Consulado y Centro de Promocion Argentino en Shanghai

ARGENTINA ECONOMIC OVERVIEW Nº 28

(June 2004)

ADVANCES IN PUBLIC DEBT RESTRUCTURING

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* The details of the proposed restructuring of the foreign debt, which now amounts to USD 100 billion (58% of the total public debt), were announced in Buenos Aires at the beginning of June.

* As in Dubai, the offer includes three types of bonds, plus a unit linked to GDP growth, a nominal reduction, interest rates below market rates and maturity at over 30 years.

* The proposal is more attractive for creditors than the one presented last year, since it offers higher interest rates and a lower reduction of capital in the case of the Discount bond.

* The loss of net present value for creditors would thus go from 90% to 70/75%, which improves the chances of winning greater acceptance.

* The design of the new bonds involves a reduction of the defaulted debt of around 60% (the weight of the total debt on GDP would go from 140% to 80%), with low interest payments during the first years (between 0.5% and 0.6% of GDP).

* The presentation of the proposal to creditors was a fundamental requirement for progress in approving the third IMF review.

* The approval process for the operation in the stock market commissions will probably be completed between July and August, followed by a 60-90 day period for the implementation of the swap.

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At the beginning of June, Finance Minister Roberto Lavagna announced in Buenos Aires the details of the foreign debt restructuring proposal which is to be offered to creditors. The defaulted debt, which is mostly in the form of bonds, now amounts to USD 100 billion (including arrears on principal and interest), and makes up 58% of the total public debt. The rest of the debt, which is being paid normally, consists of loans to multilateral agencies, guaranteed loans, the provincial bond and Boden bonds.

As in Dubai, the offer includes three types of bonds, plus a unit linked to GDP growth, a nominal reduction, interest rates below market rates and maturity periods at over 30 years. With higher interest rates in the case of three bonds (see chart), and a lower reduction of capital of the Discount bond (from 75% to 66%), this proposal is more attractive for creditors than that presented last year.

IMPROVED CONDITIONS OF BONDS

Proposal Bond Capital reduction Int. rate

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DUBAI Discount 75% 1%-5%

(September Par 0% 0.5%-1.5%

2003) Quasi-Par 30% 1%-2%

BUENOS AIRES Discount 66% 8.32%

(June 2004) Par 0% 1.35% to 5.25%

Quasi-Par 30.6% 5.57%

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Source: based on Finance Ministry data

Therefore, if the loss for creditors was previously estimated at 90% in terms of net present value (meaning that the bonds would now be worth around USD 10), the new proposal reduces the loss to 70/75%, consistent with those bonds being quoted on the market at around USD 25/30. The good performance of the Argentine economy provides a margin for improving the offer, and thus the chances of achieving greater acceptance by creditors.

The proposal is an important step towards normalising the public accounts. If generalised acceptance of the offer could be achieved, the design of the new bonds would involve a reduction of the debt in default (including arrears) of around 60%. Thus, the weight of the debt on GDP would go from the present 140% to a level nearer 80%, which is still high when compared with the ratio in 2001 (before devaluation and default) of 54%. However, it is important to note that due to the features of the new bonds, with capital payments only being made in the last 10 years of life of the securities and with capitalisation of interest in the first 10 years (in the case of the Discount and Quasi-Par), the interest payments will be low in the first years: between USD 1 and USD 1.2 billion a year, or 0.5% and 0.6% of GDP.

On the other hand, reaching agreement with private creditors would also allow the country to normalise its relations with the international financial market, which may lead to increased spending on investment, and thus to increased productive capacity of the economy, necessary to maintain high growth rates and avoid inflationary pressures.

The presentation of the proposal to creditors was also a fundamental requirement in advancing with the approval of the third IMF review, which has been underway since the middle of June. In addition, the country has comfortably complied with fiscal and monetary targets, and the Law of Fiscal Responsibility, which places limits on the increase in public spending and on indebtedness, makes more detailed information on provincial public accounts available and provides for economic sanctions for those jurisdictions that fail to comply, has been presented to Congress. Although a waiver is likely to be requested with regard to several qualitative targets, including the lack of definition of a new Tax Revenue Sharing Law, the Ministry of Finance is confident that the third review will be approved.

