Argentina and the IMF

Press Release: IMF Executive Board Completes Second Review of Argentina's Stand-By Arrangement
March 22, 2004

Press Release: IMF Acting Managing Director to Recommend to the Executive Board the Letter of Intent of the Authorities for the Second Review of the Stand-By Arrangement for Argentina
March 10, 2004

Country's Policy Intentions Documents

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Argentina—Letter of Intent and Addendum to the Technical Memorandum of Understanding

Buenos Aires, March 10, 2004

The following item is a Letter of Intent of the government of Argentina, which describes the policies that Argentina intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Argentina, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Ms. Anne O. Krueger
Acting Managing Director
International Monetary Fund
Washington D.C.

Dear Ms. Krueger:

Developments under the economic program continue to be very favorable, helping us to lay the foundations for sustainable growth and poverty reduction. The end-December 2003 quantitative performance criteria were met comfortably and all continuous structural performance criteria were observed. Furthermore, our plans for structural fiscal reform, the further strengthening of the banking sector, and carrying forward utility sector reform remain firmly on track. We are also entering a critical stage in the restructuring of sovereign debt.

Macroeconomic framework

Argentina's economy is expanding at a faster pace than projected, with real GDP estimated to have increased by 8.4 percent in 2003. Disciplined implementation of well-designed monetary and fiscal policies contributed to strengthening consumer and business confidence, reducing inflation, lowering interest rates, and rekindling private investment. The banking system is returning to profitability and bank deposits are growing strongly. Consumption was boosted by the rise in real incomes as a result of both higher wages and stronger labor demand, which in turn contributed to reducing unemployment and poverty rates. We expect the strong recovery to continue in the period ahead and have revised upward the growth outlook for 2004 to about 5½ percent, mainly on the back of robust domestic demand. Favorable external conditions should allow the continuation of a high trade surplus, despite a continued steep rise in imports of capital goods and intermediate inputs. As foreseen in the September agreement, we expect a modest and transitory increase in inflation, as a result of pending adjustments in relative prices (especially regulated prices), some recovery in retail margins, and the lagged impact of higher commodity prices.

Monetary and fiscal policies

All monetary targets for end-December 2003 were met with large margins and the monetary program remains well on track. The balance of payments remains strong and record sales of central bank bonds (lebacs) kept central bank NDA substantially below the program ceiling. Twelve-month inflation fell below 3 percent in January 2004 and all quasi-monies have now been removed from circulation. While we remain committed to the original targets of the monetary program, the combination of modest exchange rate appreciation and continuous reserve accumulation, rapidly growing bank deposits and falling interest rates, and subdued inflation, suggests a continuing strong recovery in the demand for money. If these trends continue, this may warrant some easing of the base money target at the third review of the program.

The end-December fiscal and debt targets of the program were also met by wide margins. In 2003, the primary surplus of the consolidated public sector was about 3 percent of GDP, ½ percentage point above the target. This good performance is the result of both buoyant revenues—reflecting a stronger-than-expected economic recovery and intensified policies and efforts to combat tax evasion—and continued control over spending at the federal and provincial levels. Tax revenues are expected to remain above program levels in 2004, which should enable us to comfortably meet the targeted primary surplus of 3 percent of GDP, while making room for a reduction in the distortionary financial transactions tax by July 2004. The government is also committed to targeted increases in capital and social spending. The 2004 bilateral agreements have been signed by 12 provincial governors and ratified by sufficient provincial legislatures to meet the related structural performance criterion well ahead of the end-March 2004 deadline.

Structural fiscal reforms

Plans for structural fiscal reforms are advancing in line with our commitments in the September 10, 2003 Memorandum of Economic and Financial Policies (MEFP) and accompanying Technical Memorandum of Understanding (TMU). A formal agreement with provincial governors on the main elements of the fiscal responsibility and intergovernmental reform legislation (described in MEFP paragraph 31, and TMU Section III.c) is expected by end-March 2004 (structural performance criterion). These reforms aim to ensure budgetary discipline for provincial governments, simplify the tax revenue-sharing arrangements, improve incentives to raise own revenues, and ensure a more equitable distribution of transfers among provinces. The legislation is to be submitted to Congress by end-May 2004, with ratification by federal and provincial legislatures expected by end-August 2004 (both structural performance criteria).

We have initiated work on the planned tax policy reform (MEFP paragraph 28) aimed at strengthening core taxes and allowing for the phased elimination of distortionary taxes, including the planned reduction in the financial transactions tax. As originally anticipated, the reform will be discussed at the third review of the arrangement, and legislation will be submitted to Congress by end-September 2004 along with a 2005 budget consistent with the program targets for 2005 (structural performance criteria).

