Argentina's Pension Plan Presses On

This week Argentina’s leftist president, Christina Kirchner, announced she would move forward with her plan to seize the nation’s private pension funds. Kirchner claims government seizure of the funds is needed to protect Argentinians from the global market crisis. But most observers believe her real motive is to use the $30 billion in seized assets to ease the massive debt obligations her leftist spendthrift government has run up. The move is unprecedented even by Argentina’s past socialist standards. Leftist icon Juan Peron called the nationalization of private pensions “theft” in a 1973 public address.
But desperate times call for desperate measures. And Kirchner has eagerly pointed to the unprecedented state interventions in the economy by the U.S. and Europe to help justify her policies. The proposed plan has already sunk Argentina’s markets and sent the Peso to new lows.

OCTOBER 28, 2008
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Argentina's Pension Plan Presses On, Driving Down Markets and the Peso

BUENOS AIRES -- Argentina's leftist government pressed forward with its controversial plan to nationalize private pension funds, laying out investment guidelines for the funds it wants to seize and lobbying Congress to approve the proposal.

Taking over the $30 billion in pension fund assets will ease the cash crunch faced by President Cristina Kirchner's government, but it has jolted investor confidence and triggered a dollar outflow.

The Argentine peso weakened to its lowest level in more than five years on Monday, slipping to 3.3 to the dollar from 3.28, despite central-bank intervention to support it. Traders estimate the central bank has spent roughly $500 million to $1 billion in interventions since Mrs. Kirchner announced the nationalization last Tuesday. The Buenos Aires stock market fell 5.7% on Monday, and bonds also fell.

Argentina has currency reserves of $46.3 billion.

Mrs. Kirchner said her move to seize the private funds is designed to protect contributors from alleged mismanagement amid the global market crisis. But economists say it is aimed at replenishing government coffers ahead of midterm elections and sizable debt payments coming due.

On Monday, Amado Boudou, head of the government-controlled pension system that operates in parallel to the private one, met with directors of the 10 private funds to outline the likely terms of their absorption into the state system. He indicated that rules to be issued on Tuesday will require repatriation of the funds' foreign holdings. Analysts interpreted the move as another effort by the government to support the peso.

A judge halted trading by the private funds on Oct. 21, alleging they were illegally unloading Argentine debt after having gotten advance word of the nationalization. The funds began trading again on Monday, but Mr. Boudou indicated the investigating judge will place monitors inside each fund to scrutinize their activity.

In advance of what is shaping up as a heated debate over the proposal in Congress, Mrs. Kirchner once again made her case for public pensions on Monday. "The public [sector] was considered a bad word ... and the state synonymous with inefficiency," she said. "The good of the private sector and the bad in the public sector were highlighted. We have to give the public sector its due."
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SOURCE:
Michael J. Casey ==>>michael.j.casey@dowjones.com
Matt Moffett ==>> matthew.moffett@wsj.com
Wall Street Journal Digital Network, http://online.wsj.com
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October 28 2008 20:31
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Argentine pension funds told to repatriate cash
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Argentine pension funds were preparing on Tuesday to liquidate their assets in Brazil, to comply with a government order to repatriate funds that could enable it to support the peso, which this week fell to five-year lows against the dollar.

The move, a prelude to a proposed nationalisation of private pension funds, has intensified questions over what the government will do with the more than $10bn (€8bn, £6.4bn) the funds hold in private investments, including shares in domestic and foreign companies.

The government’s surprise announcement of a state takeover last week would transfer $26bn in assets to the state pensions system.

The funds will be given three days to sell their portfolios of shares in companies in Brazil and in other neighbours – valued at 1.8bn pesos ($540m, €430m, £345m) – and repatriate the cash. No date has been set, but it should begin in the next few days.

That cash influx will provide resources for the central bank, which has been using its $47bn reserves to stop the peso from sinking too fast. It hit 3.31 to the dollar on Monday, despite central bank intervention, and held steady on Tuesday.

President Cristina Fernández said the abolition of the 14-year-old private pension system was necessary to protect pensions at a time of global financial turmoil, and denied the government wanted to grab the funds to service debts, which officials say is some $21bn next year.

But surpluses from the state system, Anses, have recently provided a source of government funding. Its coffers were swollen last year by people returning to the state system.

Parliamentarians began discussing the nationalisation plan on Tuesday and the government is pushing for a vote as early as next week, though opposition parties want guarantees that the money will not be spent on Argentina’s debt. If the plan is passed, Anses will become the country’s biggest investor in capital markets, whose liquidity and depth will become greatly reduced.

Pension funds, or AFJPs, have 55 per cent of their assets invested in Argentine government debt, according to official data. But the value of that investment fell 8.2 per cent in the first half of October, reflecting sharp falls in bond prices because of the global financial turmoil and concerns about Argentina’s financing situation. Ten per cent of AFJP portfolios are in domestic stocks, which fell 15.5 per cent in the same period.

Their disappearance raises concerns about how the government will ensure a supply of credit to consumers, who have driven growth.

The government, which is keeping close tabs on the funds’ market operations, is subsequently expected to order AFJPs to sell other foreign assets.
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SOURCE:
By Jude Webber and Stephen Fidler in Buenos Aires,
The Financial Times Limited, http://www.ft.com
==============================================
Throughout its history, the government of Argentina has often resorted to expropriating the property of its creditors and citizens. This month, in an ostensible move to protect the savings of workers in the face of a worldwide financial crisis, the administration of Cristina Fernández de Kirchner has proposed doing it again by nationalising private pension funds.

Taking over management of the pension assets of 9.5m people could, if the proposal makes it into law, ease the government’s debt repayment problems in coming years. It may also allow room for counter-cyclical measures to offset the global economic slowdown.

Growing Trade Ties China to Latin America

China is emerging as an economic powerhouse throughout the world — including in the backyard of the United States.

Hungry for trade with mineral- and agriculture-rich Latin America, the Chinese are binding themselves closer with the continent, snapping up commodities such as Brazilian soy and Chilean copper in record amounts.

In Brazil, the soy bonanza is changing the fortunes of soy farmers, as well as the landscape.
Some 13 million acres are blanketed green with soy in the Brazilian state of Mato Grosso, where a quarter of the South American nation's massive crop is produced. Soy provides Brazil a bustling trade with China.

King Soy

In the steamy state of Mato Grosso that straddles Brazil's midsection, soy rolls over the earth like an endless bolt of green velvet.

If soy is king in this state — which produces one-quarter of the country's crop — farmer Erai Maggi is the kingmaker. The 48-year-old soy tycoon started out with one tractor and 250 acres. Today his combined farms total half a million acres.

A battalion of Case Harvesters rumbles across one of his 100,000 acre farms, evoking a scene from Star Wars: gargantuan metal creatures moving with relentless precision over the land. Above the din of the harvest, a ranch hand delivers some unexpected good news.

"The yield is up," he tells Maggi. One of Maggi's nephews quickly does the math and says it's now 1.4 tons per acre, while the state's average is 1.1 tons.

Relatives in this lucrative family business surround Maggi, offering facts he says he can't be bothered with. Like how much he's worth, or whether he has overtaken his cousin, Blairo Maggi, the governor of Mato Grosso, as the state's biggest producer.

Erai Maggi openly credits China for his expanding empire. On a tour of his farm, he says sales to China spurred 20 percent growth, reviving the fortunes of his company, called "Bom Futuro" (Good Future).

"Two years ago, we thought of scaling back our planting," he says. "But then China started buying our soy. It was our salvation; otherwise we'd be in a mess. So we have to thank China."
Case Harvesters swarm across the landscape of Erai Maggi's farm at harvest time as world demand for soy grows.
Soy tycoon Erai Maggi, 48, sits on the veranda of his 100,000 acre soy farm. Maggi credits China with salvaging the fortunes of his company, but he is also critical of China for not investing more in Brazil.
Maggi shows the fruits of his labor: soy beans that have just been harvested. China is now his biggest customer, buying about 60 percent of his production.
The abundant soy harvest of the state of Mato Grosso is delivered in trucks to the warehouses of trading houses that dot the state.
Erai Maggi's 100,000-acre soy farm in Mato Grosso spread produces some of the highest yields in Brazil.

Becoming Partners

Because of the growing demand for soy, which is a key nutrient for poultry, swine and cattle, the price has risen from $150 a ton to $300 a ton. But China keeps buying because it has to provide nourishment for its increasingly prosperous middle class.

Raw materials like soy and iron ore form the basis of Brazil's skyrocketing exports to China, which doubled in just three years.

Welber Barral, Brazil's secretary of international trade in the Ministry of Development, Industry and Trade, says China has become "a very important partner to Brazil. In fact, China became the second partner to Brazil after the United States."

Barral also notes that as their commercial ties intensified, 6 percent of all Brazilian exports went to China last year, while 10 percent of all imports came from China. But Barral says Brazil's new trade deficit with China may actually be beneficial for many Brazilians.

"Because we have this sense that it reduces inflation and gives more opportunity for the poor population of Brazil that [now] has cheaper goods," he says. "On the other hand, as a principle, we don't have to reduce the 10 percent imports from China; we have to increase our exports to 12 percent."

China's ambassador to Brazil, Chen Duqing, says the Chinese and Brazilian economies are "mutually complementary" and insists that with China as a partner, Brazil will reduce its dependence on the U.S. market.

