MercoPress. South Atlantic News Agency

Buenos Aires city and province issue IOUs to pay suppliers

Argentina’s richest regions appeal to quasi-money: re-edition of 2001/02?

Faced with extremely tight finances, both the city and province of Buenos Aires have decided to pay suppliers with bonds to bridge the widening spending gap, the Argentine State Supplier Union, or UAPE, said in a press release Thursday.

The UAPE fears that the bonds mark a return to the quasi-currencies, or “patacones”, issued by local authorities following the economic meltdown in 2002. However, a spokesman for the city said that the bonds bear no resemblance to the quasi-currencies issued earlier this decade and will be fully convertible.

The local governments are planning on using the bonds “to try to cover their growing budget deficits, using the suppliers to the state to make up the difference,” the UAPE said. Suppliers have complained for months about late payments from the province and city of Buenos Aires which concentrate 70% of the country’s GDP.

“Contracting a service and later canceling it with doubtful measures is a clear ploy that will cause supply shortages and overpriced goods due to the disappearance of normal suppliers. Sooner or later it will lead to a lack of confidence, the absence of credit and bankruptcies that will make the nation poorer,” the union said.

According to the UAPE, the City of Buenos Aires has unilaterally decided to pay bills with checks postdated 90 days after receipts come due and is currently preparing an ARS700 million (183 million US dollars) bond to pay off suppliers.

The city spokesman said that the bond issuance was backed by the city legislature and not a unilateral decision from the executive. Barriers put up by the federal government which prevented the city from issuing international bonds had contributed to the decision, he added.

The province is preparing a similar ARS850 million bond, the UAPE said.

The UAPE statement comes a day after Argentina's Congress approved a bill watering down a fiscal responsibility law in a move designed to help provincial governments deal with growing gaps between spending and income.

Analysts said the proposal may help alleviate the short-term squeeze on provincial government accounts but could end up building greater problems over the medium term. It would almost certainly trigger significant debt issuance by those provincial governments most at risk, including Buenos Aires and Cordoba.

The fiscal responsibility law, introduced in 2004 by former President Nestor Kirchner at the behest of the International Monetary Fund, set caps on spending and debt levels to keep government accounts within sustainable limits.

But federal and provincial governments went on a spending spree in recent years as the economy bounced back from a severe crisis in 2002. Tax revenue kept up for the most part, and the governments were able to report respectable surpluses. But as the economy has suffered in recent months, tax revenue hasn't kept up with the rapid pace of spending. The federal government has encouraged even greater outlays, which it says are the only way to combat the impact of the global downturn on local economies.

Under the new fiscal bill, existing caps will be excluded on any spending designed to promote economic activity, maintain employment or provide social assistance. A ceiling that prevents provinces from raising spending faster than economic growth would be suspended, as would the requirement that state spending maintain “financial equilibrium.”

Provinces would also be allowed to sell assets or debt to finance current spending and would be exempted from the cap that interest payments on debt can't exceed 15% of revenue.