Argentina takes the first step on the long march to recovery

By Richard Ensor

Remembering Mao Tse-Tung's dictum that a journey of a thousand miles begins with the first step, the new Argentine regime had begun to put its economic house in order before its economics minister, Sr Martinez de Hoz, took off on his whirlwind tour of the world to drum up loans to meet Argentina's $1.2 billion debts that mature over the next few months. Although the minister's course was not entirely smooth, he did succeed in re-establishing an essential part of Argentina's image: credibility. 

That is precisely what Argentina needs now. International banks are not willing to throw good money after bad, but in Argentina's case they are prepared, by and large, to refinance existing debt – provided that the military regime that came to power after Mrs. Peron was kicked out is doing its best to remedy the country's awesome economic and political problems. The latter are uppermost in everyone's mind. "Argentina's problems" says A. C. Campos of Eulabank in London "are political rather than economic. If they could have political stability they could have a real economic miracle, for the infrastructure is already well developed and the country has substantial resources. The take-off” he adds, "would be terrific."

Few bankers doubt that, and many of them view Argentina's attempts to haul itself up by its bootstraps as part of a recovery trend in other developing countries, some of whom are already looking decidedly less shaky because of the uptrend in commodity prices. But bankers cannot be blamed for feeling that they have seen it all before in Argentina's case and, while they are prepared to refinance, most of them will be very reluctant to commit any additional new money yet.

The success of Sr Martinez de Hoz's tour, after a masterful softening-up campaign by aides in previous months, has been due in part to the charm and frankness of the ex-Harvard Business School Old Etonian himself, and his personal contacts in the European financial centres. He has been recognized not only as a man with his feet firmly on the ground, but also as an Economics Minister who should last longer in the political saddle than his predecessors. 

His tour met with a mixed reception. It seemed unlikely that the French, British, or American banks would come up with the full quotas alloted to them by the Argentinians, and there were still a number of pre-conditions that had to be met before the loans could be taken up. The first of these was whether the IMF would be prepared to sanction new loans of $300 million – a decision taken in his favour in mid-August. A second condition is that the commercial banks had to produce a minimum aggregate total of $800 million against the Argentine expectation of $900 million. Sr Martinez de Hoz was waiting apprehensively but the odds were in his favour. 

The German and Belgian banks were the keenest to take up their tranches. The former, with the Deutsche Bank taking the lion's share of $15 million, have agreed to provide $85 million in total, the latter some $15 million. No doubt the forwardness of the Belgian banks was hastened by the offer of the Office Belge du Ducroire, the government export guarantee body, to guarantee 80% of the loan and by their ability to lend in Belgian Francs. The three major Swiss banks were also pleased to take up their share of $60 million.

The US banks, visited earlier by the Economics Minister, were quick to come up with $340 million for re-scheduling, but were very hesitant about the $160 million of new money that was sought. 

"None of the American banks is lending any new money. What's the attraction?" questions one US banker. "If you're not part of the re-scheduling there's little chance of getting your money back."

British banks too, were some $15 million short of their allotted target of $75 million, despite the endeavours of Lloyds Bank International, which was chosen as the UK co-ordinating bank; while credit Lyonnais, the French co­ordinator, has had a stiff task scraping up $30 million of the $50 million total set by the Argentinians for the French banks. The British position is more understandable; at present both countries still have their ambassadors withdrawn because of the shadow-boxing taking place over the Falkland Islands. 

However, the tardiness of the French banks to come forward of their own accord has been embarrassing for the French Ministry of Finance as well as Credit Lyonnais. The French authorities are believed to have exerted informal pressure on some of the French banks involved, a precedent not to the liking of the banks in question. "Officially there has been no pressure from the Ministry", explains one Paris-based banker. "What has happened is that we have asked for some incentive; not a guarantee, but perhaps an authorization allowing us to lend in francs and ease our credit ceiling limitations. But the French administration has been particularly slow in replying."

The French government is keen to maintain its presence, because of the significant trade links between the two countries, and in an attempt to improve its ties with the new regime under Lt-General Jorge Videla. It may also want to soften French opinion ahead of EEC-Argentinian talks on beef expected later in the year. The banks, on the other hand, are understandably sceptical about the claims of the new Government that Argentina is entering a "New economic era". Their doubts are an unhappy and unpopular reminder to the other lenders of the risk with which Argentina has been associated.