At the same time, Duqing acknowledges that he has had to address apprehensions among some business circles in Brazil that a lopsided commercial relationship may be developing.

"They are claiming before my arriving here that China is invading with products," he says with a laugh. "But I told them, 'You know, we understand globalization. Commercial exchange is inevitable. You must buy, we must sell.'"

The Chinese have been outselling Brazilians in sectors such as shoes. By one estimate, done by the Brazil-China Business Council, Chinese competition is responsible for Brazil losing more than 90 percent of its shoe sector in the U.S. market.

Feeling Friction

Sergio Amaral, former Brazilian ambassador to France, says China is as big an opportunity as it is a threat. He cites such unfair competitive practices as dumping in the textile sector, in which he says suits priced at just $1 are entering the Brazilian market.

Amaral says the "big challenge" for the 21st century is "how countries will react to these dislocations — whether it will be possible to accommodate China or whether this emergence will bring about friction and conflict."

Friction is already stirring. China imports far more raw materials from Brazil than manufactured products. In addition, China has not kept President Hu Jintao's promise to make sizable investments in South America, and attitudes are hardening.

Soy farmer Erai Maggi says he is very keen to see China invest in Brazil's long-neglected roads and railways, which make transport costs five times what they are in the United States. But he's skeptical.

"China investing in infrastructure here?" Maggi asks. "I haven't seen a cent of that. Who from China is going to invest? All I hear is talk — just like a parakeet."

The China-driven soy boom also has alarmed environmentalists who say it has pushed farming northward into the Amazon rainforest and changed the quality of the region's rivers. "We are basically changing nature for money in Brazil," says conservationist Adalberto Eberhard.

But the Chinese ambassador, Duqing, says China isn't Canada. He says developing economies that try to industrialize pollute and that every country must find its own way to reconcile development and damage to the environment.

'A Different World'

In the broader frame, the U.S. market share in Brazil has declined the past five years as China's has surged. Rubens Barbosa, former Brazilian ambassador to Washington, says the United States' focus on the war in Iraq made it possible for newcomer China to begin to eclipse the United States in its traditional sphere of influence.

"Other countries are benefiting from this growing lack of presence, not to say interest," he says. "And other countries, Brazil and China, are taking over in Latin America."

Despite the anxities about a rising trade deficit with China, many Brazilians have a sense of expectation now with their economic destiny linked to the Chinese. Many feel their rising economic prowess is putting them on the path to the developed world.

Meanwhile, Amaral says, a partnership between such developing powerhouses as Brazil and China has the potential to change the world in unprecedented ways.

"This superpower, the United States, is facing some checks and balances and that is positive," he says. "A different world is in the offing."

A world that Amaral says is less unipolar and more democratic in its decision-making.
SOURCE:
All Things Considered, April 1, 2008,
Julie McCarthy,Foreign Correspondent, South America
NPR (National Public Radio)
Washington, D.C.

China to join Inter-American Development Bank

2008-10-24 00:01:07
WASHINGTON, Oct. 23 (Xinhua) -- China will join the Inter-American Development Bank as a donor member, building on its growing links with Latin America and the Caribbean.

The Asian power will become the 48th member country in the Washington, DC-based IDB, the single largest source of long-term lending for the region, said the bank in a statement released on Thursday.

"We are thrilled to bring a large and growing economy like China into a community of nations that are working together to resolve the complex development challenges facing Latin America and the Caribbean," said IDB President Luis Alberto Moreno.

"It is a historic decision that takes China's thriving commercial relationship with our region into the development sphere," he noted.

China has agreed to contribute 350 million dollars to the IDB Group to bolster key programs at a time when the world economy is under duress.

The funds would be distributed as follows:

-- 125 million dollars will go to the IDB's Fund for Special Operations, which provides soft loans to Bolivia, Guyana, Haiti, Honduras, and Nicaragua.

-- 75 million dollars will go to multiple IDB grant funds to strengthen the institutional capacity of the state, including municipal governments and private sector institutions.

-- 75 million dollars is for an equity fund to be administered by the Inter-American Investment Corporation (IIC), which lends to small and mid-sized private businesses.

-- 75 million dollars is to be administered by the Multilateral Investment Fund, the IDB arm that focuses on microenterprises.

"China's membership in IDB will provide both sides with a new platform and opportunity for increased two-way trade and investment and greater technological cooperation," said Zhou Wenzhong, Chinese ambassador to the United States. "This is a win-win decision that will serve everyone's interest."
"China will, after officially joining the IDB, cooperate closely with the bank, support the IDB in reducing poverty and promoting development, and share our experience with the countries of Latin America and the Caribbean for the purpose of mutual benefit and common development," he added.
Over the past decade China has become an increasingly important commercial partner for many countries in this region. Trade between Latin America and the Caribbean and China jumped 13-fold since 1995, from 8.4 billion dollars to 110 billion dollars in 2007.
China is now this region's second biggest trading partner after the United States. In 1995 it was the 12th biggest, trailing Japan and Germany, among others.
"The flow of ideas, resources and technology between China and Latin America has grown exponentially in recent years," said Moreno. "China is an increasingly important commercial partner and investor for the region and a vast new market for our exports."
China's entrance was approved by other member countries in a month-long voting process ended on Oct. 15. The 26 Latin American and Caribbean borrowing nations own 50.01 percent of the IDB. The United States holds just over 30 percent of the shares.
China will purchase 184 shares, or 0.004 percent of the IDB's ordinary capital, which became available after the breakup of Yugoslavia. China will be the IDB's third East Asian member after Japan and South Korea, which joined in 1976 and 2005, respectively.
As an IDB member country, China will be represented at the Board of Executive Directors, sharing a chair with other donor nations. Executive directors oversee the day-to-day oversight operations, approve loans, establish policies and set interest rates, among other duties.
China will also have a seat on the Board of Governors, the IDB's top decision-making body. Governors, who are usually finance ministers or central bank presidents, meet once a year to review the bank's operations and make major policy decisions. Next year's meeting will be in Medellin, Colombia, marking the IDB's 50th anniversary.
The IDB employs about 2,000, with offices in its 26 borrowing member countries and in Tokyo and Paris.
SOURCE:
Editor: yan
www.chinaview.cn

China joins Latin American regional lender

24 Oct 2008 01:25:25 GMT
WASHINGTON, Oct 23 - China on Thursday became a member of the Inter-American Development Bank, the biggest lender to Latin America, at a time when trade and investment between the Asian giant and region is flourishing.

IADB President Luis Alberto Moreno said China planned to contribute $350 million to the IADB as a donor country. The money will be divided among various funds that lend to economic and development projects in Latin America and Caribbean countries.

China has become the region's second-biggest trading partner after the United States as trade between China and the region has jumped 13-fold since 1995 to $110 billion in 2007.

"As Latin America faces the shocks from the liquidity crisis we are working with governments to protect growth and social spending," Moreno told a news conference.

The U.S. Treasury welcomed China's membership of the IADB, saying "it will strengthen the bank and make it more representative and reflective of the global economy."

China has become an important consumer of commodity exports from countries in Asia, Latin America and Africa, but there is concern that should its economy slow with less demand from major economies, it may affect growth in these regions.

Moreno told Reuters that many Latin American economies have started bracing for slower growth levels, as the pace of global expansion is hit by the financial crisis.

"Latin American economies were pretty resilient, almost for a year since the crisis began, but since July things have started to move a little bit," he said. "There have been downward pressures on commodity prices and that certainly will have an impact on growth in Latin America," he added.

"We hope this year that, seeing this started late in eh year, growth will remain close to 4.5 percent as was projected," he added. Next year, however, growth "will look more like 3 percent, but could be lower."

China's Ambassador to Washington, Zhou Wenzhong, said Chinese membership will provide "both sides with a new platform and opportunity" for trade and investment.

"This will serve everyone's interest," he told the news conference. "China and the countries of Latin America and Caribbean are all developing countries. In political, social and in many other areas we are all much alike," he added.

New challenges facing countries, from climate change and energy demands, call for more cooperation among countries, Zhou added.
SOURCE:
Lesley Wroughton, Alibaba.com

Latin America ties prompt China's entry in development bank

Wednesday, 10.29.08
WASHINGTON -- As a sign of China's growing ties with Latin America, the Asian giant announced Thursday that it will join the Inter-American Development Bank, which is the primary multilateral lender focusing on the Western Hemisphere.

The move, which has been in the works for about a decade, comes as Chinese trade with Latin America booms on the strength of record exports of copper, soybeans and other regional commodities to the red-hot Chinese economy.

Chinese trade with Latin America skyrocketed to $110 billion last year from $8.4 billion in 1995, and China has become the region's second-biggest trading partner, behind only the United States. In 1995, China was Latin America's 12th-biggest trading partner.

"The biggest part of world trade growth is trans-Pacific," the development bank's president, Luis Alberto Moreno, said Thursday while announcing China's planned entry. "We're looking to follow those trends."

China will join the bank as a donor nation and will contribute $350 million to programs that fund everything from institution building to small business aid. The bank claims 26 borrowing member countries and 22 donor members, including Japan and South Korea. It approves an average of $8 billion in new loans and credit guarantees every year.

China's ambassador to the United States, Zhou Wenzhong, said at the bank's headquarters that such multilateral tools were the key to solving the international financial crisis, which threatens Chinese and Latin American growth.

