VII Capital Market - Ministerio Hacienda · sed up to levels near 10,500 points and 2,100 points res- ... FTSE 100 (United Kingdom) ... CAPITAL MARKET

1

C A P I T A L M A R K E T

Capital MarketVII

!In the first quarter of 2001, average prices of Argentine fi-

nancial assets increased slightly. Stocks recovered with respect

to the average of the fourth quarter of last year, and the same

did public securities, so the sovereign risk implicit in their prices

fell slightly. This modest advance took place within a more

favorable international environment. Face to a strong slowdo-

wn of United States economy and the fall of American stock

exchanges, the Federal Reserve implemented since January an

aggressive monetary policy that provoked, until June 2001, six

successive reductions of short term interest rate. Said rate reduc-

tion was partially followed by Europe. However, at the closing

of this Report, new reductions of corporate profits were an-

nounced in the United States, with a significant fall of the

growth rate expected for world economy this year. Within this

environment, the fall of the technological stocks listed at the

NASDAQ continued.

The domestic scenario was characterized by the absen-

ce of economic reactivation and the difficulties to close the fiscal

gap. The year 2000 ended with a GDP fall of 0.5% y/y whe-

reas the fiscal deficit amounted to U$S 6,900 millions, a little

lower than the previous year, with a growing weight of interest

within total Government obligations. In view of the problems

to access external financing, in December, the government had

decided to negotiate a contingent loan from the IMF with the

aid of multilateral and bilateral agencies, known as the “finan-

cial shield”. As a consequence of this, during January and part

of February 2001, expectations improved and since that there

was a significant recovery of bonds and stocks price.

By the beginning of March, both indicators of tax co-

llection and industrial activity showed the persistence of reces-

sion and the difficulty to comply with the targets agreed upon

with the IMF. Besides, a financial crisis broke out in Turkey that

provoked the rise of sovereign risk of emerging countries, with

a particular effect over the Argentine economy. Then there came

two changes of Ministers of Economy, and finally the imple-

mentation of a program with a higher political consensus focu-

sed not just on public expenditure cuts. The Congress and the

executive power approved an emergency fiscal plan, whose first

step included a Competitiveness Law, meant to improve eco-

nomic conditions for the sectors producing tradable goods that

were most affected by the crisis. For the sake of this, the gover-

nment resorted basically to a tax on current account transactio-

ns, together with a series of tax deductions for sectors such as

textiles, shoe wear, steel, automotive and other.

Nevertheless, this series of measures was not enough

and April’s fiscal and real indicators confirmed the persistence

of the crisis. Thus, the government decided to implement a

huge dollar public securities swap maturing in the next five

years, for other series of securities with longer terms (between 7

and 30 years). This transaction allowed for the decompression

of the financing needs for the next fifteen years by approxima-

tely 16,000 million dollars, with one total transaction that in-

volved securities for almost 30,000 million dollars (Please see

Annex to this Chapter). Once it was completed, the govern-

ment decided to advance the enforcement of a system of wide

2


convertibility (by which the peso will be backed in equal parts

by dollars and euros). As well a tax reform focused on a reduc-

tion of income tax, an increase of employers contributions to

social security and changes in the fuels tax. The plan seeks to

improve competitiveness and encourage consumption; at the

time compliance of fiscal targets is guaranteed.

I. International outlook

United States

In the first quarter of 2001, the United States growth

rate continued slowing down, with an increase of GDP of 1.2%

year-on-year. This figure was somewhat higher than the increa-

se of the previous quarter, but much lower than the first quarter

of 2000, 4.8%. The GDP variation for the whole 2000 was

5%, but for 2001, the main forecasts anticipate an important

slowdown (around 2.5%). Consumption continued growing

in the first quarter at higher rate than output (3.4%), particu-

larly durable goods, to the extent they account for a negative

savings of families. Exports fell slightly, but imports declined

significantly (-9%). Nevertheless, credit to consumption

continued growing more quickly than household income,

which deteriorated their financial situation. The current

account imbalance remains at 4% of GDP. In turn, unem-

ployment rate experienced a slight rise, up to 4.5%. Later

on, by the end of May, there was an acceleration of retail

inflation, which amounted to 3.6% p.a., basically as a con-

sequence of price increase of fuels and electricity.

In the first quarter of 2001, the plunge of technolo-

gical stocks had started and in the first quarter of 2001 this

process continued, which should impact as a moderation

of consumption during this year. Within that environment,

since January of 2001 the Federal Reserve implemented an

aggressive monetary policy through six consecutive decli-

nes (up to June 2001) of short-term interest rate, with the

aim of avoiding recession. So, the federal funds rate decli-

ned from 6.5% at the end of 2000 down to 3.75% at the

end of June this year. Said policy was accompanied by an

also expansive fiscal strategy, since the American Congress

approved a cut of income taxes, which would mean 1.3

billion additional dollars available for consumption in the

next ten years. The fiscal effect of the measure for the se-

cond semester of year is estimated to be 0.5% of GDP.

Long-term rates of United States Treasury bonds

gradually declined during the first quarter of 2001, thus

following the fall of short-term rates, but rose again in the

second quarter. Thus, the differential between short and

long term expanded in the last months, from less than one

percentage point to a little more than two points. At the

closing of this report, the 30-year bond promised a yield of

5.7% p.a. The fact that both in the United States and in

Europe there is a controlled fiscal situation, in general, en-

courages a decline of rates. In the last year, the yield curve

of American Treasury securities returned to normal, adop-

ting the traditional shape as per the longer the term, the

higher the rate (Graph 7.1).

American stocks had suffered strong falls during

2000, partially reversing the appreciation of the previous

5 years. In the first quarter of 2001, the main stock indexes

continued falling. By March 2001, the Dow Jones index

amounted to 9,500 points, with an accumulated loss of

almost 20% from its peaks. In turn, the NASDAQ compo-

site indicator, where mainly technological and Internet stoc-

ks are listed, undergone a real plunge of 60% from its

peaks recorded in March 2000, down to levels near 1,800

points. From then on, there was a certain recovery until

3


May, and both the Dow Jones and the NASDAQ increa-

sed up to levels near 10,500 points and 2,100 points res-

pectively. However, at the closing of this report, perspectives

indicated that the stocks decline would continue, in view of the

successive warnings of lower returns of leading technological

companies, including telecommunications.

