FACTBOX-Key political risks to watch in Argentina

By Helen Popper

BUENOS AIRES, May 3 (BestGrowthStock) – 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 ease a
financing crunch.

President Cristina Fernandez faces rising debt obligations,
but she will be reluctant to slow spending in the run-up to the
2011 presidential election even as inflation quickens.

She won her battle to use billions of dollars in central
bank reserves to pay debt after months of chaotic legal and
political wrangling.

But that won’t be enough to plug the funding gap, and
attention has now shifted to the government’s offer to swap
defaulted bonds and what else Fernandez might do as she seeks
to patch up frayed ties with the country’s creditors.

Here are some of the issues investors are watching:

DEBT SWAP

The government is opening a swap this week to mop up as
much as $20 billion in defaulted debt and many investors are
expected to accept even though it means a loss of 66.3 percent
on the face value of most bonds. [ID:nN15183384]

A high rate of acceptance is crucial if Latin America’s No.
3 economy is to return to global credit markets for the first
time in eight years.

If well over 60 percent of investors participate it could
reduce the risk of lawsuits by holders of defaulted bonds and
reduce Argentina’s cost of borrowing.

Economy Minister Amado Boudou has said the swap should
allow Argentina to issue bonds paying a single-digit coupon,
although investor concern over Fernandez’s unorthodox economic
policies might mean yields stay above 10 percent.

A decision not to issue a new bond could exacerbate the
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 will see any
rate of less than 60 percent as disappointing. The government
may announce early results on May 17 [ID:nN25230272]

— Impact of swap outcome on debt yields and whether they
fall low enough to encourage a new bond sale. Global market
turbulence could hinder Argentina’s plans.

— Threats of legal action by bondholders who refuse to
accept the offer.

CASH CRUNCH

Argentina faces debt obligations of about $15 billion in
2010, most of which come due in the second half of the year.

Without new financing the government could see a deepening
of the fiscal deficit, which reached $1.8 billion last year,
and could force the government to find ever more creative ways
to maintain the primary budget surplus, which measures how much
money the government has to make debt payments.

Although the courts have allowed Fernandez to tap billions
of dollars in foreign currency (Read more about trading foreign currency. reserves to pay debt, the
opposition could seek to lodge further challenges.

Tax revenue is picking up quickly following last year’s
slowdown, but public spending is growing even faster and is
unlikely to ease as next year’s election draws closer.

What to watch:

— Outcome of upcoming Senate vote on the use of reserves.

— Deepening of fiscal deficit as debt payments come due.

— Further depreciation of the peso (ARSB=: ), which would
raise income by boosting revenues from export taxes and boost
central bank profits, most of which come from currency gains,
but it would also fuel rising consumer prices.

INFLATION

Inflation is accelerating 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]

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:

— Government income-boosting measures that could prove
inflationary.

— 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 union. An increase in
strikes could impede industry and exports in certain sectors.

— Gap between official price data and private surveys.

— Depreciation of the peso, which would raises the cost of
imported goods.

CONGRESS DEADLOCK

Fernandez lost control of both houses of Congress in last
year’s mid-term election, making it harder to push measures
through Congress.

However, the opposition has failed so far to form a united
front against the government, allowing Fernandez’s
congressional allies to block several key votes by refusing to
take their seats and by forging alliances.

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.

What to watch:

— Any congressional moves that could further complicate
the state financing situation. The lower house is due to debate
a bill that would give the provinces a bigger share of a
financial transactions tax.

— Increased use of presidential decrees as a way to rule,
which would likely fuel political tensions and increase the
involvement of the courts.

— Any progress on center-left’s proposal to tighten
controls on banks by imposing lending quotas and maximum
interest rates for small businesses and limiting market share.

Stock Market Advice

(Editing by Kieran Murray)

FACTBOX-Key political risks to watch in Argentina