Zhou said that Chinese economic expansion probably would slow to 8 percent next year, while the International Monetary Fund predicted Wednesday that Latin American economic growth would be around 3 percent.

The White House has invited China and other countries to participate in a meeting of the Group of 20 nations Nov. 15 that will tackle the global financial crisis.

"This is the moment for cooperation and dialogue and close consultations with all countries," Zhou said. "No one country can fix these problems."

Despite such diplomatic words, some U.S. observers say that China's rise threatens the United States' traditionally strong role in the hemisphere.

For example, Chinese trade with Brazil, which is Latin America's biggest economy, has swiftly surpassed even the strong ties between Brazil and its neighbor Argentina and is approaching levels of Brazilian trade with the United States.

Chinese investors also are pouring money into mining, energy and other Latin American ventures that can feed China's ever-growing appetite for raw materials.

Asked about such U.S. suspicions, Zhou said China's ambition in the region was cooperation, not dominance.

"We don't want to compete with the U.S. for anything here in Latin America," Zhou said. "What we're in favor of is peaceful development, harmonious development and sustainable development."
By JACK CHANG
McClatchy Newspapers
http://www.miamiherald.com/business/nation/story/738751.html
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China joins Inter-American Development Bank; plans to invest in Latin America

Chris Kraul reports:

In the latest sign of China's increasing economic stake and political muscle in Latin America, the Asian giant is joining a Washington-based international bank that finances development projects throughout the region.

China's membership in the Inter-American Development Bank, announced Thursday, is expected to increase the nation's profile and influence in a part of the world that historically has been under the sway of the United States.

China will invest $350 million in the bank and assume a role in its socially conscious projects, including efforts to mitigate poverty and global warming and to provide potable water, infrastructure improvements and micro-credit, bank President Luis Alberto Moreno said in an interview.

Analysts saw the move as providing the Chinese with a new forum to meet Latin American decision-makers and improve Beijing's image in the region.
SOURCE:
Los Angeles Times, LAT Home > Blogs > La Plaza
http://latimesblogs.latimes.com/laplaza/2008/10/china-joins-int.html
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October 24, 2008
China joins Inter-American Development Bank

Beijing could increase its profile and influence by financing projects in Latin America and the Caribbean.
Reporting from Bogota, Colombia -- In the latest sign of China's increasing economic stake and political muscle in Latin America, the Asian giant is joining a Washington-based international bank that finances development projects throughout the region.

China's membership in the Inter-American Development Bank, announced Thursday, is expected to increase the nation's profile and influence in a part of the world that historically has been under the sway of the United States.


China will invest $350 million in the bank and assume a role in its socially conscious projects, including efforts to mitigate poverty and global warming and to provide potable water, infrastructure improvements and micro-credit, bank President Luis Alberto Moreno said in an interview.

Analysts saw the move as providing the Chinese with a new forum to meet Latin American decision-makers and improve Beijing's image in the region.

Analyst Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington, said the Chinese could be seeking to outflank the United States in its own backyard.


"The U.S. is well prepared to meet Chinese challenges in the Taiwan Strait or the high seas," Hufbauer said. "It is poorly prepared to grapple with Chinese financial diplomacy, both because 'our' institutions -- the International Monetary Fund and the World Bank -- are small potatoes compared to the Chinese war chest, and because Americans don't think of national security in financial terms."

The importance of Latin America and the Caribbean to China is evident in growing trade, which has jumped thirteenfold since 1995, to $110 billion last year.

The Asian nation is now the region's second leading trade partner, after the United States.

Over the same period, U.S. trade with Latin America grew more slowly from a larger base. Trade between the two reached $588.4 billion in 2007, up from $201 billion in 1995.

"Membership in the [bank] is only one indicator of Beijing's pocketbook diplomacy," Hufbauer said.

"China has already been at work in Africa and Asia, and the global financial crisis will create abundant vineyards for future pickings."

China has announced plans to set up a sovereign fund to invest $200 billon in projects abroad, and Latin America could receive a significant share.

At the 2004 Asia-Pacific Economic Cooperation summit in Chile, China promised to invest $100 billion in Latin America over the next decade. After a slow start, Chinese money is starting to flow to projects such as a $3-billion steel factory going up near Rio de Janeiro, the largest single Chinese project in the region.

China has also established a multibillion-dollar social investment fund with leftist Venezuelan President Hugo Chavez, with whom it is about to launch a communications satellite.

China has looked increasingly to Latin America, which is rich in soy, wheat, corn, iron ore, copper and oil, for commodities to help expand its industrial base and provide for its increasingly affluent citizens.

Beijing has acquired oil assets in Ecuador, paying $1.4 billion in 2006, and bought a stake in an oil production company in Colombia.

China typically stays out of politics in countries where it invests.

"They aren't converting anyone to communism because they don't believe in it themselves," said University of Miami professor Michael Connolly.

But China does have an agenda in Latin America, said Evan Ellis at the consulting firm Booz Allen Hamilton in Arlington, Va.

China is irked by the diplomatic recognition of Taiwan by 12 Central American and Caribbean nations, he said, and could use the bank forum to lobby against such diplomacy.
SOURCE:
By Chris Kraul is a Times staff writer.
chris.kraul@latimes.com
LAT Home > World News > Latin America
http://www.latimes.com/news/nationworld/world/latinamerica/la-fg-chilatin24-2008oct24,0,5262469.story?track=rss
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Friday, October 24, 2008
China To Join IDB With $350 Million Contribution

“China will join the Inter-American Development Bank, or IDB, as a donor member, contributing $350 million to the multilateral lender.

The IDB said Thursday that China is aiming to build on its growing links with Latin America and the Caribbean. China will become the 48th member country in the Washington, DC.-based IDB, which claims to be the single largest source of long-term lending for the region. …” [Dow Jones/Factiva]

Asia Pulse adds that “… ‘We are thrilled to bring a large and growing economy like China into a community of nations that are working together to resolve the complex development challenges facing Latin America and the Caribbean,’ said IDB President Luis Alberto Moreno.

‘It is a historic decision that takes China's thriving commercial relationship with our region into the development sphere,’ he noted. …China's entrance was approved by other member countries in a month-long voting process ended on Oct 15. …China will purchase 184 shares, or 0.004 percent of the IDB's ordinary capital, which became available after the breakup of Yugoslavia. China will be the IDB's third East Asian member after Japan and South Korea, which joined in 1976 and 2005, respectively. …” [Asia Pulse (Australia)/Factiva]

Reuters notes that “…China has become the region's second-biggest trading partner after the US as trade between China and the region has jumped 13-fold since 1995 to $110 billion in 2007. … The US Treasury welcomed China's membership of the IDB, saying ‘it will strengthen the bank and make it more representative and reflective of the global economy.’ …” [Reuters/Factiva]

Los Angeles Times writes that “…Analysts saw the move as providing the Chinese with a new forum to meet Latin American decision-makers and improve Beijing's image in the region. …China has announced plans to set up a sovereign fund to invest $200 billon in projects abroad, and Latin America could receive a significant share. …’ [Los Angeles Times/Factiva]
SOURCE:
World Bank, News > Press Reviews
URL for this page: http://go.worldbank.org/GGNUO0IHT0
http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,date:2008-10-24~menuPK:34461~pagePK:34392~piPK:64256810~theSitePK:4607,00.html
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China to join Inter-American Dev Bank with US$350 mln donation

Oct. 24, 2008 (China Knowledge) - China has agreed to donate US$350 million to join Inter-American Development Bank (IDB), in bid to deepen its economic relationship with Latin America and the Caribbean, according to the statement released by IDB. On Oct. 15, IDB's other member countries approved China to enter IDB as the 48th member after a month-long voting process.
SOURCE:
China Knowledge Online,
http://www.chinaknowledge.com/News/news-detail.aspx?type=1&id=18364

Some Lessons for Indian Air Carrier Companies

LAN Airlines Reports Net Income of US$122.1 Million for the Third Quarter of 2008
Oct. 28, 2008,4:48 p.m EDT
SANTIAGO, Chile (BUSINESS WIRE)
LAN Airlines S.A , one of Latin America's leading passenger and cargo airlines, announced today its consolidated financial results for the third quarter ended September 30, 2008. "LAN" or "the Company" makes reference to the consolidated entity, which includes passenger and cargo airlines in Latin America. All figures were prepared in accordance with generally accepted accounting principles in Chile and are expressed in U.S Dollars.

HIGHLIGHTS

-- LAN reported net income of US$122.1 million for the third quarter 2008, excluding extraordinary items. This represents a 55.0% increase compared to net income of US$78.8 million in the third quarter 2007. Including these extraordinary items, LAN reported net income of US$80.4 million.

-- Third quarter results include a non-operating provision of US$50 million in relation to the ongoing US and European global investigations of a large number of international cargo airlines, among them LAN Cargo S.A., LAN's cargo subsidiary, into possible price fixing of fuel surcharges and other fees in the European and United States air cargo markets.

-- The Company reported operating income of US$135.8 million for the third quarter 2008 compared to US$98.7 million for the third quarter 2007, maintaining a flat operating margin for the quarter at 11.3%. This result was in spite of higher fuel prices, which resulted in US$168.7 million in additional fuel costs during the quarter.

