Argentine president Christina Fernandez de Kirchner will today fly to Paris, where it is understood that she may meet with the Paris Club of creditors to discuss restructuring $6.3 billion of debt.
The unprecedented move has been widely interpreted by investors as the clearest sign yet that Argentina wants to mend its relations with the international financial community, as domestic pressures – both political and economic – begin to boil over.
While economic officials are trying to flesh out a new and credible inflation index, the Argentine president is expected to meet her French counterpart Nicolas Sarkozy for bilateral talks.
Some see a window of opportunity for the resumption of talks with the debtors’ organizations. “I expect little progress. But [a conversation with the Paris club] is definitely on the agenda,” Guillermo Mondino, Lehman Brothers’ head of emerging market research, said.
But he added that the fate of Argentina’s bond holdouts – $20 billion worth of defaulted bonds whose holders rejected payout terms – is still “less on the agenda”, and “even less progress” is expected on that issue.
Miguel Kiguel, former Argentine finance secretary, told Emerging Markets that while the government is finally moving forward – having initiated preliminary negotiations with the Paris Club – “they still have a long way to go.”
The main obstacle remains the official inflation rate, Kiguel said. The IMF’s blessing remains a precondition for a Paris Club deal, but the Fund objects “strongly to the manipulation of the [inflation] index,” said Kiguel. “If they were transparent about inflation, it would not be a problem.”
While the official consumer price index stands at below 10%, independent economist put the inflation rate above 20%.“The manipulation of inflation has destroyed the capital markets in pesos. It has damaged Argentina’s reputation with investors,” said Kiguel.
Martin Redrado, president of the Argentine central bank, speaking at a seminar at the IDB meeting in Miami, said that – even though Argentina’s debt default was the largest in emerging markets, and officials have been accused of repeatedly distorting inflation data – they are now anxious to project an image of normalization. They want to “leave behind the negative effects of the 2001-2002 crisis”, said.
The failure to tackle inflation effectively will certainly lead to a new round of interest rates hikes, according to market analysts.
“Interest rates will have to go up in the mid- to upper-teens sometimes next year,” Kiguel said. Meanwhile, others point to the fact that Argentina may already be defaulting on its domestic debt again, from the technical point of view.
Carmen Reinhart, professor of economics at the University of Maryland, said: “Argentina is already defaulting on its domestic debt. Actual inflation is about 28%. Official inflation is about 6%. They are indexing to the 6%. In other words they are robbing you of your holdings in domestic currency debt.”
Meanwhile road blockades by farmers that have paralysed the agricultural sector in the Pampas for three weeks were lifted yesterday, and trucks loaded with produce started heading for urban markets and ports.
A one month truce was agreed. While both sides – the agri sector and the government – claimed victory, a true resolution of the conflict looks elusive.