MercoPress. South Atlantic News Agency

Argentina announces 6.5 billion USD guarantee fund for 2010 debt payments

Cristina Kirchner and Minister Amado Boudou made the announcement in a national televised address

Argentina will set aside 6.5 billion US dollars of its foreign currency reserves to ensure the country meets its 2010 debt payments, the government said on Monday. The move is seen as an attempt to lower costs for issuing new debt, ahead of a complicated year.

The fund is intended to remove doubts about Argentina's ability to pay and could be used to make payments on government bonds or debt with multilateral lending organizations, Economy Minister Amado Boudou said in a nationally televised address with President Cristina Fernandez.

“The objective of this fund is to give the maximum level of assurance,” he said.

Analysts said the decision could give Argentine debt prices a boost in the short term. But some said that using reserves instead of fiscal surplus to pay debt was a worrying sign.

The announcement comes as Argentina is moving to reach a restructuring deal with holders of some 20 billion USD in defaulted bonds in a bid to return to international credit markets eight years after a massive debt default.

Some private analysts say Argentina could face a financing gap of as much as 7 billion USD next year, including funding for the country's provinces.

Argentina's primary budget surplus -- a gauge of its ability to service its debt -- has shrunk in recent months as a slowing economy has reduced tax revenue and the government has increased spending in an attempt to offset the slowdown.

The fund is a “rational” idea and will tap “excess” reserves, Mrs. Kirchner stated. Argentina's reserves currently stand at 47.54 billion US dollars.

Alberto Ramos, a senior economist at Goldman Sachs, said the government's decision was “bullish” for Argentine short-term debt.

“But it is clearly negative from an institutional standpoint as it weakens the central bank and provides the government with extra rope to extend a notoriously profligate spending stance that is often shaped according to political criteria,” he said in a research note.

Market conditions are ripe for a country like Argentina to issue new debt because risk appetite has soared and investors are eyeing attractive interest rates in emerging market assets at a time when developed countries are paying low rates.

But Argentina's financial past is expected to make the cost of issuing debt higher than in other countries, and Boudou has said he would like to see Argentina return to global credit markets paying a single-digit interest rate.

Mrs. Kirchner said the new fund should put investors at ease.

“In addition to making sure we can pay our debts, we are at the same time sending a strong message to the market that we're not going to accept just any interest rate,” she said.

Minister Boudou in an interview with Buenos Aires media said that in 2010, Argentina has to face international obligations and “what we are doing is taking reserves from the Central Bank and using them to wipe out debts.”

Boudou said that these measures generate high expectations within the country, and makes people more confident about economic possibilities, which creates more employment as a result. “We are looking to create more means of formal employment for all Argentines,” he said.

At the Government House and in front of President Cristina Kirchner, Boudou underlined that the project would allow Argentina to “keep growing and will allow the private sector to borrow funds at a lower interest rate.”

“The growth isn't just circumstantial, we took the right measures,” Boudou said, adding that ”we are forecasting a very good 2010”.