-- Total revenues for the third quarter 2008 reached US$1,204.6 million compared to US$874.6 million in the third quarter 2007, due to a 36.1% increase in passenger revenues and a 51.4% increase in cargo revenues. Passenger and cargo revenues accounted for 63% and 34% of total revenues, respectively during the third quarter 2008.

-- For the first nine months of 2008, the Company reported net income of US$260.4 million, excluding extraordinary items. This represents a 25.5% increase compared to net income of US$207.5 million in the same period in 2007. Including these extraordinary items, LAN reported net income of US$218.6 million.

-- Continuing with the expansion and renewal of its fleet, LAN received one new Boeing 767-300 passenger aircraft, three new Airbus A318 passenger aircraft and one new Airbus A320 passenger aircraft during the third quarter 2008.

-- LAN maintains a solid financial position, as reflected by its BBB international credit rating (Fitch). LAN has no short term debt and all its long term debt is aircraft related. As of September 30, 2008, only 8% of debt is maturing in the short term and the Company has a ratio of 2.4 times net debt / EBITDA for the last twelve months. LAN ended the quarter with US$492 million in cash, cash equivalents and committed credit lines, representing 11.2% of revenues for the last twelve months. The Company has limited exposure to foreign exchange rate fluctuations since approximately 84% of revenues are US dollar denominated.

-- On September 2, 2008 LAN launched its service to Toronto, Canada, which is served as an extension of the Santiago-New York City direct flight with five weekly frequencies.

-- On September 15, 2008 LAN launched its new Premium Economy class on board its new Airbus A320 fleet. This is an especially designed product option for passengers who travel short distances for business within the region, offering more cabin room and greater comfort in a cabin designed for 12 passengers. This roll-out of Premium Economy makes LAN the first company in South America to offer this service to passengers who travel for business on regional flights lasting less than 5 hours.

-- During the quarter, LAN continued to receive international recognition. In August 2008, the Company was again named best airline in South America at the World Airline Awards, based on a global survey of passengers carried out annually by SkyTrax.

LAN Airlines is one of the leading passenger airlines in Latin America. The company serves more than 60 destinations around the world through an extensive network that offers full connectivity within Latin America while also linking the region with North America, Europe and the South Pacific, as well as 58 additional international destinations through its various code-share agreements. LAN Airlines and its affiliates have a leading position in their respective domestic markets of Chile and Peru as well as an important presence in the Argentinean domestic market.

Currently, LAN Airlines operates one of the most modern fleets in the world, with 75 passenger aircraft and its cargo affiliate, LAN CARGO, operates 9 dedicated freighters. The company recently completed its short haul fleet renovation process by acquiring new aircraft from the Airbus A320 family, enabling LAN to improve its efficiency and to reduce significantly its CO2 emissions. The fleet renovation is part of the company's commitment to the protection of the environment.

LAN is one of the few Investment Grade airlines in the world (BBB). The company's world class quality standards enabled its membership in oneworld(TM), the global alliance that encompasses the best airlines in the world.


MarketWatch,The Wall Street Journal Digital Network:
http://www.marketwatch.com/news/story/LAN-Airlines-Reports-Net-Income/story.aspx?guid=%7B71F47542%2DB49D%2D4C9A%2DAADA%2DE2B9BB6744E8%7D

Brazil Auto Makers Expect Flat 2009 After Years Of Records

October 28, 2008: 02:20 PM EST
SAO PAULO -(Dow Jones)
Brazilian auto makers will be looking back on another year of record sales come Christmas but will be casting a wary eye on the prospects for 2009.

Local auto sales are already stumbling amid the restriction of credit, which indicates an end to five years of growth.

"We expect sales to be stable next year, which isn't bad considering the [ financial] crisis," said Peugeot Chief Executive Laurent Taste, referring to the global credit crunch and the likelihood of an economic slowdown in Brazil.

Credit is the lifeblood of the local auto industry, with 65% of domestic sales financed. However, the international credit crunch has seen finance availability tighten.

The first impacts of the crisis appear already to be having an impact.

The Brazilian Motor Vehicle Manufacturers Association, or Anfavea, expects sales to rise 24% to 3.1 million in 2008. But Peugeot's Taste said he thinks the crisis means sales will probably reach only 2.7 million cars.

In addition, Renault CEO Jerome Stoll said the company also lowered its estimate to 2.75 million units.

Domestic vehicle sales in the first 24 days of October totaled 172,254 units, down 12% from 195,396 units sold in the first 24 days of September and 4% lower than the same period of 2007, according to preliminary data.

Demand was boosted by economic growth.

Gross domestic product in Latin America's largest economy is seen expanding 5.23% this year, according to a central bank survey of analysts, but it is expected to subside to 3.19% in 2009.

Despite the concern about 2009, big players are maintaining medium- to long- term expansion plans.

According Jaime Ardila, General Motors Corp (GM) region chief executive, the company will maintain its investment plans in Brazil over the next four year and is negotiating additional investments with the company's headquarters.

GM plans to invest $1.5 billion in Brazil by 2012. Part of that money has already been spent. Ardila that GM in Brazil was also talking to the corporate headquarters in the U.S. for another $1 billion. A decision on that isn't expected until sometime next year.

"Brazil has become the last island in the storm," said Bill Mann, an automotive analyst at Motley Fool in Alexandria, Va.

Executives of the major car companies also said that the weaker local currency will make Brazilian-made cars more affordable in nearby Latin American nations.

"GM, Ford (F) and others are looking for the best return on investment, and South America is among the bright spots in the world today for them," said Tim Gilbert, chair of the automotive department at Northwood University in Florida.

"Brazil stands in complete contrast with the declining fortunes of their U.S. and European operations, which have been hit hard by the current financial crisis."

Mann warns that even if return on investment in Brazil makes the most sense for General Motors, in particular, "my bet is that the bulk of these investments won't really kick in until 2011. I still think they will be conservative, even in Brazil," Mann said.

GM's local rival, Italy's Fiat (FIATY), will also maintain investments worth BRL5 billion programmed for the 2008-2010 period despite the threat of global recession.

"The fundamentals of the Brazilian economy continue to be strong," said Cledorvino Belini, chief executive for Fiat in Brazil. "We are maintaining all projects here."

-By Rogerio Jelmayer and Kenneth Rapoza, Dow Jones Newswires
http://money.cnn.com//news/newsfeeds/articles/djf500/200810281420DOWJONESDJONLINE000676_FORTUNE5.htm

Latin America better girded for financial crisis

The region is affected by global downturn, but more prepared this time thanks to greater foreign reserves and less external debt.
Mexico City and Sao Paulo, Brazil
October 24, 2008
As leaders in Washington rushed to stem the growing financial crisis in the United States, Latin American leaders thought they'd be unscathed. Brazil's president, Luiz Inácio Lula da Silva, when asked what repercussions he expected at home, retorted, "What crisis?" Venezuelan President Hugo Chávez called it the "crash of capitalism."

A few weeks later, the tone has changed remarkably for a region heavily dependent on the international prices of minerals, crude oil, and food – all of which have taken a hit – not to mention remittances, tourism, and investment.

Stock markets across the region are falling. Argentina's has sunk 20 percent since Tuesday. Brazil's dropped 10 percent Wednesday; Mexico's, 7 percent; Chile, 6 percent.

Mexico and Brazil, the region's two largest economies, spent chunks of their federal reserves to stem unexpected currency declines. Mexico introduced an emergency stimulus package, while Brazil offered $2 billion in loans to exporters through local banks. The era of uninterrupted economic growth and fiscal surpluses, it seems, could be on the wane.

Yet even as nations await the full impact of a crisis that is reaching every corner of the world, Latin America is better placed today to weather the downturn than at any other time in the past half century, says Gray Newman, senior Latin America economist at Morgan Stanley in New York. Countries in the region have, overall, kept spending within budget and built up their currency reserves. Many have solved external imbalances and adopted flexible exchange-rate systems.

"Faced with a global downturn the region's largest economies are likely to face a relatively normal business cycle rather than a fully fledged crisis," says Mr. Newman. "That is good news and represents a graduation from the past for some countries in the region."

Still, the region will have to readjust after years of steady growth. Average annual growth rates across Latin America – at 5.1 percent from 2004 to 2008 – are expected to fall hard, with expectations for next year at just 2.8 percent, according to Rahul Ghosh, head of Latin American country risk and financial markets at Business Monitor International in London.

Commodities prices are a key reason. The metals, grains, and livestock that South America sends around the world, particularly to China, helped push Latin America to five years of unstinting growth. Trade surpluses that averaged almost $100 billion a year between 2004 and 2008 are likely to fall to around $23 billion next year, according to a Morgan Stanley report.

The nations that have worked to get their economies in order – such as Brazil, Chile, and Peru – are among the best placed to keep growing next year.

Argentina, Venezuela, Bolivia, and Ecuador are expected to face tougher times – both because they are dependent on commodity exports, says Alfredo Coutino, a senior economist for Latin America at Moody's Economy.com, and because of greater needs for external financing.

On Tuesday, President Cristina Fernandez de Kirchner in Argentina sent a bill to Congress with a plan to nationalize the country's $30 billion private pension system, in an effort she said was to protect retirees in the midst of the financial crisis.