End 1997 End 1998 End 1999 End 2000 31-Jan-01 28-Feb-01 30-Mar-01 30-Apr-01 31-May-01 22-Jun-01

Interbank Interest Rates

LIBO US$ (6 months) 5.84% 5.08% 6.13% 6.20% 5.26% 4.91% 4.71% 4.30% 3.98% 3.73%

LIBO EUR (*) (6 months) 3.75% 3.22% 3.52% 5.07% 4.83% 4.64% 4.42% 4.74% 4.44% 4.32%

LIBO YEN (6 months) 0.77% 0.54% 0.23% 0.54% 0.44% 0.27% 0.13% 0.10% 0.08% 0.08%Treasury Rates

US 1 year 5.49% 4.54% 5.91% 5.09% 4.93% 4.47% 4.17% 4.30% 4.12% 3.88%

US 10 years 5.74% 4.65% 6.37% 5.11% 5.11% 4.90% 4.92% 5.34% 5.38% 5.12%

US 30 years 5.93% 5.09% 6.48% 5.46% 5.50% 5.31% 5.44% 5.79% 5.75% 5.58%

Exchange Rates

EURO/US$ 0.913 0.857 0.992 1.061 1.068 1.083 1.141 1.125 1.183 1.169

YEN/US$ 130.1 114.9 102.4 114.8 116.6 117.4 126.33 123.5 119.2 124.4

SWISS FRANC/US$ 1.456 1.386 1.594 1.611 1.635 1.668 1.743 1.733 1.798 1.773

STERLING POUND/US$ 0.604 0.602 0.619 0.670 0.683 0.692 0.702 0.698 0.705 0.708

GOLD US$/Oz Troy (London) 289.8 286.9 287.8 272.3 265.9 267.2 265.9 264.1 265.9 274.0

Stock Market Indexes

Dow Jones (USA) 7,916.0 9,316.3 11,452.5 10,786.8 10,887.4 10,495.3 9,878.8 10,735.0 10,911.9 10,604.6

NIKKEI (Japan) 15,258.7 13,842.0 18,934.4 13,785.7 13,843.6 12,883.5 12,999.7 13,934.3 13,262.1 13,044.6

FTSE 100 (United Kingdom) 5,132.3 5,882.6 6,930.2 6,222.5 6,297.5 5,917.9 5,633.7 5,966.9 5,796.9 5,665.7

DAX (Germany) 4,249.7 5,006.6 6,958.1 6,433.6 6,795.1 6,208.2 5,830.0 6,264.5 6,123.3 5,941.8

CAC 40 (France) 2,975.5 3,942.7 5,958.3 5,926.4 5,998.5 5,367.5 5,180.5 5,640.0 5,454.2 5,183.7

Latin American Exchange Rates

Argentina 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Brazil 1.12 1.21 1.81 1.95 1.97 2.05 2.15 2.20 2.38 2.32

Mexico 8.12 9.94 9.48 9.62 9.68 9.69 9.46 9.24 9.17 9.07

Latin American Stock Markets

(in local currency )

MERVAL (Argentina) 688 431 550 417 533 436 444 436 439 416

BOVESPA (Brazil) 10,197 6,729 17,092 15,259 17,673 15,891 14,438 14,917 14,650 14,682

IPC (Mexico) 5,206 3,913 7,130 5,652 6,541 6,032 5,728 5,987 6,595 6,540

*Up to 12/31/98 these rates corresponded to libor in m arks

Source: Public Credit National Office, Ministry of Econom y.

TABLE 7.1International Capital Markets Indicators

4


Europe

In the first quarter of 2001, the pace of GDP growth in

the zone of the euro amounted to 2.5% year-on-year, with a

remarkable fall with respect to the variation of the same quarter

of the previous year, when it was 3.5%. Simultaneously, the

decline of unemployment rate seemed to stop, at levels near

9%. Wholesale inflation remained relatively high (5% p.a.),

due to the weakness of the euro and the rise of oil price in the

last year. Both exports and imports of countries outside the

zone of the euro grew 12% p.a. After the general fall of

European stock exchanges in 2000 (in Germany, the DAX

index had lost 30% and technological papers more than

50%), in the last months, there is a certain generalized

recovery (3-4%).

By December 2000, in view of the fall of U.S.

growth, the euro had recovered part of the place lost against

the dollar in the last two years, exceeding the quote of 90

cents of dollar. This reaction diluted again by March, toge-

ther with the fall of world stock exchanges. Besides, the

European Central bank reduced short-term interest rates

by the end of May to 4.5% p.a., in view of the clearer

evidences of slowdown in the main economies of the re-

gion. Thus, the euro went back to 86 cents of dollar by

mid June. However, in the last meeting of June 7, the ECB

decided to maintain interest rates constant, with the aim of

defending the value of the euro in view of the fears of an

acceleration of inflation. Retail prices grew 3.4% in May

(from 2.6% in March), exceeding the limits established by

the bank itself as target for the zone of the euro. In Ger-

many, inflation recorded a peak of the last seven years.

