Argentina in crunch tax talks with holdout provinces
BUENOS AIRES, Argentina (Reuters) -- The Argentine government pressed
on Wednesday in its bid to seal a crucial tax agreement with the country's
most powerful provinces to head off potentially the biggest debt default in
The biggest provinces, run by the main opposition Peronist Party, are resisting
plans to reduce their share of tax revenue to help balance Argentina's budget. This
could unlock foreign support for the government to restructure most of its $132
President Fernando de la Rua, visiting German Chancellor Gerhard Schroeder,
appealed for "more understanding" from the international and financial community
for his country's efforts to resist a meltdown that could drag down the global
So far, four small provinces run by the Peronists have agreed to cut their
tax revenues in exchange for lower interest rates on bank debts, as have nine
provinces, plus the capital -- run by De la Rua's ruling center-left Alliance coalition.
That leaves 10 Peronist-run holdouts -- grouping the biggest and most powerful.
Without the likes of Buenos Aires province -- accounting for a third of
population as well as a third of the country's economic output -- the government
will struggle to balance its books and avoid financial collapse amid a slump now in
its fourth year.
"There are meetings all morning today (with the government)," said a
spokeswoman for Buenos Aires province.
Officials from the three biggest provinces -- Buenos Aires, Santa Fe and
were meeting with Economy Ministry officials early on Wednesday, while the
governors were due to meet with senior government officials later in the day.
Analysts say broad agreement from the provinces is essential as a show
long-absent political unity that many investors are awaiting before taking part in a
massive government debt swap worth up to $102 billion.
But most expect the governors to sign eventually.
"The governors basically know they have no option in the end but to sign
want to have serious, professional negotiations before they do," said one official
close to the talks.
Standard & Poor's would rate Argentine provincial bonds and loans exchanged
credit in "selective default" until the operation ends, when some debt could however
be rated "positive outlook," a rating agency said Wednesday.
While such a move would initially be negative, heavily- indebted provinces
see their debt profile improve immediately af ter the swap.
Economy Minister Domingo Cavallo, expected to join in Wednesday's negotiations,
has taken a carrot and stick approach. Only provinces that agree to the pact will be
eligible to exchange bonds or credit for guaranteed loans that could save them
around $1 billion a year in total.
Cavallo is due to meet with U.S. Treasury Secretary Paul O'Neill on Friday
meeting of the Group of 20 finance ministers in Ottawa, where Argentina's
economic straits are expected to headline.
De la Rua has been frantically seeking to plug holes in confidence both
at home and
abroad. Argentine shares and bonds have been severely punished by markets in
recent months amid swirling rumors of impending default or devaluation.
Local shares have fallen 40 percent so far this year and Argentines have
about 16 percent of their deposits from banks, pushing Argentina ever closer to a
banking crisis that would endanger its decade-old currency peg to the dollar.
"Argentina is dependent on international support. Our country is not seeking
capital from multilateral lenders ... But what we need from the international financial
and political community is more understanding for our problems," De la Rua told
business leaders in Berlin on Wednesday.
The government, which devotes a fifth of its budget to servicing its debt,
swap locally held bonds for new paper at lower interest rates in a deal it describes
But ratings agencies have warned that the local institutions have no real
stand to lose money through the lower rates -- making the debt swap tantamount to
The new bonds offered to local bondholders will pay interest of 7 percent
or less --
well below the 11 percent to 30 percent rates that the government and
cash-strapped provinces now pay.
A forced default would dry up credit to Argentina, which accounts for about
percent of all traded emerging market debt, deepen a recession and even cut off
credit to other emerging markets.
A senior U.S. Treasury official on Tuesday dubbed Argentina's debt management
"very promising," saying the government had proposed a good strategy and that the
United States would be watching closely.
Copyright 2001 Reuters