BUENOS AIRES (Reuters) - Argentina has moved to clean up lingering damage from its massive 2002 debt default and lure investors as President Cristina Fernandez works to stoke economic growth ahead of next year's presidential election.Her government completed a restructuring of up to $18.3 billion in defaulted debt in June, and speculation is growing that Latin America's No. 3 economy will soon issue a global bond for the first time in eight years. [ID:nN22213218]
Economy ministry officials say the government does not need to sell debt to meet its fiscal requirements, pointing to brisk tax revenue growth as the economy rebounds and record high
central bank reserves, which it has been using to pay debts. [ID:nN20198868]
The October 2011 election is still more than a year off, but potential contenders are already jockeying for position and the government is cranking up social spending. That could further fuel inflation, running at an annual rate of about 25 percent. [ID:nN28180590]
Here are some of the issues investors are watching:
POST-SWAP OUTLOOK
Argentina's completion of the long-awaited debt swap has boosted investor appetite for sovereign bonds, although the government was unable to issue a $1 billion bond in conjunction with the exchange as planned due to risk aversion sparked by Europe's debt woes. [ID:nN23208350]
Bond prices have risen since the swap and that is raising speculation that the government could issue the 2017 global bond if yields on that paper dip below 10 percent. Economy Minister Amado Boudou has said repeatedly that the government will wait until market conditions are right. [ID:nN16130710]
However, lawsuits from "holdout" creditors have prevented Argentina from tapping international debt markets in the past and could continue to pose difficulties even though the swap has reduced the threat. [ID:nN24156323]
Persistent investor concerns over Fernandez's unorthodox economic policies will also keep yields relatively high. [ID:nN30180460]
Boudou has said the next step in Argentina's drive to patch up its relationship with creditors is to open talks over the roughly $7 billion the country owes the Paris Club, but a deal is not seen as imminent.
Fernandez is unlikely to restructure the Paris Club debt before the election because it would involve mending fences with an old foe, the International Monetary Fund, or IMF.
What to watch:
-- Impact of swap outcome on debt yields and whether they fall low enough to encourage a new bond sale. Much of this depends on global risk appetite.
-- Several provinces and some Argentine businesses have already issued bonds since the swap closed. Others may follow suit and market watchers will be looking closely at yields. [ID:nN28149625]
-- Fresh lawsuits by bondholders who refused to accept the swap offer and reaction of courts, especially if the government does decide to tap global credit markets.
-- A possible debt swap to extend maturities coming due in the run-up to the 2011 election.
INFLATION
Inflation has surged during the last eight months as the economy rebounds from last year's sharp slowdown and private forecasts put the annual rate at at least 20 percent, far above official estimates and fueling pay demands. [ID:nN14153611]
Many trade unions have secured hefty annual pay rises in recent months, easing a wave of strikes and labor protests, and a recent hike in pensions and child benefits could soften the impact of soaring food prices on the poor.
But political analysts say inflation remains the government's Achilles heel as it tries to bolster its support, which has recovered from last year's lows on the back of the economic recovery.[ID:nN04144810]
Brisk public spending is not expected to slow, stoking inflation, and further use of central bank reserves to pay debt means more money is available for government projects.
Controversy over consumer price data continues despite Boudou's vows to restore credibility to the figures.
What to watch:
-- Any sudden price surges that could hit the poor and spark anti-government protests among Fernandez's support base.
-- Fresh government income-boosting measures that could prove inflationary, such as tapping credit markets to allow higher social spending as the election nears.
STATE FINANCES
Argentina faces debt obligations of at least $13 billion in 2010, most of which come due in the second half of the year, but economic analysts say use of central bank funds means the government can manage without new bond sales. [ID:nN13268404] Without access to credit markets, Fernandez has used financing from the country's state-run pensions agency and other government agencies along with central bank foreign currency reserves. [ID:nN13268404]
Tax revenue is picking up quickly following last year's slowdown, growing at rates of about 30 percent in recent months year-on-year, but public spending is also growing rapidly and is unlikely to ease as next year's election draws closer.
Opposition lawmakers are pushing several measures that would hit state finances and their drive to grab the political initiative could gather speed as voting draws nearer.
Government ministers have hinted that Fernandez would veto an opposition-backed proposal to boost pensions if it wins congressional approval, saying it would bankrupt the state. [ID:nN13269275]
Any cuts to multibillion-dollar grains export levies would also dent state coffers, and a special power allowing the government to set them expires on Aug. 24. [ID:nN27104330]
What to watch:
-- Signs of a fiscal deficit or any narrowing of the primary budget surplus despite the use of reserves for debts.
-- Creative government accounting as way to maintain the primary budget surplus, which measures public accounts before debt payments and which widened 54 percent year-on-year in the first half of the year. [ID:nN29247801]
-- The term of Central Bank President Mercedes Marco del Pont expires in September. Fernandez is expected to nominate Marco Del Pont, a close ally, for a second term but Congress will vote on the nomination.
ELECTION BUILD-UP
Argentina's opposition has failed so far to form a united front against the government despite winning control of Congress in last year's mid-term election. But with attention shifting to next year's vote, they are getting organized. [ID:nN29168631]
Fernandez's approval ratings hovered around 20 percent after last year's mid-term, but a brisk economic recovery has lifted her popularity to about 35 percent, pollsters say. That would help her husband Nestor Kirchner, who preceded her as president and is expected to run for a second term.
What to watch for:
-- Signs of sustained rebound in the government's popularity would boost former Kirchner's chances of returning to the presidency in the 2011 election.
-- The emerging field of candidates for the vote and signs of front-runners for a primary race in Fernandez's fractured Peronist party. [ID:nN05577111]
-- Any signs of opposition challengers who might take Kirchner on in a first-round presidential vote.
Written by Helen Poppers for Reuters
(Editing by Kieran Murray)
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Source: http://www.reuters.com/article/idUSRISKAR20100802