Recently, the labor government in Great Britain was

re-elected and, consequently, the debate opened in said

country about its future incorporation to the zone of the

euro. This inclusion is particularly supported by big in-

dustrial corporations and the government, and resisted by

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

04/0

6/19

99

08/0

7/19

99

13/0

8/19

99

17/0

9/19

99

22/1

0/19

99

26/1

1/19

99

30/1

2/19

99

04/0

2/20

00

10/0

3/20

00

12/0

4/20

00

19/0

5/20

00

23/0

6/20

00

28/0

7/20

00

01/0

9/20

00

06/1

0/20

00

10/1

1/20

00

15/1

2/20

00

19/0

1/20

01

23/0

2/20

01

30/0

3/20

01

04/0

5/20

01

08/0

6/20

01

1 aæo

5 aæos

30 aæos

GRAPH 7.1Yield of US Treasury Bonds

5


80.00

90.00

100.00

110.00

120.00

130.00

140.00

150.00

29/1

2/19

95

15/0

3/19

96

31/0

5/19

96

16/0

8/19

96

01/1

1/19

96

17/0

1/19

97

04/0

4/19

97

20/0

6/19

97

05/0

9/19

97

21/1

1/19

97

06/0

2/19

98

24/0

4/19

98

10/0

7/19

98

25/0

9/19

98

11/1

2/19

98

26/0

2/19

99

14/0

5/19

99

30/0

7/19

99

15/1

0/19

99

30/1

2/19

99

17/0

3/20

00

02/0

6/20

00

18/0

8/20

00

03/1

1/20

00

19/0

1/20

01

06/0

4/20

01

22/0

6/20

01

Yen / U$S

0.6

0.7

0.8

0.9

1

1.1

1.2

29/1

2/19

95

15/0

3/19

96

31/0

5/19

96

16/0

8/19

96

01/1

1/19

96

17/0

1/19

97

04/0

4/19

97

20/0

6/19

97

05/0

9/19

97

21/1

1/19

97

06/0

2/19

98

24/0

4/19

98

10/0

7/19

98

25/0

9/19

98

11/1

2/19

98

26/0

2/19

99

14/0

5/19

99

30/0

7/19

99

15/1

0/19

99

30/1

2/19

99

17/0

3/20

00

02/0

6/20

00

18/0

8/20

00

03/1

1/20

00

19/0

1/20

01

06/0

4/20

01

22/0

6/20

01

a great part of the population. Consequently, there was

a deterioration of the quotation of the sterling pound of

3% against the dollar, which amounts to 9% compared

to one year before. It is estimated that the fall of the

pound could continue in the event there is a voting

about the adoption of the euro, and the definite incor-

poration could take place in two years’ time.

Brazil

After a first quarter with a growth of 4.1% y/y of GDP,

during the second quarter of 2001, the Brazilian government

implemented measures to limit energy consumption, due to

the lack of electricity derived from the drought in a great part of

its territory. The country strongly depends on hydroelectric

GRAPH 7.2Dollar Quotation compared to main currencies

Euro/U$S

6


production, and this shortage coincided with a period of

high cost of oil, of which Brazil is a big importer. Conse-

quently, the forecast of GDP growth for 2001 decreased

from 4.5% to 3%, and inflation accelerated from the begin-

ning of this year. By May, the increase of consumer prices

exceeded 7% p.a., and it is estimated that they will go on

rising, pushed by transport and energy.

The coexistence of inflation with high levels of ex-

ternal deficit and fiscal deficit (4% of GDP), aside from the

appearance of political problems within the ruling coalition,

provoked important stock exchange falls (-28% in dollars in

the last year). At the same time, there was a rise of country

risk up to 850 basis points in June, and the real plunged.

The currency fell from R$1.96 per dollar in last December

down to less than R$2.45 per dollar in June, which would

mean a nominal fall of 25%. The Central bank had to take

part selling dollars and securities indexed by the dollar. Ne-

vertheless, industrial growth continues to be remarkable, for

example in the case of automotive (24% p.a.). Argentina

took advantage of this bull market, and its exports of cars to

Brazil increased approximately 50% in 2001.

Japan

In Japan, GDP growth had been moderate in 2000

(1.5%). However, in the first quarter of 2001, there was a

trend switch, and GDP fell slightly (-0.1%). Economic

analysts estimate that the contraction will be repeated in the

second quarter, and that it would probably result in a nil

result for 2001. Thus, Japan would continue showing the

worst result within the main developed economies. It is

worth pointing out that Japan was the economy with the

poorest performance within the G-7 during the last fifteen

years, with a growth of just 3% since 1996.

This unfavorable scenario is completed with retail

deflation (the only one case within developed countries)

and very low interest rates (0.15% p.a. for the discount

rate), aside from a fall of the stock market of 20% in the last

year. Nevertheless, in the last three months, the stock ex-

change recovered 13%, although it continues to show his-

torically low levels of the last 15 years. Unemployment is

still at 5%, although this modest result was achieved at the

expense of deepening fiscal imbalance up to 6% of GDP

through successive expansive fiscal programs. According to

IMF estimates, it would probably not prevent a new defla-

tion during 2001, in spite of the increase of imported fuels

prices.

The fiscal imbalance coexists with a strong external

surplus, since the current account excess amounts to 2.5%

of GDP. Traditionally, this excess is partly allocated to the

purchase of American debt bonds. An important recovery

of growth in the future seems improbable, since public debt

amounts to 130% of GDP and many banks continue

showing low solvency ratios, with non-performing loans for

more than 300,000 million dollars. The government refu-

ses to reform the financial system, where foreign banks play

a much smaller role than in other developed economies.

However, these irregular loans did not provoke any deposit

flight crisis up to now, since the government guarantees all

placements.

The yen fell constantly against the dollar during the

last months, from near 100 yens per dollar at the beginning

of 2000, to more than 120 by last March. In the last mon-

ths, it remained relatively constant, at 124 yens per dollar at

the closing of this report. With this evolution, it is probable

that external demand continue to be the key of recovery, in

an economy where big corporations are strongly focused on

the world market.

7


II. Evolution of the Argentine StockMarket

In 2000, the Argentine stock market had shown a fall

of business volume, continuing with the trend evidenced in

1999. In this process, stock transactions lost economic signifi-

cance compared to the last years, accounting for only 5% of

GDP. The average stock’s price also declined during 2000. In

December last year, the indicator had not yet been able to take

off the area of 400 points.

In the first quarter of 2001, after obtaining the loan

known as “financial shield” and the better expectations, there

was an important recovery, thus the MERVAL was near 540

points by the end of January. This rise was enough for the

quarterly average to be 471 points, 12% above the fourth quar-

ter of the previous year. Nevertheless, at the end of February,

the stock exchange returned to falling, which became deeper

after the Turkish crisis and the domestic political problems,

until again reaching lows of 400 points at the end of March. It

is worth adding as explanation the persistence of the recession

during the first quarter, when GDP went back again to 2.1%

y/y.

In almost all the second quarter, the indicator conti-

nued an erratic course. There was a soft recovery after the appro-

val of the Competitiveness Law in April. Afterwards, the MER-

VAL fell again until the approval of the debt swap in June.