We plan to submit to Congress by end-March 2004 legislation to further strengthen tax compliance covering customs duties and social security contributions (MEFP paragraph 29) (structural benchmark). In the area of social security reform, a draft proposal to extend the coverage and increase the efficiency of the system is expected to be made public by June 2004 to elicit comments from all interested stakeholders; reform legislation will then be submitted to Congress during the second half of 2004.

The banking strategy

Additional measures are being taken to strengthen banks' capital and profitability so as to facilitate the credit creation needed to sustain the recovery.

• Progress is being made in finalizing bank compensation payments. In the case of asymmetric pesoization, compensation bonds were placed in advance in escrow accounts; the central bank has recently completed the process of claim verification and informed banks where there has been an overestimation of compensation due. With respect to the compensation for losses from asymmetric indexation, implementing regulations have been issued, and the central bank will soon issue additional instructions to the banks to formalize the process. However, given the complexity of the verification process, compensation will spill over to the second quarter. Therefore, the end-March 2004 target will be missed and we request the structural performance criterion to be reset to end-June 2004.

• After being suspended for two years, the capital adequacy regime was reintroduced in January 2004. Accordingly, banks are required to build gradually an adequate capital cushion against exposure to the public sector and interest rate risk. Banks that are found not to be in compliance with the new capital adequacy norms or that are expected to incur significant future losses are required by the central bank to take prompt corrective actions and are subjected to intensified monitoring by supervisors.

• Following the submission and analysis of annual business plans, the central bank has requested all banks to submit multi-year business plans by end-March 2004. Following the review of such plans, the central bank will augment its work and reach agreement with all banks on strategies to ensure the viability of their operations in the context of mutually acceptable multi-year business plans by end-June 2004 (structural benchmark).

As regards the major public banks, and as anticipated at the last review, new bids were launched on February 27, 2004 on agreed terms of references for the selection of the financial advisors to conduct the due diligence and strategic reviews of Banco de la Nación and Banco de la Provincia de Buenos Aires. We expect to select the advisors by end-June 2004 (structural performance criterion) and to complete the strategic review of Banco de la Provincia de Buenos Aires by end-September 2004 and of that for Banco de la Nación by end-November 2004; time-bound action plans for strengthening these banks will be finalized by end-December 2004 (structural performance criterion).

The working group charged with the design of reforms of the central bank is finalizing its report containing its key findings and recommendations and plans to issue it by end-March 2004 (structural benchmark). Based on the report's findings and feedback from a wider audience, the authorities will finalize recommendations by September 2004.

With regard to the safeguards assessment program for central banks, by end-June 2004 the central bank will begin providing financial statements to the Fund in accordance with International Financial Reporting Standards, commencing with the end-December 2003 financial year (structural benchmark). In addition, beginning in March 2004 the central bank's externally appointed controller (the Síndico) will verify and report to the Fund that all monetary data used for program monitoring purposes have been prepared in accordance with the Technical Memorandum of Understanding.

Legal framework for private corporate restructuring

We have completed the reports on the corporate insolvency framework and the financial condition of the corporate sector, the latter of which shows that substantial progress has been made in restructuring corporate debt in the context of the existing insolvency framework. We are studying the modalities for distributing these reports to a wider audience for comment.

Utility sector reform

We have taken some key steps to advance reforms in this sector, including: (i) initiating tariff increases for key sectors; (ii) pressing forward in the renegotiation of some key concessions; and (iii) updating information of the financial condition of the utility sector as a guide toward further policy evolution.

Regarding the tariff increases, a key step in restoring the viability of the nonregulated energy concessions was taken in mid-February 2004 with the announcement of an increase in tariffs charged to industry-level users for electricity and natural gas, and for liquid gas used in passenger transport. The increases will be in the range of 10-35 percent and will be implemented retroactively to February 2004 in the case of electricity. For gas, increases will become effective by May 2004 after public hearings. The Energy Secretariat has been granted the power to negotiate the specific adjustments on a bilateral basis with gas producers.

Regarding progress in the renegotiation of the 62 concessions, we have allowed 13 inter-urban road concessions to expire, and awarded new concessions to operate and maintain this infrastructure. We expect to complete the renegotiation of an additional 39 concessions by end-June 2004, and all others by end-2004. The renegotiated contracts will then be subject to public hearings, a review by control entities, and final ratification by Congress.

In February 2004, we invited a joint World Bank-IMF fact-finding mission to update the assessment of the utilities sector and the progress made in the renegotiation of concessions, as part of our previous commitment to work with the international community in this area. The recommendations of the joint mission will provide an input to complete the process of renegotiating the concessions in a timely manner. As a next step, we will invite the Bank and the Fund to discuss this assessment and to detail the areas where the government will seek Bank cooperation.

