power, said Martmn Redrado, president of think-tank Fundacisn Capital. This would also signal commitment to the structural reforms, which the IMF has long urged, including reform of the labour laws and of provincial finances. The incoming government could also try to retain some of the existing economy ministry "technocrats", who are used to dealing with international investors and the global financial community. It certainly does not sound like a honeymoon. And life afterwards is not shaping up to be a bed of roses. AT A GLANCE Key Numbers My Portfolio EQUITIES London Latest London Closing World Closing World Indices CURRENCIES Exchange Rates Pound & Dollar Spot Int. Currency Rates Money Rates MANAGED FUNDS UK & Offshore CAPITAL MARKETS Benchmark Govts Int. Bonds 10-year Spreads Emerging Mkt. Bonds EURO PRICES Euro Spot EMS Ecu Rates Euro-zone Bonds Euro Trading Day

BYE BYE SOUTH AMERICA

-- Drken (Drken@bubble.gone), August 23, 1999

Answers

While the article has some interesting things to say, I hardly think that "BYE BYE SOUTH AMERICA" is a useful commentary. A credit downrating by Moody's will hardly reduce South America to a smoking crater.

A little background for those trying to understand the importance of this article.

Argentina has pegged it's currency (the real) to the dollar. This tactic was designed to increase investor confidence that profits made in Argentina (in reals) could be repatriated (as dollars or another "hard" currency) at a predictable and favorable exchange rate. This made Argentina look especially lucrative to major US banks looking for high rates of return on loans.

The current recession in Argentina makes it an easy target for currency traders to attack the real as overvalued. The same factors at work that are undermining China are at work undermining Argentina. It is very likely (almost a dead certainty) that Argentina will devalue, default, or a mixture of both. Either alternative will just be one more grenade tossed into the global marketplace. Either one will mean lower profits for US banks with big outstanding loans to Argentina, and for US businesses exporting to Argentina.

In the big scheme of things Argentina is middling small fish. But they are one of the strongest and largest of Latin American economies, behind Brazil and Mexico. Bad times in Argentina will spread to its neighbors. Bad times in Latin America hurt the USA. Argentina is just one more domino going down. More will follow. The USA in that line of dominoes, too.

-- Brian McLaughlin (brianm@ims.com), August 23, 1999.


Brian, you know "BYE BYE SOUTH AMERICA" is a foregone conclusion. Remember asian contagion started with thai devaluation,obviouslly thailand did not cause the contagion but started the dominoes.When I refer to south america,I meant the possible downgrade was just another nail on the coffin.Soon it will be our turn.America is not an oasis.

-- Drken (Drken@bubble.com), August 23, 1999.

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