Thus, the average of the local stock exchange during April and

May still remained below 440 points. At the closing of this

Report, after the approval of the debt swap and the measures

taken to advance wide convertibility to the external sector, the

index recorded 420 points, slightly above the 2000 close, but

some 20 points below the last day of March. A similar evolu-

tion followed the BURCAP indicator during the first quarter,

which with 790 points average in May was 14% below the

average of 2000.

In the long-term, the evolution of the securities market

300

400

500

600

700

02/0

1/19

98

20/0

2/19

98

08/0

4/19

98

29/0

5/19

98

17/0

7/19

98

04/0

9/19

98

23/1

0/19

98

11/1

2/19

98

29/0

1/19

99

19/0

3/19

99

07/0

5/19

99

25/0

6/19

99

13/0

8/19

99

01/1

0/19

99

19/1

1/19

99

07/0

1/20

00

25/0

2/20

00

12/0

4/20

00

02/0

6/20

00

21/0

7/20

00

08/0

9/20

00

27/1

0/20

00

15/1

2/20

00

02/0

2/20

01

23/0

3/20

01

11/0

5/20

01

GRAPH 7.3Merval IndexWeekly closing

8


is strongly unfavorable, since the MERVAL had exceeded 800

points in the third quarter of 1997. However, in the last

year, the evolution of international stock exchanges was,

in general, also negative. In the first week of June, an-

nual falls of 28% for Brazil and 24% for Chile (in do-

llars) were recorded, as well as declines of around 20%

to 30% for most of Asian emerging markets. Also in the

last year, stock exchanges in Germany, France, Italy and

United Kingdom have stopped growing, and in some

cases such as Japan, the plunge amounts to 30%. Only

Mexico diverted from the general trend, with a 20%

profit in dollars (Table A 7.3 of statistical appendix and

Graph 7.3).

III. Evolution of Quotes andPublic Debt Placements

1. Evolution of sovereign risk

In the first quarter of 2001, there was in average

a minimum decrease of sovereign risk1 implicit in the

price of public securities compared to the previous quar-

ter. The indicator calculated by J.P. Morgan for Argenti-

ne securities (EMBI Argentina) decreased from 807 ba-

sis points in the fourth quarter of 2000 down to 752

basis points. However, compared to the first quarter of

2000, there appears a strong deterioration of the index,

which rose almost 37% in that period (200 basis po-

ints). Graph 7.4 and Table 7.2 show the evolution of

the main Argentine securities.

The annual deterioration of Argentine sovereign

risk is significant since, in the same period, the risk co-

rresponding to the group of emerging countries decrea-

sed practically 100 points, as a consequence of the pro-

gress made by some markets in Eastern Europe and Asia.

This means that Argentina decreased some 300 basis

points as a whole with respect to the average risk of

emerging markets during the last year. In Latin America,

the evolution was, in general, negative because Argenti-

na dragged the rest of the region, although the increases

were much lower for Mexico and Brazil. In our country,

the persistence of recession, the insufficient advances in

the fiscal front and certain reserves on the part of inter-

national investors about long term fiscal solvency, pro-

voked an important relative decline of public securities

prices, as compared to the average of emerging coun-

tries. For example, the traditionally positive difference

between Argentine and Brazilian sovereign risk reversed

along the year, from 131 basis points in the first quarter

of 2000 (lower risk for Argentina), until becoming ne-

gative in the first quarter of 2001 (lower risk for Brazil

by 22 basis points). More recently, the latter trend be-

comes deeper.

By the end of last year, the government announ-

ced a contingent loan facility from the IMF and other

credit international agencies, plus the commitment of

local banks for the renewal of debt. This fact was added

to the sudden fall of United States interest rate at the

1 Such indicators are defined as a spread between yield rates of the different dollar securities of the country and yield rates of the United States Treasury bondsof similar term.

9


beginning of January, which allowed a soft fall of risk

during January and February, together with the impro-

vement of the stock market and the fall of local interest

rates. However, after certain real economy indicators and

the fiscal collection of February were known, and after

the resignation of the minister of economy, expecta-

tions worsened and the Argentine EMBI exceeded

1,000 basis points in the third week of March. The

change in the economic management was not enough

at the beginning to improve expectations, and after a

slight decrease, the Argentine EMBI reached peaks of

BRADY BONDS

300

700

1,100

1,500

12/3

0/99

01/1

9/00

02/0

8/00

02/2

8/00

03/1

9/00

04/0

8/00

04/2

8/00

05/1

8/00

06/0

7/00

06/2

7/00

07/1

7/00

08/0

6/00

08/2

6/00

09/1

5/00

10/0

5/00

10/2

5/00

11/1

4/00

12/0

4/00

12/2

4/00

01/1

3/01

02/0

2/01

02/2

2/01

03/1

4/01

04/0

3/01

04/2

3/01

05/1

3/01

06/0

2/01

06/2

2/01

PAR

STRIP

DISC.

STRIP

FRB

GLOBAL BONDS

300

450

600

750

900

1050

1200

12/3

0/99

01/1

9/00

02/0

8/00

02/2

8/00

03/1

9/00

04/0

8/00

04/2

8/00

05/1

8/00

06/0

7/00

06/2

7/00

07/1

7/00

08/0

6/00

08/2

6/00

09/1

5/00

10/0

5/00

10/2

5/00

11/1

4/00

12/0

4/00

12/2

4/00

01/1

3/01

02/0

2/01

02/2

2/01

03/1

4/01

04/0

3/01

04/2

3/01

05/1

3/01

06/0

2/01

06/2

2/01

RA 03

RA 17

GRAPH 7.4Sovereign RiskIn basis points

10


almost 1,300 points at the end of April, figures that

had not been recorded since the Russian debt crisis

September of 1998.

