President Announces Paris Club Debt Repayment U-Turn for Argentina

Argentine president Cristina Fernández de Kirchner marked a U-turn in economic policy yesterday by announcing the payment of all outstanding debt to the Paris Club, an informal group of international creditors. She confirmed that a decree had been issued, authorising economy and finance minister Carlos Fernández to tap into Central Bank reserves to finance the expense. According to Fernández, total outstanding debt with the Paris Club, including interest and arrears, stands at US$6.71 billion, of which 30% accounts for loans from Germany, 25% from Japan, 9% from the Netherlands, 8% from Italy, 8% from Spain, and 7% from the United States. The president was keen to hail the move as evidence of Argentina's willingness to meet its international obligations. The United States was one of the first to praise the Argentine president for her decision to finally address the defaulted Paris Club debt. The investment community also reacted positively, with domestic investors notably finally seeing a window of opportunity for wider access to international financing and credits. Besides a Bloomberg report quoting that Paris Club president Xavier Musca welcomed her decision, the creditors' association has not yet formally commented on the move.

Outlook and Implications

Together with an overall initiative to buy back sovereign bonds in circulation, the full repayment with the Paris Club is the authorities' latest attempt to improve Argentina's standing in the financial markets. Everything started with a bond sale to the Venezuelan government in early August, when the authorities offered a high 16% yield of return on a US$1-billion offer, which was badly accepted by the local market. Country risk went up in August, reaching levels only observed in early 2005—precisely when the government was trying to complete its debt-restructuring process and was still in default. Although further buybacks will improve repayment capacity in the near term, they will also decrease the primary surplus for 2008 and 2009—a bad precedent considering the aggressive expansion in public expenditure. In addition, the Paris Club repayment further erodes the previous level of foreign reserves, which suffered an approximate US$6-billion loss during the last four months. The country's import coverage ratio is set to decrease from 12.3 months of imports in April to only 8.7 months in early September after the payment, although this still remains a comfortable margin. However, it does raise questions over the government's discretionary use of international reserves.

Although the repayment has been hailed as a positive step, notably by local investors, there are also doubts on the manner in which the policy switch was announced—unilaterally. The Paris Club had conditioned any debt repayment process to a loan programme and economic monitoring by the International Monetary Fund (IMF). The absence of the IMF was notable in the president's speech yesterday, though it failed to surprise per se given the Kirchners' distancing from the institution. IMF influence over national economic policy is highly unlikely to return to Argentina under Fernández's rule.