DETAILS OF CONDITIONS FOR ISSUANCE OF BONDS

The Government will offer to creditors a Discount bond, with a considerable reduction in capital (66%), but with a shorter maturity period (30 years) and a higher interest rate (8.32% per annum), as opposed to the Par bond, which will have no reduction but will mature 5 years later and will have a lower interest rate (incremental from 1.35% to 5.25% per annum). Meanwhile, the Quasi-Par bond is an intermediate case in terms of reduction (31%) and interest rate (5.57% per annum), although it has the longest maturity (42 years) (see chart).

CONDITIONS OF ISSUANCE OF BONDS

PAR DISCOUNT QUASI-PAR

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AMOUNT ISSUED USD 10 bn USD 20.17 bn USD 8.33 bn

MATURITY 35 years 30 years 42 years

CURRENCY USD, yens, USD, yens, peso

euro or peso euro or peso

CAPITAL CER (only for CER (only for CER

INDEXATION peso issues) pesos issues)

CAPITAL 0% 66% 30.6%

REDUCTION

CAPITAL Semiannual Semiannual Semiannual

AMORTIZATION from year 25 from year 20 from year 32

ANNUAL INTEREST 1.35% (1-5), 8.32% 5.57%

RATE 2.5% (6-15),

3.75% (16-25),

5.25% (26-35)

PAYMENT OF Semiannual Semiannual Semiannual

INTEREST

INTEREST No 4.35% (1-5), 5.57% until

CAPITALIZATION 2.55% (6-10 year 10

APPLICABLE LAW USA, UK, Japan USA, UK, Japan Argentina

or Argentina or Argentina

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Source: CEI based on Finance Ministry data.

The features of the bonds were designed in such a way as to best suit the different types of creditors. So the Par bond would probably be aimed principally at retail investors, since it gives preference to preserving the capital (it has no reduction). The Discount bond, on the other hand, would enjoy greater preference among foreign institutional investors, who are interested in the international legislation of the securities and in the flow of funds generated by the bond, which has a shorter maturity period and pays a higher interest rate. The Quasi-Par bond, on the other hand, would be aimed at the local AFJPs (private pension funds) since it is a very long-term bond (10 years of interest capitalisation), is subject to local legislation, a better rate of interest than the Par Bond, and the capital reduction is equivalent to accepting conversion to pesos at $1.4 plus the CER (as with the guaranteed loans).

Under this new plan the number of currencies is also reduced. In the case of Par and Discount bonds, the current debt securities denominated in dollars, euros or yens may be exchanged for new debt securities denominated in the original currency of the debt security, in dollars or in pesos (indexed against the CER); the current bonds denominated in currencies other than those indicated may be exchanged only for new bonds denominated in dollars, euros or pesos (indexed against the CER), while the current debt titles in pesos will be exchangeable only for new titles in pesos (indexed against the CER). In the case of the Quasi-Par bond, there will be a single denomination in pesos indexed against the CER.

All the bonds will include an additional detachable coupon linked to the evolution of the local economy. This means that an additional payment will be made when the economy grows above a certain level. This coupon linked to GDP growth will mature in 30 years and will be payable in December of each year. In order to define the time and the amount of the payment, a base scenario is envisaged with annual growth of 3% as of the end of 2004. When GDP in a given year exceeds the level marked out by the previous calculation and records simultaneous expansion of over 3% annually, the payment of the additional coupon is triggered. This payment is calculated as 5% of the difference between current GDP and the GDP of the base scenario (measured in current values) and is expressed in the currency of the corresponding bond according to the market exchange rate.

Additionally, in order to achieve greater participation of bondholders in the swap, improved conditions were offered for the issuing of bonds if acceptance of the offer exceeds 70%. In the case of the Par bond the interest rate for the first five years rises from 1.35% to 2.08% a year. In the case of the Discount bond it rises from 8.32% to 8.52% a year and the percentage of capital reduction falls from 66% to 63%. Meanwhile, in the case of the Quasi-Par bond the yield rises from 5.57% to 5.96% a year and the capital reduction falls from 30.6% to 29.5%. So this mechanism would allow the present value of the bonds to be increased by an average of USD 3.

The Finance Ministry has already begun the respective enrolment and information procedures in the Securities Exchange Commission in the United States and the National Securities Exchange Commission in Argentina. The approval process should be completed in either July or August and then there will be a further 60 to 90 days to implement the swap, at which time the acceptance level of the proposal will be clear. The scarce information published by the Government so far concerning the details of the proposal and of the sustainability model on which it is based is due to legal requirements related with the approval process of the securities.