The nation most directly affected by the US economy is Mexico, where more than 80 percent of exports head north, and where remittances represent one of the most important sources of income. Already, signs of trouble have surfaced in Mexico. The peso has plunged more than 20 percent this month after years of stability. Growth is now estimated at less than 2 percent for 2009.

President Felipe Calderón introduced a $4.4 billion "emergency spending" plan for a new oil refinery, infrastructure, and new hospitals and schools to stimulate job growth. He remained optimistic despite the problems. "Once these difficult moments pass, our economy will be stronger, will generate more jobs, and will grow more quickly," he said.

It is optimism that Mr. Coutino shares. He says Mexico has taken proper measures such as reducing its external debt and accumulating sufficient foreign reserves, unlike in past crises. "The big difference with past crisis episodes is that Mexico is in a better macroeconomic situation now. They are not going into recession," he says. "They do have resources they didn't have in past crises."

That is true across the region. In the past, Latin American economies were so tied to the US that when crisis hit there, the rippled effects were felt across the continent, in sales, income, and most noticeably in gross domestic product.

But nations such as Brazil have decoupled in recent years. Business Monitor International forecasts that only 14 percent of Brazilian exports in 2008, for example, will head to the US. For Brazil, Argentina, and other nations in the region, demand in Asia has been a buffer.

Over the weekend chief bankers from across the region met in Santiago, Chile, to address the regional impact. In a joint statement they said: "We're in better shape to face the financial turbulence, thanks to solid economic fundamentals."

Still, Newman cautions, some countries are being too optimistic. Argentina, Brazil, and Colombia, for example, still expect less than 4 percent growth next year, according to the International Monetary Fund; Newman estimates all will be closer to 2 percent.

The past half decade in Latin America has been one of boom times. Venezuelan President Hugo Chávez has been able to pour billions into social programs for the poor across his country and sent oil at subsidized rates around the rest of the region with oil windfalls. Lula has been able to tackle poverty, increasing the social spending budget fourfold in 2008.

Now the equation is changing. Oil prices, from highs of around $147 a barrel in July, has fallen to less than half that amount. The fall robs nations like Venezuela, Mexico, Bolivia, and Ecuador of much-needed cash, and many are being forced to adjust future spending.

"What I would say is that this is the first real test for Lula and Chávez," says Mr. Ghosh. "This has been a great time for Latin America in terms of external conditions. It will be interesting to see if they stick by the market-friendly policies they've advocated. There will be a public clamor to spend in a bid to prop up growth and help consumers hit by slower growth and inflation."
SOURCE:
By Sara Miller Llana – Staff writer and Andrew Downie – correspondent
The Christian Science Monitor
http://www.csmonitor.com/2008/1024/p06s01-woam.html

UNASUR decides to establish South American Parliament in Bolivia

Members of the Union of Latin American Nations (UNASUR) attend a meeting in Cochabamba October 17, 2008
Bolivia's President Evo Morales (L) and his Chilean counterpart Michelle Bachelet wave to the crowd in Cochabamba October 17, 2008. Bachelet is in Bolivia to attend the Union of Latin American Nations (UNASUR) meeting
Bolivia's President Evo Morales (L) shakes hands with his Chilean counterpart Michelle Bachelet during a meeting in Cochabamba October 17, 2008. Bachelet is in Bolivia to attend the Union of Latin American Nations (UNASUR)

LIMA, Oct. 17-- The Union of South American Nations (UNASUR) decided at a meeting on Friday to set up a South American Parliament in Bolivia to promote the bloc's integration.

Chilean President Michele Bachelet, also the UNASUR's temporary president, and Bolivian President Evo Morales opened the meeting in Bolivia's Cochabamba province which drew representatives from 12 countries in the region.

"There are many tasks that the UNASUR is urged to accomplish, as part of the Latin American and Caribbean efforts," Bachelet said.

Bolivian Vice President Alvaro Garcia said that UNASUR members consider it necessary to promote the construction of the institutionalism and the first step is for UNASUR members to present their proposals on the establishment of the Parliament.

During the meeting, the participating countries agreed to appoint in 45 days their representatives to work on the proposals and to meet again in Cochabamba in mid-January in 2009 on the issue.

The meeting also agreed to create a working table formed by representatives from the UNASUR, the Andean Parliament and the Common Market of the South (MERCOSUR).

The establishment of the parliament "could take weeks or months" as the proposals will have to go through a long procedure to get approved, Garcia said.

Liberation sweeping Latin America : Bolivian Press

Thursday, October 9th, 2008

UNITED NATIONS - Speaking at a press conference after his address to the UN General Assembly, Bolivian President Evo Morales said a “great feeling” of liberation is sweeping Latin America and cannot be stopped.

“The combat of our people is a historic struggle against empire,” he told reporters. “Where there is imperialism, all you find is exploitation and the pillaging of natural resources. With no imperialism, there is development, justice and there is freedom.”

Latin America has changed and the United States must get used to it, wrote Larry Birns, director of the Washington-based Council on Hemispheric Affairs, in an analysis of relations between Latin America and her northern neighbor posted on the think tank’s website. “The Bush administration, distracted by the war in Iraq, gave the region the required space to develop its own consensus on regional developments; coming up with new formulas in its quest to diversify relationships; pluralizing its world trade contracts and engaging in constructive relations across the board,” Mr. Birns continued.

While the administration for the past eight years basically ignored Latin America, “more left-leaning presidents were elected” than ever before in the history of the Americas; and a plethora of regional organizations that did not include the U.S. as a member were formed, he noted. “The region suddenly saw a rise in its importance on the world stage as its metal and agricultural commodities increased in relevancy and value during the current fuel and food crisis, and new links emerged between Latin America, India, China, Russia, and the European Union,” wrote Mr. Birns.

President Morales told reporters Sept. 23 that Latin American nations were now able to build their own partnerships and unions based on respect for differences, peace, dialogue and dignity. “The Union of South American Nations had been created precisely so that Latin America would no longer be the back garden of the empire. Unlike other international organizations, such as the Organization of American States, UNASUR is managed completely by South American countries; and no longer are trips to Miami or New York required to solve our problems,” the Bolivian president said.

Alimany Bakarr Sankoh, president of the Hugo Chavez International Foundation for Peace, wrote in a different analysis that no amount of intimidation or terrorism, be it political or economic terrorism, can shake the confidence of the people of Latin America toward their governments. “Clearly, the control of the wealth of Latin America” is at the root of U.S. hatred “for Venezuela, Ecuador, Paraguay, Bolivia and Cuba,” Mr. Sankoh wrote.

During his address to the General Assembly, Foreign Minister Samuel Lopez said, “Nicaragua aimed to overcome poverty” and “its citizens would help redefine the country’s path to doing so.”

Fernando Lugo Mendez, president of Paraguay, told the General Assembly his new administration, which had come to power on Aug. 15, realized citizens voted for greater social justice. “Political and economic stability are not more important than social stability and I am committed to applying policies that will combat extreme poverty,” he said.

Michelle Bachelet Jeria, Chile’s president, agreed there was a growing demand for democracy among the people of Latin America. “South American nations have learned that we can work together to solve any crisis and we have a strong desire to leave the dark history of our past behind,” she said.

Guatemala’s president said his nation was giving social policy the scope and strength it deserved, moving forward programs that served the poorest regions of his nation. “We are working extremely hard in the regions inhabited by the 23 indigenous communities that constitute the majority of Guatemala’s population. The programs aim to establish a system of wealth distribution and social justice,” said President Alvaro Colon Caballeros.

It is clear the U.S. remains “largely oblivious” to the multifaceted developments that are taking place in an increasingly self-confident Latin America, wrote Mr. Birns. “It may be too late for Washington to develop cooperative and mutual beneficial policies,” he added.

Argentina: differing economic analyses

The global financial crisis will hit each Latin American country differently. Analysts seem to think that Peru is best-positioned. The country is expected to have the highest economic growth of any South American nation in 2009.
Argentina seems to be another story. I came across this analysis.Disagree with it or not, it seems well researched.
Former president Nestor Kirchner and current president Cristina Fernandez at La Matanza on Friday. (Photo: Argentine President's Office)

Monday, October 20, 2008

Averting Disaster in Argentina

The Kirchners should look to Chile's mar­ket-based economic reforms, privatizations, and limited government as a model.

The irresponsible economic policies pursued by the government of Argentina in the wake of its sover­eign debt default in 2001, and its debt-restructuring offer in 2005, provide a vivid case study of the root causes of Argentina's steadily declining scores in the annual Index of Economic Freedom published by The Heritage Foundation and The Wall Street Journal.

In late December of 2001, Argentina declared a default on its massive sovereign debt—the largest such default inworld history. In 2005, the country presented bondholders with its final offer, a "take-it-or-leave-it" debt-swap proposal for bonds with an original face value of $81 billion. The offer required bondholders to agree to a 70 percent reduction, the largest sovereign debt "haircut" on record. Holders of bonds amounting to about 76 percent of the debt— many of them state-owned banks and other entities of the Argentine government with little say in the deci­sion—agreed to the swap. The remaining 24 per­cent—"holdout" bondholders—who rejected the offer include more than half of Argentina's foreign creditors.