In May, the indicator remained high, with an

average of 994 basis points. After the implementa-

tion of the debt swap, at the beginning of June, the

EMBI fell 100 basis points in two days, although it

then increased temporarily. At the closing of this

chapter, the indicator was still high, some 985 basis

DATEPRE 4 PAR DISCOUNT FRB RA 08 RA 17 RA 27

STRIPPED STRIPPED31-Mar-99 583 805 953 706 676 62125-Jun-99 730 938 1,080 799 741 69030-Sep-99 689 892 1,075 665 609 56230-Dec-99 591 714 767 589 514 45731-Mar-00 394 795 832 436 581 55030-Jun-00 480 945 940 687 693 68429-Sep-00 520 929 928 587 710 65629-Dec-00 823 1048 1066 681 789 6915-Jan-01 468 916 943 628 732 64612-Jan-01 476 933 959 609 717 62219-Jan-01 532 929 948 566 714 62826-Jan-01 506 896 918 561 676 60902-Feb-01 488 898 941 533 676 60709-Feb-01 514 939 973 571 685 64016-Feb-01 566 934 937 632 725 65523-Feb-01 695 1010 1001 706 756 68302-Mar-01 678 1015 1003 760 775 71309-Mar-01 619 988 979 704 751 68416-Mar-01 900 1132 1114 924 855 72423-Mar-01 1758 1381 1384 1318 933 84930-Mar-01 1258 1233 1155 1048 889 80506-Apr-01 1223 1116 1135 957 867 76013-Apr-01 1015 1119 1109 934 815 72520-Apr-01 1065 1300 1138 1418 994 90227-Apr-01 1591 1432 1191 1192 1137 81304-May-01 1401 1268 1254 1160 914 86611-May-01 1480 1306 1298 1248 1013 90218-May-01 1247 1164 1223 933 915 83324-May-01 1210 1098 1115 816 886 81601-Jun-01 1545 1223 1142 893 974 88108-Jun-01 1200 1061 1061 825 922 878 76215-Jun-01 1253 1130 1187 984 1012 920 83922-Jun-01 1483 1267 1176 1127 1106 956 850

Source: Public Credit National Office, Ministry of Economy.

BRADY BONDS GLOBAL BONDS

TABLE 7.2Evolution of sovereign riskIn basis points

11


Date of Currency Amount Amount Term Coupon Spread Security issue issued in dollars -years- rate

(1) (2) (3)

Global 12.0%/31 31-Ene-01 USD 500 500 30.00 12.00% 656

Euro 10.0%/07 22-Feb-01 EUROS 500 470 6.00 10.00% 586

Global 12.375%/12 21-Feb-01 USD 1,594 1,594 11.00 12.38% 720

Reop Global 12%/31 28-Feb-01 USD 250 250 29.90 12.00% 678

Reop Global 12%/31 30-Mar-01 USD 225 225 29.90 12.00% 768

Reop Global 12%/31 26-Abr-01 USD 200 200 29.80 12.00% 734

Global 7-15,5%/08 19-Jun-01 USD 11,456 11,456 7.50 (a) 1,092Global 10-12%/08 19-Jun-01 PESOS/USD 931 931 7.30 (b) 1,086

Global 12,25%/18 19-Jun-01 USD 7,463 7,463 17.00 12.25% 973

New Global 12%/31 19-Jun-01 USD 8,521 8,521 30.00 12.00% 913

Reop Global 12%/31 27-Jun-01 USD 300 300 30.00 12.00% 865

TOTAL 31,910

(1) In m illions original currency(2) In m illions, as of the date and exchange rate of issue(3) Over U.S. Treasury Bonds of sim ilar duration(a) Coupon rate is 7% for the first 3 years and 15,5% for the rem aining ones(b) Coupon rate is 10% for the first 3 years and 12% for the rem aining onesSource: Public Credit National Office, Ministry of Econom y.

points, although with a downward trend. It is esti-

mated that, to the extent the fiscal situation is con-

solidated and growth returns, sovereign risk should

fall significantly.

2. Public debt placements

International market

Placement at the international market during

TABLE 7.3International market issues in 2001

Issues Amount Average Spread Year Volume in dollars Life

(1) (years) (2)1994 (*) 19 2,600 3.3 238

1995 18 6,370 4.0 3711996 30 10,413 8.2 3951997 18 10,214 14.9 3101998 24 11,664 13.3 4291999 40 11,869 7.6 5942000 16 12,359 11.8 536

2001 (**) 11 31,910 16.9 973

(*) Excludes syndicated loan for U$S 500 millions (**) First semester(1) In millions, as of the date and exchange rate of issue(2) Over U.S. Treasury Bonds of similar durationSource: Public Credit National Office, Ministry of Economy.

TABLE 7.4Bond placements in the international market

12


the first half of 2001 amounted to U$S 31,910 millions, a

peak record for Argentina. This amount includes the swap mega

transaction for U$S 28,371 millions, analyzed in detail in an

Annex to this chapter. Additionally, other placements of debt

were made for U$S 3,539 millions (Table 7.3), including two

issues of Global Bonds for U$S 2,094 millions. Maturities of

these debt instruments were agreed upon between 6 and 30

years. In the first semester, the average spread of all these securi-

Placement Date Currency Amount (1) Term Disc. Rate N.A.Rate Status09-Jan-01 DOLLAR 369.1 94 8.29% 8.47% Cancelled09-Jan-01 DOLLAR 362.9 182 8.76% 9.17% Cancelled23-Jan-01 DOLLAR 356.9 91 6.64% 6.75% Cancelled06-Feb-01 DOLLAR 350.0 91 6.60% 6.71% Cancelled06-Feb-01 DOLLAR 354.0 182 7.09% 7.35% Cancelled20-Feb-01 DOLLAR 350.0 91 6.74% 6.86% Cancelled13-Mar-01 DOLLAR 350.0 182 8.50% 8.88% Outstanding13-Mar-01 DOLLAR 506.7 364 10.50% 11.75% Outstanding27-Mar-01 DOLLAR 353.0 91 10.67% 10.96% Cancelled10-Apr-01 DOLLAR 350.0 88 10.09% 10.35% Cancelled10-Apr-01 DOLLAR 350.0 179 11.24% 11.91% Outstanding08-May-01 DOLLAR 350.0 91 12.06% 12.44% Outstanding22-May-01 DOLLAR 350.0 92 11.73% 12.09% Outstanding22-May-01 DOLLAR 150.0 169 11.75% 12.44% Outstanding12-Jun-01 DOLLAR 350.0 91 7.74% 7.89% Outstanding12-Jun-01 DOLLAR 350.0 182 9.43% 9.90% OutstandingTOTAL 5,602.6

Placement Date Currency Amount Term Interest Spread(1) Rate

7-Feb-01 (*) DOLLAR 2,608.1 5.2 11.75% 65730-Mar-01 DOLLAR 420.0 4.1 12.13% 982TOTAL 3,028.1

Placement Date Currency Amount Maturity Interest Spread(1) Rate

13-Feb-01 DOLLAR 150.0 13-Feb-04 (2)+435 bp 60319-Jun-01 DOLLAR 2,060.4 19-Jun-06 (3) (3)TOTAL 2,210.4

(*) This BONTES issue was part of a securities swap transaction (1) Nominal value in millions. In LETES it includes an additional 10%, optional for market makers.(2) Monthly adjusted interest rate by the dollar deposit rate, every term(*) The interest rate applied is the highest of the one surveyed for US$, for 30 - 59 days’ terms plus 580 bp. and the Badlar rate in US$ plus 150 bp.Source: Public Credit National Office, Ministry of Economy.

