November 14, 2001

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
                 billion debt.

                 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 share of
                 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 the
                 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 Cordoba --
                 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 of
                 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 but ...
                 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 for
                 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 could
                 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 at a
                 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 withdrawn
                 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 fresh
                 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, wants to
                 swap locally held bonds for new paper at lower interest rates in a deal it describes
                 as "voluntary."

                 But ratings agencies have warned that the local institutions have no real choice and
                 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 14
                 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