COMMODITIES FINANCE POPULISM

The country's current left-wing government, led first by Peronist Party leader Néstor Kirchner (presi­dent from 2003 to 2007) and now by his wife, Presi­dent Cristina Fernández de Kirchner, has used revenues from commodities exports to finance the same sort of populist policies that have kept General Juan Peron and his political progeny in power in Argentina more or less continuously since the 1940s with a simple but economically destructive formula: wasteful welfare state handouts, a swollen bureau­cracy to redistribute wealth, and powerful closed-shop trade unions protected from foreign competi­tion; all generously lubricated with corruption.

Although Argentina had made an impressive economic recovery after the disastrous 2001–2002 crisis, the Kirchners pulled off several years of eco­nomic growth with smoke and mirrors. They thumbed their noses at conventional economic wis­dom, imposing price controls and a 21st-century version of Juan Peron's "Import Substitution" indus­trialization policy, as well as essentially lying about the true levels of inflation that their polices have cre­ated. Not only does an artificially low inflation fig­ure overstate real gross domestic product (GDP) growth, it also permits the government to make lower interest payments to bondholders based on a consumer price index (CPI)-linked formula.

The Kirchners have also toed the party line of their only major benefactor—hard-left socialist president of Venezuela Hugo Chavez—and so they are rejecting advice on market-friendly economic reforms from the International Monetary Fund (IMF). In a cynical move in 2005, the government of Argentina repaid more than $9 billion in low-interest loans from the IMF ahead of schedule, greatly helped by revenue from high-interest bonds the Argentine government sold to Chavez, inflict­ing the resulting higher interest payments on Argen­tina's beleaguered taxpayers. With Argentina's loans paid off, the IMF has less leverage over the Kirchner government.

THE CHAVEZ ALTERNATIVE

Chavez is using Venezuela's oil wealth as a weapon to undermine the IMF, which he accuses of being a tool of the Western imperialist powers (led by the United States). Chavez is pushing the cre­ation of a South American competitor for the IMF— the "Bank of the South" (Banco de Sur)—which he hopes to dominate through Venezuelan oil wealth and use to advance his regional political ambitions.

At long last, the Kirchners' luck appears to be running out. The economy is slowing and the Kirchners are finding it increasingly difficult to con­vince people in Argentina and around the world that the inflation figures reported by their govern­ment statistical office (INDEC) are correct. Although INDEC maintains that inflation in Argen­tina is running at an annual rate of 9 percent, most knowledgeable observers place the real figure at roughly 30 percent—and growing.

Meanwhile, facing declining government reve­nues due to the economic slowdown they created, and the need to continue government handouts to their urban-poor political base, the Kirchners attempted to raise the already heavy taxes on exports of agricultural commodities, especially soy­beans, in March 2008. That set off an unprece­dented rebellion by Argentina's farmers that has hurt the country's image around the world and shredded Cristina's domestic approval rating. "Con­cerns are growing that as the nation's economy slows, if Kirchner doesn't deal with mounting debt, rising inflation, sagging investment, and limited resources to pay for subsidies, then Argentina may be on the way to an economic crisis and [another] debt default."

SAME AS BURKINA FASO

Hundreds of U.S. companies operate in or export to Argentina, employing tens of thousands of peo­ple whose futures have been jeopardized by the Argentine government's long-standing refusal to set­tle with the holdouts. The country's investment cli­mate has been damaged. This past August, Standard & Poor's cut Argentina's foreign-debt rating from B+ to B, which is five grades below investment grade and places Argentina in the same category as Belize and Burkina Faso, far behind neighbor and rival Brazil (which achieved investment grade in 2008). This lower rating will raise the cost of bor­rowing for Argentine businesses and make Argentina less competitive in the global economy.

Impartial rule of law, government transparency, and vigilance against state corruption are among the most important measurements used to calculate the annual Index of Economic Freedom. The Kirchners' Peronist government has callously disregarded them all—as demonstrated by Argentina's steadily declining scores—and this has been well illustrated by their attitude toward the bond-debt-swap hold­outs. It is a classic case of an assault by a leftist-pop­ulist regime on the property rights of both domestic and foreign bondholders.

The Kirchners' aggressive and antagonistic atti­tude toward the holdouts (refusing until only recently even to consider re-entering negotiations) threatens to undermine established and time-tested international lending norms, ultimately to the detri­ment of all developing nations. As a leader of the globalized economy and the international financial institutions that have ensured prosperity for billions of people over the past 50 years, the United States has a special responsibility to prevent abuse of that system by Argentina or other rogue nations.

WITHHOLD LENDING

The U.S. Administration should insist that the IMF, the Inter-American Development Bank, and the World Bank withhold any future lending to Argentina until Argentina adopts free-market and good-governance reforms addressed in the Index of Economic Freedom.

The U.S. Congress should hold hearings on the threat to both the U.S. economy and the world financial system if more sovereign debtors were to follow the bad example of Argentina and repudiate their debts. Congress should also investigate possi­ble legislative remedies to prevent abuse of the legal system by sovereign debtors.

One of the wealthiest countries in the world a hundred years ago, "Argentina suffered during most of the 20th century from recurring economic crises, persistent fiscal and current account deficits, high inflation, mounting external debt, and capital flight." Though Argentina's most recent military dictatorship was finally overthrown in 1983, three of the democratically elected presidents since then have left office early and another served only in a caretaker capacity. In fact, during the 2001 debt default, Argentina went through five presidents in two weeks.

WASHINGTON CONSENSUS

After the Cold War, Argentina and other Latin American governments wanted to repair their economies damaged by the "lost decades" of the 1970s and 1980s, when Argentina and many other countries in the region were ruled by dictatorships and bedeviled by hyperinflation. By the time Carlos Menem was elected president of Argentina in 1989, inflation was raging at a rate of at least 250 percent—per month. Menem and other Latin leaders implemented the "Washington Consensus," a series of policy steps needed for an economy to enter the modern world—macroeco­nomic discipline, microeconomic liberalization, and participation in the global economy.

Menem's sweeping market-based policies and his attempt to end 50 years of statism through an ambi­tious privatization program led to increased invest­ment and growth with stable prices. Inflows of foreign direct investment (FDI) to Argentina were among the highest in Latin America through most of the 1990s.

To break the back of hyperinflation in 1991, President Menem adopted a Currency Board exchange rate mechanism and imposed peso–dollar parity. The government pegged the Argentine peso to the U.S. dollar at a 1:1 exchange rate through a strict "convertibility" law. "While convertibility defeated inflation, over time the rigidity that it imposed on exchange rate policy, combined with lack of fiscal discipline and poor governance, undermined Argentina's export competitiveness and created chronic deficits in the current account of the balance of payments, which were financed by massive borrowing."

NO LABOR REFORM

In addition, unfortunately, neither Peronist Menem nor his successor, Fernando de la Rúa of the Radical Party, followed through on reforms needed to make Argentina's historically rigid and anti-free-market labor laws more investor friendly, nor did they reduce regulatory burdens on business, strengthen the judiciary, or reduce impediments to trade. They withheld their wholehearted support for the U.S.-led negotiations for a Free Trade Area of the Americas (FTAA) agreement. Even more sig­nificantly, widespread corruption in the Menem and De la Rúa administrations undermined confidence in the government and hampered economic growth. The absence of deeper reforms caused new investment flows to slow, unemployment to rise, and "eventually, the [2001 debt] crisis [to] hit."

In 1998, the domino effect of the Asian financial crisis "precipitated an outflow of capital that gradually mushroomed into a four-year depres­sion, culminating in a financial panic in Argentina in November 2001." By early December, the financial and political crisis came to a head. Private capital fled the country and the government— drowning in debt—stopping interest payments on government-issued bonds to tens of thousands of individual investors, pension funds, and financial institutions (in Argentina and abroad).

On December 20, 2001, amidst bloody riots, President De la Rúa resigned. At the end of the month, the government defaulted on roughly $82 billion in privately held debt and over $6 billion in "Paris Club" debt to official government creditors (including approximately $360 million owed to the U.S. government). It was "the largest sovereign debt default in history" and it rattled the world's already jittery financial markets.

The legislative assembly elected Peronist Edu­ardo Duhalde on January 1, 2002, to complete De la Rùa's term. Duhalde quickly abandoned the peso's 10-year-old convertibility link with the dollar, a move that was followed by a sharp currency depre­ciation and rising inflation. "While the [currency] board was operating, most contracts in the [utilities and transport] sector[s] were written in U.S. dollars; when the peso was devalued, the government decided to void most of these agreements," an act of bad faith and a harbinger of things to come. As a result of the voided contracts, for instance, "multi-year price freezes on electricity and natural gas rates for residential users stoked consumption and kept private investment away, leading to restrictions on industrial use and blackouts [by] 2007."

REPUDIATING $20 BILLION DEBT

After a new president, Peronist Néstor Kirchner, took power in 2003, the government presented a "take-it-or-leave-it" debt-swap proposal to its foreign and domestic creditors. The swap (which was slightly sweetened in June 2004) amounted to a 70 percent reduction of the face value of the original bonds, which creditors would be forced to exchange for "three new bonds—Par, Quasi-Par and Discount—for a maxi­mum estimated face value of $21.8 billion, plus a coupon linked to GDP growth [which the govern­ment pledged to maintain at 2.7 percent]."