But it is the political outlook that is demanding attention. "The success of the economy is dependent on political stability", explains Robert Tarter of Bankers Trust in London. "That's why there has been the long term economic malaise; there has been no continuity." 

Unfortunately there is no clear indication that Argentina's internal political problems have yet been solved. Much of the opposition of the left wing terrorists has been destroyed; on the other hand the campaign of repression has led to a short term escalation of violence. Even if Campos is right in claiming that the regime is "very near the end of solving the guerrilla problem", that problem still exists. 

On the other hand the new Government has made some very obvious and solid advances with the economy; and the fact that Sr Martinez de Hoz had these under his belt before he embarked on his journeys has strengthened his case considerably. The most striking improvement is the way in which the inflation rate has been brought down, not by imposing price controls but by relaxing them. Selling prices had frequently been pegged below costs, destroying all incentive to produce, and encouraging steadily worsening stagflation. By removing price controls a market economy has been re-introduced. 

Thus the official consumer price increase in June was a mere 2.8%, mere at least by Argentine standards. In March alone the rise had been a frightening 37.6%, with calendar 1975 showing a 350% increase in consumer prices. Earlier in the year the pessimists had been forecasting inflation rates of anything up to 6,000% in 1976; but it looks now as if price rises could be constrained to almost European proportions in the second half of the year. 

The budget deficit is also being reduced by a tough policy of public expenditure cuts that has included sacking underemployed civil servants. In 1975 the budget deficit was an estimated 13% of GNP, but the forecast for 1976 as a whole is now down to a modest 5%. "The progress on this front has been fantastic", says Campos. "It has proved that the Government is capable of managing, an all-important point for foreign creditors."

Major economic problems remain. The Economics Minister has been indicating that wages must be allowed to fall behind the rise in prices, but there are still elements in the army prepared to maximize the opportunities arising out of any social discontent engineered by an excessive incomes policy. Similarly, a wealth tax is being introduced that will hit the powerful landowners lobby. Longer term, a critical element in Argentina's plan is to encourage foreign investment in the country on the Brazilian model. To this end Sr Martinez de Hoz has been telling bankers that the exchange market will be "freed by the end of the year", a promise if not a date that the bankers are taking seriously. He is known to be a great advocate of the free market economy, and has stated that he will reduce to the "indispensable minimum" the areas of investment prohibited to foreigners. The new plans for foreign investment will also simplify the present confused status of foreign, national and other companies. 

Unlike the Brazilian model, the new Argentine regime is using shock treatment in the short term. For example there is no indexation of savings or wages. Instead, the Government is relying on the fact that Argentine workers are well equipped to suffer a certain amount of squeezing. However, new investment will take time to attract even to Argentina's wide open oil fields. "They are convinced that they will get a lot of investment rapidly", explains a banker who was present when the Economics Minister visited London. "I am not so optimistic. People remember what happened after 1966. Even though Peron has now disappeared the prospective investor will adopt a wait-and-see attitude. First there will be the lending, only then will the investment follow". 

But it is the short term that is regarded as critical for the prospects of the new Government, and in particular the ability of the agricultural sector to tide the economy through the next few months while the industrial sector is allowed to recover. The US Department of Agriculture now estimates that the next wheat harvest may bring in up to 1 million tons more than 1975's 8.5 million tons, a welcome contribution to the trade balance, although a shortage of storage silos may limit the total benefit. Despite the EEC limitations on Argentine beef, exports in the first five months of this year were running at almost twice the 1975 level at $130 million, but the momentum of these initial economic successes will have to be maintained. 

Given this perspective, Sr Martinez de Hoz's success in effectively finding the financial support he needed is clear. He had the whip hand and was prepared to use it. And even the French banks are diplomatically using the argument that it was not the risk they disliked so much as the fact that they regard the job of debt restructuring as none of their business. "Our role is to raise money for commercial objectives, not to do the work of international organizations and reorganize outstanding debt", argues one Paris banker. In any case the French support will not be critical. 

