The exchange will enable the national government to tap international debt markets for the first time since 2001, making it easier and cheaper for provinces to issue bonds locally and abroad, said S&P analyst Sebastian Briozzo. Speculation the government is nearing completion of the swap drove down Argentina’s borrowing costs by the most in six months in March, with the extra yield investors demand to own the country’s debt instead of U.S. Treasuries sinking 1.60 percentage points.
Provincial financing needs will jump to 26 billion pesos ($6.7 billion) in 2010 from 18.5 billion pesos last year, said Veronica Sosa, an analyst at Buenos Aires research company Economia y Regiones. The local governments’ deficit will swell to 13 billion pesos this year, equal to 0.8 percent of gross domestic product, from 9 billion pesos in 2009, she said. The finances have deteriorated to such an extent that Buenos Aires is paying for some goods and services with promissory notes.
“Giving bonds to suppliers is one of the first things that provinces do when they have liquidity problems,” Briozzo said in a March 30 telephone interview in Buenos Aires. “The situation will continue to deteriorate, but at the same time you’re not talking about deficits that are impossible to finance if the market opens up.”
Argentina will present its final offer to defaulted debt holders on April 14, Economy Minister Amado Boudou said last week.
Bond Yields
Buenos Aires, which accounts for more than a third of the nation’s economy, plans to sell at least $500 million of bonds overseas once the nation’s restructuring is completed, said Felisa Stangatti, a spokeswoman at the provincial Economy Ministry in La Plata. The province’s 2010 budget authorizes the sale of as much as $1.1 billion in local and overseas bonds.
“Yields are going to drop after the swap,” she said in a March 19 interview.
Yields on Buenos Aires’s benchmark dollar bonds also have declined on the prospect the country will restructure its defaulted debt. The yield on the province’s $475 million of 9.375 percent bonds due in 2018 tumbled 3.8 percentage points in March to 13.91 percent, according to Bloomberg data.
Financing Needs
Argentine dollar bonds yielded 6.4 percentage points over Treasuries on March 30, the smallest gap since Jan. 4, according to JPMorgan Chase & Co. The spread was 6.46 points on April 1.
Besides Buenos Aires, the provinces of Mendoza, Neuquen, Cordoba and Santa Fe are among the few regional governments with the management capacity and economic scale to issue bonds abroad, Briozzo said.
Cordoba plans to sell as much as $350 million of bonds overseas this year, according to Alejandro Henke, executive director of Banco de Cordoba, which is owned by the province.
Wages will climb an average of 20 percent this year and account for about 55 percent of provinces’ budgets, according to Economia y Regiones.
Provincial deficits, financed through bond sales and the use of promissory notes and scrip, contributed to Argentina’s record $95 billion default in 2001. Eleven regional governments were printing their own currencies that year.
Promissory Notes
In January and February, Buenos Aires province paid for 850 million pesos of goods and services with 12-month notes, Stangatti said. Another 600 million pesos of bills will be settled the same way by the end of the year, she said.
As many as five provinces may follow Buenos Aires in making payments with notes or other kinds of debt, Economia y Regiones’ Sosa said in a March 16 phone interview.
Rio Negro, in the southern region of Patagonia, may pay suppliers with peso-denominated promissory notes due in 2026 as its budget gap widens to 240 million pesos this year, or 2.7 percent of its GDP, from 150 million pesos in 2009, the province’s Treasury Secretary Ricardo Gutierrez said in a March 18 telephone interview.
Gutierrez declined to say how much of the notes, which will pay interest equivalent to the central bank’s interbank rate, may be issued. They won’t be used to pay salaries, he said.
Tax Sharing
At the other end of the country, Corrientes may be forced to use notes because the central government hasn’t transferred 90 million pesos due under a national tax-sharing regime, Governor Ricardo Colombi said in a statement posted on his province’s Web site on March 10.
Opposition Senator Ruben Giustiniani, who is sponsoring a bill to increase the provinces’ share of a tax on financial transactions, said last month that the portion of national tax revenue the federal government keeps for its own uses has risen to 75 percent from 50 percent five years ago.
Fernandez opposes the proposal, saying on March 15 that it would cost the federal government 10 billion pesos a year.
“If they remove federal funds from one place, they will have to explain which funds the government will have to cut,” Fernandez, 57, said in a speech in Ushuaia, a city on the southern tip of Argentina. “Public works? Universities? Pensions?”
Markets Last Week
Last week, the yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 was little changed at 11.44 percent, according to JPMorgan. The peso weakened 0.3 percent to 3.8788 per dollar. The Merval stock index slid 2.7 percent to 2,373.71.
The following is a list of events in Argentina this week:
Event Date
Car Sales (March) April 7
Tax Revenue (March) April 5
(tentative)
Basket of Basic Goods (Feb) April 8