By 2005, bondholders accounting for a total of 76 percent of Argentina's defaulted debt accepted the government's offer of about 30 cents per one dollar of original debt. Many of these bondholders were Argentinean state-owned banks and govern­ment-controlled pension funds, which had little recourse after the Kirchners pressured them and threatened legal consequences if they refused to sign off on the debt-swap deal. Even so, the 76 per­cent acceptance rate was very low compared with other recent sovereign restructurings.

The acceptance rate for international creditors, however, has been estimated at only about 50 per­cent. And those foreign holders of more than $20 billion in bonds, the "holdouts" who refused to accept a 70 percent haircut in the 2003–2005 restructuring—which many called a "buzz cut"— are suing for full repayment.

CONTEMPT FOR BONDHOLDERS

Until very recently the government of Argentina has refused even to engage with the holdouts, among which are several hedge funds, along with a number of pension funds as well as individual investors from Germany, Italy, and else­where. After rejecting the Argentine government's initial 2003 offer, the holdouts sued the Argentinean government in U.S. federal courts, an act that an irri­tated President Néstor Kirchner branded "geno­cide." Kirchner also scoffed when Rodrigo de Rato, managing director of the IMF, requested that the Argentinean government be more respectful to the holdouts and treat its creditors with respect. Hans Humes, an asset manager who represents investors holding about $40 billion worth of defaulted debt, observed that Néstor Kirchner's behavior was proof that "Argentina is just trying to bully people into accepting an unacceptable offer."

The intransigence of the Argentinean government toward the holdouts, while perhaps attractive politi­cally for the Kirchners vis-à-vis their supporters, has been costly to the government in other ways. Argen­tina's reputation among global investors has deterio­rated, and "the latent threat of [attachment of assets by creditors] prevents [the government of Argen­tina] from accessing international capital markets" and thereby raises its borrowing costs. Until recently, the continuing refusal by the government to negoti­ate with the holdouts was causing the default to look more and more like a repudiation. Very few coun­tries have taken such a hard stance in the past and those that have done so (for example, Zimbabwe), have done incalculable damage to their reputations and their investment climates.

Unfortunately, Argentina has a long history as a deadbeat in world financial markets. In fact, the Paris Club, representing developed countries' official government creditors, was invented to deal with a sovereign debt default by Argentina—in 1956.

SUBSIDIZED BEEF, HEAVY INFLATION

The Kirchners' strat­egy has been to exploit record-high commodity prices to finance their leftist-populist policies and keep the peso artificially low. In the process they have overheated the economy and stoked exports and inflation.

To deal with the high inflation their policies have generated, the Kirchners have simply denied that it is high and maintain the fiction that inflation in Argentina is relatively moderate. They imposed a new set of methodologies and ordered INDEC's stat­isticians to abandon best practices. Criticism of INDEC's figures has increased "as public and private estimates of price increases diverge ever further." Recent estimates by private-sector analysts "put observed inflation closer to 30 percent." Not only does an artificially low inflation figure allow the Kirchners to overstate real GDP growth, but it also permits the government to make lower interest pay­ments to domestic bondholders because the interest calculation is based upon a formula using Argen­tina's CPI.

The Kirchners have used other tricks to hide inflation or attempt to depress it. They have imposed wage and price controls and have gone so far as to ban exports of world-famous Argentine beef in order to flood the domestic market and drive down the prices of beef (a staple food in Argen­tina). In 2006, "President Néstor Kirchner banned beef exports in an effort to keep rising beef prices from pushing the country's [CPI] out of control."

These efforts to tamp down inflation artificially and provide protection to local industry from com­petition from imports have succeeded in the short run. According to Morgan Stanley analyst David Volberg, "the peso has actually weakened nearly 2% annually against a basket of its main trading partners, although it should be strengthening because of strong terms of trade and steady eco­nomic growth."

LUCK RUNNING OUT

As The Economist noted recently, since the economy recov­ered in "mid-2002….it has seemed to defy eco­nomic gravity. [Argentina under the Kirchners has] violated many standard economic prescriptions: it has shunned the IMF and shafted private bondhold­ers; kicked out foreign companies and set up new state-owned ones…. Yet over the past six years, Argentina's economy has grown at an annual aver­age rate of 8.3 percent—faster than any other big econ­omy except China."

Although the farmers benefited initially from increased agricultural exports as a result of the gov­ernment's weak peso policy, the Kirchner govern­ment began to look at those export revenues as a golden goose. When (now-former) Finance Minis­ter Martín Lousteau attempted to raise taxes on agri­cultural exports to 44 percent earlier this year (the third increase in six months), the farmers revolted, staging strikes and blocking shipments of food, both for export and to Argentine cities. Although the farmers demonstrated peacefully, the govern­ment at times responded with police brutality and its usual populist weapon—Communist rent-a-mobs (Picateros).

After months of fruitless negotiations between the government and the farmers over the level of export taxes, the legislature finally resolved the impasse in a close vote that reflected great political courage by Cristina Kirchner's vice president, Julio Cobos. The Kirchners were defeated by the sen­ate's decision to overturn the tax increase, but that means that now government revenues will drop and Argentina's debt-to-GDP ratio will deteriorate. Debt levels are rising—currently 56 percent of GDP (67 percent if the debt owed to the haircut holdouts is included), compared with 54 percent in 2001 at the time of the default. Some economists in Argentina have raised the spectre of another default on the horizon.

The Economist reports that Argentina may be reaching that turning point:

A slowdown, long predicted by the Kirch­ners' opponents, is at hand. When compared with the same period last year, retail sales (measured by volume) are down 10% to 15%. On Calle Florida, Buenos Aires's main shopping street, almost every block has at least one vacant shop front. Employment in the private sector is still growing, but at half last year's rate, according to Nicolás Bridger of Prefinex, a consultancy. Meanwhile, infla­tion has taken off.

British journalist Ambrose Evans-Pritchard re­ports that Argentina still looks safe on paper, but he notes that "the yield spread on inflation-linked peso debt has ballooned to 1230 basis points. They are priced for the dustbin. The world's biggest exporter of soybeans—and number two in corn—is riding the food boom, even if at war with its own farmers. The trade surplus is $12 billion. Foreign reserves are more than $50 billion. Yet the default premium is soaring anyway. " Evans-Pritchard reports spec­ulation by University of Maryland economics pro­fessor Carmen Reinhart that the Kirchners are manipulating the inflation figures to "engineer a partial default on [Argentina's] domestic debt."

BONDHOLDERS WIN, LOSE

The holdouts have been aggressive in trying to force the Kirchners to pay their debts. Dozens of class action and individual lawsuits have been filed against the Republic of Argentina in the Federal Dis­trict Court for the Southern District of New York. All of the federal cases were heard by U.S. Circuit Judge Thomas Griesa, who has consistently ruled in favor of the holdouts in the first instance. Many more claims have been brought by Argentina's cred­itors in Europe before the International Centre for Settlement of Investment Disputes (ICSID)—and in Argentina's own courts.

Nonetheless, Argentina has managed to evade these adverse rulings by shuffling its domestic assets. Creditors have been unable to execute their judgments against the country because it moved anything that might be attached from the United States and has hidden the rest in protected accounts, such as those held by its central bank. Seeking relief and with no other recourse, the cred­itors appealed their enforcement action to the Sec­ond Circuit in 2007 but lost on a fairly basic issue: They had sued the wrong entity (the central bank instead of the Republic). The court hinted, however, that they might have better luck simply alleging fraud, that Argentina was abusing the law "to play a shell game to deprive creditors of their legitimate remedies." The creditors have not yet indicated whether they will pursue this line of attack.

Argentina's economy is slowing, but real GDP growth for 2008 is still forecast to be 6 percent although it is unclear how much that figure has been manipulated by erroneous INDEC inflation figures. Nevertheless, there are growing problems related to the default that will negatively affect growth and hurt the average Argentinean: "mount­ing debt, rising inflation, sagging investment, and limited resources to pay for subsidies"

INCREASED RISK

An analyst for Morgan Stanley predicts that the risk of a wage-price spiral will increase in Argentina due to default-related inflation. "We suspect that wage negotiations are a key risk…and that…labor demands [for] wage growth [will] further spur infla­tion and risk an economic downturn as both supply and demand pull back."

There are at least 450 U.S. com­panies operating in Argentina with more than 150,000 employees. As noted above, those work­ers' futures were jeopardized by the Argentinean government's refusal, to date, to settle with the hold­outs, which has damaged the country's investment climate. At a recent meeting a panel of distin­guished economists lamented Argentina's long trail of broken promises. They estimated that the country has failed to attract approximately $6 billion in for­eign direct investment every year since the 2001 default. Much of that FDI has flowed instead into Argentina's more stable and prosperous neighbors, especially Brazil and Chile. "One problem lies in a history of broken contracts, debt defaults, and weak institutions. Another is the expectation of economic crises and investors' focus on short-term gains. Eco­nomic damage has also resulted from price controls, export bans, and the waning credibility of the INDEC National Statistics Institute, in addition to Argen­tina's still-defaulted Paris Club debt and litigation by holdouts from a 2005 sovereign restructuring."

Argentina has borrowed more than $25 billion over the years from the Inter-American Development Bank (IDB). Nearly 300 IDB loans were funded in part by Amer­ican taxpayers, since the U.S. government funds almost one-third of the IDB's capital. A default by Argentina on IDB loans would, ultimately, have to be paid by the American taxpayer.