Treasury Bonds (BONTES)

Other transactions ("Promissory notes" bonds)

Treasury Bills (LETES)

TABLE 7.5Public Debt Issues in the domestic marketIn 2001

13


ties over American treasury bonds with the same term was 973

basis points, with an average duration of around 16.9 years.

This meant an average longer term of 5 years as compared to

placements made in 2000, although spread levels also increa-

sed significantly (a rise of more than 300 basis points with

respect to the average spread of previous year) (Table 7.4).

Analyzing placements by type of currency, it can be

seen that more than 95% was denominated in dollars, and the

rest corresponds to issues in euros and in pesos. This composi-

tion was strongly influenced by the debt swap transaction,

which involved all the old series of bonds issued in American

currency. The difficult conditions of the international debt

market faced by our country in the new issues placement’s,

partly derived from the delicate fiscal situation. As well, the rise

of the sovereign risk implicit in the price of bonds during Mar-

ch to June eventually provoked the swap transaction, which

had to accept high interest rates in dollars for longer terms than

the ones prevailing up to then.

Domestic market

During the first quarter, most Treasury Bills (LETES)

auctions scheduled in the local market were performed, on a bi-

monthly basis since 2000 (Table 7.5). According to the sche-

dule, the auctions made at the beginning of each month, LE-

TES were placed at 91 and 182 days’ terms (except in March),

and in the auctions made at the end of the month, bills’ term

was 91 days.

Along the first quarter, interest rates showed an erratic

course. As a consequence of the announcement of the IMF

contingent loan, the rate in the December 2000 auction of

LETES for 91 days had fallen to 11.8% p.a. (compared to the

peak of 12.6% paid in November), and the one corresponding

to 182 days did so to 12.2%. The best international perspecti-

ve (reduction of United States rates, slight strengthening of the

euro and better commodities prices) reinforced the fall of rates

at the beginning of January, when 90 days’ LETES declined to

8.5% p.a. And even more at the beginning of February, when

only 6.7% p.a. was paid for 90 days.

By the end of February, the Turkish financial crisis took

place and, after knowing our country’s fiscal and real results for

said month, expectations worsened again. In this environment,

two ministers of economy changes took place and the percep-

tion of sovereign risk was higher, thus suspending the auction

of the beginning of March. In the auction at the end of March,

however, the 90-day rate was 11% p.a., somewhat lower than

expected by the market, and even at the beginning of April,

there was a new decline to 10.4%. Nevertheless, the lack of

economic reactivation and the scenario of fiscal fragility was

translated into a fall of domestic confidence during May, when

the LETES rate exceeded 12.4% at the beginning of May and

remained at 12.1% at the end of said month. Finally, after a

successful debt swap at the beginning of June, lower rates were

obtained in the last auctions: 7.9% for 90 days at the begin-

ning of June, and 9.1% at the end of the same month.

As regards the other placements in the local market, it is

worth mentioning that during the first quarter of 2001 Trea-

sury Bonds (BONTES) were issued for U$S 3,028 millions.

This debt was mostly used for the bond swap (U$S 2,608

millions), and the rest was place in cash. Finally, promissory

notes discount during the months already elapsed of 2001

amounted to U$S 2,210 millions and, the same as for LETES,

there was an increase of interest rates compared to last year.

IV. Private Pension Funds Investments

As of April 30, 2001, the value of private pension funds

14


amounted to approximately $ 21,632 millions, around 7.6%

of GDP. This represented a decrease of 1.5% with respect to

the end of January 2001. Average profitability in April 2001

compared to the same month of 2000 was just 2% y/y, some

12 points lower than the previous year. This meager result is

basically the consequence of the fall of stocks and public secu-

rities, due to the rise of country risk during the last two quarters.

Historically, the average profitability of the system was 11.2%

p.a. by the end of April of 2001, some two points less than one

year before. It is worth pointing out that during the last three

years (April 1998 - April 2001) the average profitability of the

system was somewhat lower than 5% p.a., due the fact that in

that period two years of bad results were recorded (1999 and

2001) and only 2000 was clearly positive. The system’s con-

%Limit Amount % Amount % Amount %

(1) Fund Fund FundI. Cash and Cash Equivalents 175,239 1.5 163,040 1.0 157,243 0.73II. Investments 11,351,155 98.5 16,624,059 99.0 21,474,982 99.27Public securities issued by the National govt. 50 5,530,824 48.0 8,141,465 48.5 10,606,959 49.03

Negotiable Publ. Sec. issued by Nat'l govt. 2,292,438 19.9 3,731,782 22.2 4,112,513 19.01 Publ. Sec. issued by Nat'l govt. - Forward 3,238,386 28.1 4,409,683 26.3 6,494,446 30.02

Securities issued by State Organisms 15 231,125 2.0 637,630 3.8 1,023,404 4.73 Negotiable Sec. issued by State Org. 100,359 0.9 167,600 1.0 103,520 0.48

Sec. issued by State Org. - Forward 52,535 0.5 22,711 0.1 168 0.00 Provincial Govt. Securities 46,132 0.4 391,226 2.3 765,780 3.54 Municipal Govt. Securities 32,098 0.3 56,093 0.3 153,936 0.71

Long term Corporate Bonds 28 193,151 1.7 238,660 1.4 425,644 1.97Short term Corporate Bonds 14 83,223 0.7 105,466 0.6 90,776 0.42Convertible Corporate Bonds 28 11,839 0.1 14,245 0.1 0 0.00Fixed Term Deposits 28 2,170,132 18.8 2,597,395 15.5 3,479,455 16.08