The American banks who have provided $360 million, subject to IMF support, stipulated that they would lend only on the understanding that the Europeans and Japanese (earmarked for $100 million) came up with their share. The French shortfall has been compensated for by the German and Swiss support, so that the European total has been more or less reached. 

Sr Martinez de Hoz's reputation has also been enhanced by the terms of the loan: over four years, with a spread of I⅞% and a yield that is handsomely improved by a management fee of I⅜% and a commitment fee of ¾%. The finely judged spread was to "avoid the status of a South American banana republic", while the generous management fee was needed to boost the attraction of the overall package. The four year term has been a special attraction. "It shows a knowledge of the market", says F. W. Grol of European Brazilian Bank. "The psychology of four rather than five years is clever." 

The idea of using a co-ordinating bank in each country was also appreciated. "One doesn't like to be a participant bank rather than a manager", explains Peter Bareau of LBI. "Co­ordinating banks remove that problem, while bringing together homogenous groups of banks that know each other very well." It also saves Argentina the management fee, while by breaking up the total requirement into national areas, national competitive spirits are brought into play. 

Bankers are confident that the $1.2 billion being raised, including the agreed IMF loan, will be sufficient. As one explained: "They shouldn't need any extra lending of this sort over the next four years: their repayments run at some $900 million for each of the four years." And Campos foresees that by the end of the year "Argentina will be appearing frequently in the market for commercial loans, and will be getting the following it needs. This time the Government was not really looking for new money, it just wanted relief." 

Undoubtedly the critical question remains the success of the anti-guerrilla campaign during the rest of this year. The ability of Sr Martinez de Hoz with his training as chief executive of Acindar, Argentina's biggest private steel company, and his team of technocrats to correct the economy is already being taken for granted, provided he is given the political quiet he needs. 

Certainly the economic position and the regime's approach to the banks compares very favourably with a similar approach made in January by the then Economics Minister. "Nothing the minister said then could convince anyone", says a London-based banker who was involved in the talks. "The banks were pretending to do everything, but at zero miles per hour. Their economic aide memoire wouldn't have got a delta minus in a university exam: it was not surprising it came to absolutely nothing." The minister finally returned to Argentina empty-handed a few weeks before the March coup. 

Like the old joke about Brazil that it was always a country with a future, Argentina has always been a country with a past. In the 1930s Argentina's GNP per head ranked seventh in the world. In 1948 the average hourly wage of a skilled manual worker bought him almost 4lbs of beef or over 15 pints of milk. Today GNP per capita is 46th in the world league table, half the level of Israel and two thirds that of Singapore's, and the hourly wage buys 1lb of beef or 9 pints of milk. A new dawn is now being forecast, but like the exploits of the new government in 1966 it could prove to be false. So far, however, the new regime's attempts to tackle the problems have been impressive.

The principal guidelines of the new economic plan include:

i. a reduction in the fiscal deficit, to be achieved by reducing the number of personnel in the central administration and in public sector enterprises, and by encouraging private investment in non-essential state enterprises and in companies that had been subject to public intervention to maintain employment;

ii. tax reforms, including a wealth and capital gains tax;

iii. further issues of bonds to help finance the public debt, both within Argentina and eventually abroad;

iv. a gradual liberalization of the exchange market by transferring trade transactions to the free market, with a view to achieving a single free rate;

v. denationalization of bank deposits, so as to reactivate banking and financial activities;

vi. promotion of exports, and multilateral payments agreements with other countries;

vii a new foreign investments law with adequate guarantees to attract foreign companies to form subsidiaries in Argentine;

viii large-scale investment in the agricultural sector to increase production and productivity;: better prices and lower duties for grain and meat exporters; abolition of slaughtering quotas for meat producers and the ending of the JNG monopoly on the marketing of grains and oilseeds;

ix. expansion of the energy and mining sector, with participation from foreign companies in the exploration and development of petroleum and mineral deposits;

x. a price policy ruled by market forces rather than by government controls (although excessive price increases could entail prosecution), and periodic wage increases when economic conditions permit.

Source: Bank of London & South America Review