Argentina's default has also hurt the pension funds of American teachers and other workers in the non-profit sector. The Teachers Insurance and Annuity Association of America (TIAA-CREF) lost $100 million, not including lost interest and penal­ties, when Argentina's government defaulted—a big hit to the pension funds of teachers and college pro­fessors across the U.S.The artificially low peso has hurt U.S. soybean farmers. When the farmers were on strike in Argentina, U.S. soybean exports rose. But when Argentina, the world's largest pro­ducer of soybeans, returned to full production and began exporting soybeans again at artificially low peso prices, "soybean demand from U.S. processors fell 6.7 percent."

ARGENTINA'S SINKING SCORES

Impartial rule of law, secure property rights, transparency in government, and vigilance against government corruption are among the most impor­tant measurements used to calculate the annual ranking of 179 countries in the Index of Economic Freedom published by The Heritage Foundation and The Wall Street Journal. Argentina's Index score plum­meted from 70.9 in 1998 (ranking 19th freest econ­omy in the world out of 156 countries scored) to 55.1 by 2008 (ranking 108 out of 162 countries).

The structural problems in Argentina's economy are outlined in the 2008 Index of Economic Freedom, which reports low scores on property rights, labor freedom, freedom from corruption, and especially financial freedom. The Kirchners' manipulation of the official government inflation index allows them to reduce interest payments on government bonds. The interest payments are calculated using a for­mula that includes the CPI. Thus, the Argentinean government's use of an artificially low inflation fig­ure in the formula in practice results in the theft of a portion of the interest payments it owes to bond­holders (the difference between the interest owed if the higher—true—inflation figure were used versus the lower interest payment resulting from using the artificially lower CPI figure), thereby violating their property and legal rights.

The 2008 edition of the Index noted that the 2001–2002 foreign debt crisis remains unresolved, and local capital markets are not healthy for entre­preneurs. Argentina scored only 55.1 out of a possi­ble 100, with zero being "least free" and 100 indicating "most free." Its low rank even in the Western Hemisphere, 23rd of 29 countries, reflects how far behind Argentineans are from those they consider peers: Canada, the U.S., and Chile.

TAX EVASION

Compared to the typical country, Argentina has only one economically favorable institution: rela­tively small government in terms of expenditures. Most advanced economies are cutting their corpo­rate tax rates, but Argentina's top corporate and income tax rates are 35 percent. Yet tax revenue as a percentage of GDP is low, as is expenditure, as a result of tax avoidance and evasion. Property rights, labor freedom, and freedom from corruption are low, but financial freedom is especially problematic. Political interference with an inefficient judiciary hinders foreign investment, and popular and official obstructions of due process make international courts preferable to Argentine courts. A brief look at some of the defects in the Argentine system detailed in the 10 Index freedoms for Argentina confirms these findings:

Business Freedom. "Inconsis­tency and lack of transparency per­sist…. Regulations are often applied inconsistently."

Trade Freedom."Extensive non-tariff barriers…to constrain trade, protect domestic industries, and maintain price controls for some goods include import and export controls, tariff escalation, import and export taxes, reference pricing, bur­densome regulations, restrictive sani­tary rules, subsidies…. While the customs process has been improved, many delays continue."

Fiscal Freedom. "Argentina has high tax rates."

Government Size. "The state's role in the economy has grown in recent years, and structural budgetary weakness persists. The energy and transport sectors are particularly dominated by the public sector."

Monetary Freedom. "Official government figures for inflation show it to be relatively high, averag­ing 9.4 percent between 2005 and 2007. Credible unofficial figures report the true rate of inflation was raging at an annualized rate of at least 25 percent in 2008. The government regulates prices on numer­ous goods and services, including electricity, water, retail-level gas distribution, urban transport, and local telephone services. It also establishes price agreements with producers and sellers."

Investment Freedom. "Investors are obliged to keep foreign currency earnings in the country for a period of at least 180 days. In June 2005, the government further tightened capital controls by increasing the minimum holding period for capital inflows and establishing that some capital inflows are subject to a 30 percent unremunerated reserve requirement to be deposited in a local bank for 365 days. …The most significant deterrent is legal uncertainty concerning creditor, contract, and property rights. The flow of capital is restricted, and repatriation is subject to some controls."

Financial Freedom. "Argentina's banking system remains significantly dominated by the state's pres­ence. The largest bank is state-owned and serves as the sole financial institution in parts of the country. Argentina remains unable to gain full access to international capital markets, however, because of the government's outstanding debt."

Property Rights. "The executive branch influ­ences Argentina's judiciary, and independent sur­veys indicate that public confidence remains weak. Courts are notoriously slow, inefficient, secretive, and corrupt. Many foreign investors resort to inter­national arbitration. An important violation of property rights is the ‘piquete,' by which protestors take over private business, causing extensive losses with no effective punishment by the police or the government." The government's manipulation of official statistics for inflation has caused domestic bondholders to lose billions in interest payment because of the effect of the lower inflation figures on the formulas for domestic debt re-payments.

Price controls and poor intellectual property pro­tection have made Argentina less attractive for FSI from multinational pharmaceutical companies. "A senior manager at U.S. firm Eli Lilly [says] that it was looking elsewhere for growth in the absence of robust patent laws and tolerance of copy drugs by the Argentine authorities." Unsurprisingly, Argen­tina features prominently as one of the nine coun­tries on the U.S. Trade Representative's Priority Watch List published in April 2008.

Freedom From Corruption. "Corruption is per­ceived as widespread. Argentina ranks 105th out of 179 countries in Transparency International's Cor­ruption Perceptions Index for 2007. Foreign inves­tors complain frequently about both government and private-sector corruption. Money laundering, trafficking in narcotics and contraband, as well as tax evasion plague the financial system."

Labor Freedom. "Argentina's labor market operates under restrictive employment regulations that hinder employment creation and productivity growth."

Other Indices Echo the Index Findings:

Forbes "Best Countries for Business" report in 2008: Argentina ranked 92nd of 121 countries versus 75th out of 144 in 2007.


World Bank Doing Business 2009 report: Argen­tina ranked 113th of 181 countries, down from 109th of 178 countries in 2008.


World Economic Forum (WEF) Global Competi­tiveness Index: Argentina dropped from 70th of 131 in 2006 to 85th of 131 in 2007.


Transparency International Corruption Percep­tions Index: Argentina ranks 105th of 179 coun­tries for 2007 versus 93rd of 163 countries in 2006.
WHAT TO DO

As a leader of the globalized economy and the international financial institutions that have ensured prosperity for billions of people over the past 50 years, the United States has a special respon­sibility to prevent further abuse of that system by Argentina and possibly other rogue nations. The U.S. government must also act to prevent further losses to the American taxpayer emanating from the Argentine default.

The Argentinean government should:

Follow through on its recently announced inten­tion to re-enter negotiations to repay debts to the Paris Club and private bondholders.


Honor the commitments made by the govern­ment of Argentina at the time of the borrowing and repay the loans with full faith and credit.


Take note of and implement the steps needed to correct the deficiencies described in the 2008 Index of Economic Freedom.
The U.S. Administration should:

Make debt repayment a policy priority in recog­nition of the importance of the strengthened U.S. relations with Latin America that would flow from the resulting improvement in financial freedom and investor confidence throughout the region.


Hold Argentina accountable in all high-level contacts between U.S. and Argentinean govern­ment officials by emphasizing the need for the Kirchner government to settle with its interna­tional creditors.


Insist that the IMF, IDB, and the World Bank withhold any future lending to Argentina until policy reforms outlined in the 2008 Index of Eco­nomic Freedom are implemented.
The U.S. Congress should:

Hold hearings on the threat to both the U.S. economy, for example, U.S. businesses and U.S. jobs affected by Argentina's economy, as well as the world financial system if more sovereign debtors were to follow the bad example of Argen­tina and repudiate their debts.


Investigate possible legislative remedies to prevent abuse of the U.S. legal system by sovereign debtors.
LOOK TO CHILE

The Kirchners should take note of and imple­ment the steps needed to correct all of the deficien­cies described in the 2008 Index of Economic Freedom, for the good not only of their own citizens but of all South America. The government must also be honest about the true rate of inflation and cease efforts to manipulate the value of the peso. The gov­ernment of Argentina has an obligation to its citi­zens to reach some sort of agreement with all external creditors so that it can regain full access to world financial markets.

Instead of perpetuating wasteful welfare-state handouts and income redistribution based on an unsustainable economic model, the Argentine gov­ernment should look west and emulate the success that Chile has enjoyed from a combination of mar­ket-based economic reforms, privatizations, and limited government.

The Kirchners also should look north to Brazil, where fellow leftist and President Luiz Inacio Lula has been more successful governing than the Kirch­ners. Lula has called inflation a "degrading disease," preferring fiscal restraint and support for Brazil's central bank anti-inflation measures. As a result, Brazil has enjoyed much greater inflows of FDI and was recently awarded investment-grade foreign-debt rating.

The Kirchners' collusion with Hugo Chavez in his campaign against the world financial system poses a grave threat to global prosperity. Their aggressive and antagonistic "take-it-or-leave-it" atti­tude threatens to undermine established and time-tested international lending norms, ultimately to the detriment of all developing nations in the form of higher borrowing costs.

BY:James M. Roberts
James M. Roberts is a research fellow in economic freedom and growth in the Center for International Trade and Economics at The Heritage Foundation.