Fixed Term Certificates 173,087 1.5 2,084,794 12.4 3,223,063 14.90Variable return fixed term deposits 1,997,045 17.3 512,601 3.1 146,312 0.68Prepayable Fixed term deposits 0 0.0 110,081 0.51

Corporate stocks 35 1,823,508 15.8 3,199,541 19.1 2,371,770 10.96Public companies stocks 14 292,170 2.5 249,218 1.5 257,538 1.19Mutual Funds 14 759,377 6.6 1,054,646 6.3 1,925,183 8.90

Closed Mutual Funds 3,716 0.0 12,292 0.1 11,196 0.05 Open Mutual Funds 427,795 3.7 592,668 3.5 304,188 1.41 Financial Trusts 327,866 2.8 449,686 2.7 1,609,798 7.44

Foreign sovereign securities 10 220 0.0 211 0.0 0 0.00Foreign corporate securities 7 28,700 0.2 61,263 0.4 927,150 4.29

Foreign corporate stocks 830,483 3.84Foreign corporate securities 28,364 0.13Mutual Funds according to article 3 Instruct. 18/00 68,303 0.32

Regional Economies (*) 163,809 1.4 236,802 1.4 305,701 1.41Real Estate Mortgage bonds and bills 28 40,365 0.4 14,151 0.1 10,069 0.05Futures and Options 2 - - 40,780 0.2 12,479 0.06Direct Investment Funds 10 21,497 0.2 32,586 0.2 38,853 0.18III. Total Pension Funds 11,526,393 100.0 16,787,099 100.0 21,632,225 100.00

(*) This type of investm ent only applies to Naci n A.F.J.P. and has a m axim um of 50% of the total.(1) Maxim um percentage per instrum ent the pension funds is authorized to invest.

Source: Secretary of Econom ic Policy, based on S.A.F.J.P. [Pension fund Superintendent]

31-Dec-98 31-Dec-99 30-Apr-01

TABLE 7.6Private pension funds investmentsIn thousand Pesos

15


centration increased after the merger authorized last year, so the

four bigger managers are now responsible for 73% of total

funds of the system and 75% of contributors, and the rest is

distributed among nine companies. In the last months, there

have even been new acquisitions.

During the last year, the number of registered persons

of the private pension system increased by approximately

480,000 persons, up to a total of 8.54 millions but, in contrast,

the number of contributors remained practically the same (3.36

millions). This means that the relation between contributors

and registered persons fell down to lows of 39.1% in April

2001. It is worth highlighting the fact that 95% of contribu-

tors are salaried workers, and only the remaining 5% are self-

employed. So, the average accumulated funds per registered

person are slightly in excess of $ 2,500.

Tables 7.6 and A 7.4 (the latter of the statistical appen-

dix) and Graph 7.5 show in detail the composition of the

funds administered by private pension funds. Table 7.6 shows

that, during 2001, there were few significant changes of said

composition measured in percentage points. National public

securities maintained their share and provincial and municipal

securities increased slightly. There was a strong increase of secu-

rities issued by foreign corporations, whereas the most impor-

tant fall was verified for national corporations’ stocks, even pri-

vatized companies and, to a lesser extent, in fixed term deposits.

The funds place in financial trusts also increased.

Analyzing these movements in detail, it can be seen

that National Public securities are the instrument with the hig-

hest share within private pension funds portfolios, accounting

for 49% of investments in April 2001 (values slightly higher

than the 48.5% recorded at the end of 1999). These percen-

tages are closer to the maximum allowed for this investment

category, namely 50%. Within these instruments there was a

change in the different categories with respect to December

1999. There was an increase in the portion of these securities

valued on an accrued basis and that will be kept until maturi-

ty2 , which now account for 30% of funds, and a slight decrea-

se of the share of negotiable securities (19%). Securities issued

by state agencies (mortgage-backed, banks, provincial and

municipal governments securities) represented at the end of

last April 4.7% of total funds, with a slight fall over the figures

recorded at the end of January 2001.

Stocks in their two categories (of corporations and pri-

vatized state-owned companies) continued losing share within

managers’ investments. In April 2001, they accounted for just

12.2% of the total portfolio, going down to the third place

within managers’ preference due to both the fall of quotes and

the decrease of stock’s volume. This percentage implies a strong

decrease with respect to the end of 1999 (20.6%) and even

with respect to April 2000 (19.5%).

In April 2001, fixed term deposits were second

within managers’ preferences, with 16.1% of total funds,

which implies an increase of two percentage points with

respect to January 2001. Term deposits with variable yield

(DIVA)3 and those with a pre-payment option account

for only 7% of total term deposits, most corresponding to

the traditional fixed term deposits with a fixed yield. The

rise of fixed term deposits during the last months is the

result of the increase of rates due to their higher relative

2 It is worth remembering that in the case of these securities (either issued by the Federal Government or by other government agencies) there is the possibilityof pricing part of them not at market value but on an accrued basis, i.e., at their purchase price adjusted for the compounding of the internal return rate thesecurity had at the time of the purchase, in which case the security has to be retained until maturity. By valuing securities this way, the private pension fundstry to ensure value increases of their shares at a low risk. On the contrary, the portion of negotiable securities is valued at market prices and, consequently,is subject to capital market volatility.

3 These deposits have guaranteed principal and their yield is based on the evolution of an underlying financial asset (national or international stock index,stocks, public securities).

16


security within a complex economic environment.

Some categories of investment have advanced lately.

On the one hand, securities of government agencies, provincial

and municipal, went from accounting for 2.6% of investments

at the end of 1999 to 4.7% in April 2001. Secondly, there

were advances in the portion of foreign companies’ securities,

which grew between the same dates from 0.4% to 4.3% of

total investments (to a good extent thanks to certificates repre-

senting stocks of privatized companies now Spanish traded in

the local stock exchange). Negotiable obligations increased to a

lesser extent, from 2.1% to 2.4% of the total (though they

decreased with respect to January this year). Mutual funds re-

covered some share within private pension funds portfolios

during the last year (from 6.3% to 8.9% of the total), especially

the portion corresponding to financial trusts (7.4% of total).

12.15%Shares

53.76%Government Securities

16.08%Term Deposits

6,41%Mutual Funds

2,27%Corporated Bonds

6.71%Others

GRAPH 7.5A.F.J.P. Investments as 04-30-01

17


On June 1º, 2001, a public debt securities swap tran-

saction took place that, due to its size, received the name of

“mega swap” and it is the first example of a mechanism to solve

a debt crisis. The basic objective of this transaction was to de-

ANNEX

GLOBAL $ / US$ GLOBAL2008 2031

Term (in years) 7.25 30

Maturity 19-Sep-08 19-Jun-31

Nominal Value Issued 930.80 8,520.69 30,431

bi-annual bi-annual10% 1º al 3º year 12%

12% 4º year at maturity

Compounding NOInterest up to jun-

06

Amortization Bullet (c) Bullet (c)

Average life 7.25 30 15.15

Yield at maturity 15.99% 14.90% 15.29%

Duration 4.99 12.15 8.00

19-Dec-03 16.66% 19-Jun-06 16.66% 19-Jun-16 20%19-Jun-04 16.66% 19-Dec-06 16.66% 19-Dec-16 20%

Amortization 19-Dec-04 16.66% 19-Sep-08 19-Jun-07 16.66% 19-Jun-17 20% 19-Jun-31Schedule 16-Jun-05 16.66% 19-Dec-07 16.66% 19-Dec-17 20%

19-Dec-05 16.66% 19-Jun-08 16.66% 19-Jun-18 20%19-Jun-06 16.70% 19-Dec-08 16.70%

Placement Price 78.32 70.7

Listing

Legislation

(a) The highest of the dollar Fixed Term deposits Survey rate for 30 to 59 days’ terms published by the B.C.R.A. plus 580 basic points and the BADLAR private lending rate in dollars plus 150 basic points (b) At the beginning: 10.28%. Averaging step-up: 12.23%. At the end: 13.54%(c) That is to say, fully at maturity

Source: Undersecretariat of Financing - Secretariat of Finance

580 pb up to jun-03

6 bi-annual installments 6 bi-annual installments5 bi-annual installments

Custody and Registratio

3.13 4.81

16

10.91

Interest up to jun-06

73.25

15.95% 15.24%

Argentina

CRYLCaja de Valores

New York State

Euroclear - Clearstream - DTCCaja de Valores

19-Dec-08

11,456.13

Buenos Aires

15.38%

78.55

6.3

Buenos Aires and Luxemburgo

3.75

100

NO

(a)

monthly12.25%

15,5% 4º year at maturity

bi-annual

PROMISSORY NOTE

Coupon

2006GLOBAL

2008

5

19-Jun-06

2,060.41

7.5

7% 1º to 3º year 10,28% (b)

GLOBAL2018

17

7,463.25

19-Jun-18

bi-annual

PORTFOLIO

compress the Government’s short-term financial needs, so as to

dilute any type of uncertainty about the Argentine State’s capa-

city to comply with its obligations. On the other hand, the

transaction releases pressure on capital markets, which allows

TABLE 7.7Description of the new bonds

The June 2001 Debt Swap

18


releasing resources to finance investment projects of companies

and individuals.

It has to be pointed out that the debt swap implies the

adjustment of the government’s deficit target agreed upon with

the IMF for the second quarter as a consequence of the pay-

ment of accrued interest of securities that were redeemed, so

this mismatch will not be considered non-compliance. Similar-

ly, in the third and fourth quarters, the reductions of the fiscal

imbalance due to the termination of interest payments of secu-

rities redeemed will also not be considered overcompliance, but

rather the fiscal result target will be adjusted downwards.

That is why, when the public accounts commitment of

the federal government was confirmed, the transaction does

not imply a fiscal relax, although it is true that the Government

Years Principal Interests Total2001 2,780 449 3,229 2002 2,833 1,785 4,618 2003 1,382 1,745 3,127 2004 950 1,494 2,444 2005 1,359 1,273 2,632

Total 9,304 6,747 16,051

Source: Undersecretariat of Financing

TABLE 7.8Decrease of debt services up to 2005Principal and Interests, in million US$

GRAPH 7.6Decrease of debt services up to 2005In million US$

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2001 2002 2003 2004 2005

Interests

Principal

19


reduces deficit in the medium term as a consequence of lower

interest rates and modifies short term solvency ratios.

As a whole, the transaction meant to concentrate in 5, a

total of 46 bonds eligible for the swap, denominated in pesos

and dollars. Three of the new securities are in dollars and matu-

re in 2008, 2015 and 2031, and there is a fourth security

instrumented in dollars or in Argentine pesos maturing in 2008.

Besides, a promissory note in dollars with 5 years’ term was

offered to redeem securities of the same type maturing this year

and in 2004. Securities maturing in 2015 and 2031 have a

grace period of five years in which accrued interest will be com-

pounded. Table 7.7 is a summary of the main characteristics of

the new bonds.

Of a total of eligible bonds of US$ NV 66,314 millio-

Variation of Variation ofaverge life Yield

(in years) (a)

Promissory Note 06 2.63 -1.70%Global 08 $/US$ 4.60 0.33%Global 08 3.35 -0.44%Global 18 -0.35 0.22%Global 31 5.33 -0.33%Total 2.78 -0.35%

(a) Portfolio redeemed less portfolio issued

Source: Undersecretary of Financing

Security

ns, there were bids for US$ 32,854 millions, of which US$

24,451 correspond to the non competitive tranche ($ 5,137

millions from Official Banks) and US$ 8,402 millions to the

competitive tranche. Of the total, accepted bids amounted to

US$ NV 29,523 millions (US$ residual NV 28,175 millio-

ns) of old bonds, and in turn new bonds were placed for US$

NV 30,431 millions. The transaction generated a reduction

of debt services (principal and interest) until 2005 for S$

16,047 millions, of which US$ 7,822 millions correspond to

the rest of 2001 and to 2002, as seen in Table 7.8 and Graph

7.6.

As a consequence of the transaction, the average term

of the debt was extended, since a bond portfolio is swapped

for another with an average life of 2.78 more years. As a coun-

terpart, average yields increased by 35 basis points (12 bp per

year of extension of average life), as detailed in Table 7.9.

TABLE 7.9Debt average term and yield

Documents

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