We are also aiming to strengthen the regulatory framework for the utilities sector. Given that some additional time is needed for further discussion of the issues involved with domestic and international experts, including the World Bank, the legislation to implement the new regulatory framework will be submitted to Congress during the second half of 2004. The framework will be formulated in a manner that is fully consistent with the renegotiated concessions, supportive of private sector participation in the provision of public services, and our social objective of protecting low-income consumers.

Program financing assurances

Finding a sustainable solution to the public debt problem in line with our policy commitments stated in the MEFP of September 10, 2003 and the letter of intent of January 9, 2004, remains a priority of the government. The main elements of our approach aimed at reaching a collaborative agreement are: (i) to appoint banks to assist in preparations and help market the exchange offer; (ii) to hold additional meetings and engage in constructive negotiations with all representative creditor groups, including the Global Committee for Argentine Bondholders (GCAB), domestic institutional and retail holders such as the Asociacion de Ahorristas de la Republica Argentina (AARA), and European retail bondholder organizations such as the Comitato Investori Titoli Argentini (CITA); and (iii) to formulate the offer so that it will result in a sustainable debt for Argentina and would attain broad support from creditors.

We are making progress in these areas as follows:

• We have recently selected six banks to assist us in organizing and carrying forward the restructuring process. Three foreign investment banks will undertake marketing the exchange offer in foreign jurisdictions and three Argentine banks will undertake the non-institutional domestic portion of the restructuring. A presidential decree that gives legal status to their appointment will be issued before March 15, 2004. The banks are hired for nine months or until an exchange launch (whichever is the earlier). It is our clear intention to retain the banks through the entire restructuring process, subject to banks satisfying their contractual obligations.

• We will deal constructively and transparently with creditors and we will give due consideration to the initiatives that they may be willing to put forward. We have already invited 21 creditor groups to meet in Buenos Aires to continue the dialogue and have established a schedule for this purpose (see Annex I and accompanying invitation letters). We will also be intensifying the dialogue with domestic bondholders. By mid-April 2004 we will seek to reach agreement on a follow-up process and timetable. This framework will ensure meaningful negotiations with all creditor groups.

• We have started to formulate such a framework with the investment banks. This will facilitate the development of proposals as a means of reaching a collaborative agreement with creditors. Within such a framework, it is our intention to discuss with creditors all aspects of the debt exchange offer, including how best to optimize the elements of the offer taking into account the proposals received from creditors and the restrictions imposed by Argentina's debt burden. In tailoring the offer, we would take the necessary steps to maintain the principle of intercreditor equity and endeavor to avoid a piecemeal approach to the debt restructuring, in particular by finalizing with the assistance of the banks an appropriate minimum participation threshold necessary for a broadly supported restructuring.

We will discuss with the banks an appropriate timing for the launch of the offer. Given the need for consultations and additional discussions with creditors, it is difficult to set a precise timetable for launching and completing the exchange offer. At this stage, however, we believe that the offer would not be launched earlier than June 2004 and not later than August 2004.

The program is based on the World Bank and IDB maintaining their exposure to Argentina, which is key to protecting international reserves. We will continue to work closely with the multilateral development banks to ensure that their disbursements are closely in line with the program.

As regards Paris Club creditors, we intend to write to the Paris Club secretariat by mid-March 2004 to indicate the scope and type of treatment that we intend to seek.

Except as modified in this letter and the accompanying addendum to the TMU, the objectives, policies, targets and commitments of the economic program remain as described in the original MEFP of September 10, 2003 and our Letter of Intent of January 9, 2004.

In view of the progress made under the program, we request completion of the second review under the Stand-By Arrangement. As we implement our program, we will continue to maintain a close policy dialogue with the Fund and the rest of the international community.

Yours sincerely,

Dr. Roberto Lavagna
Minister of Economy
Lic. Guillermo Nielsen
Finance Secretary
Lic. Alfonso Prat-Gay
President of the Central Bank


The following letter was sent to all the creditor groups listed below on March 9, 2004

Buenos Aires, March 9, 2004

As stated in our letter of February 2004, we are pleased to invite you to Buenos Aires between March 24 and April 16.

We kindly request you to contact:
Lucía Aguirre (,
Leonardo Costantino (
Adrián Nador (
at 54.11.4349.8810 or at the following fax numbers 54.11.4349.8807 and 54.11.4349.8815 in order to set the date and time.

Yours truly,

Roberto Lavagna

List of Creditor Groups Invited to Buenos Aires

1. Alliance
2. Altro Consumo
3. Asociacion de Ahorristas de la Republica Argentina
4. Asociacion de Damnificados por la Pesificacion y el Default
5. Capital Research
6. Comitato Investori Titoli Argentini (CITA)
7. Comitato per la Tutela degli Interessi e dei Diritti Dei Risparmiatori Privati
Italiani Portatori di Quote del Debito Pubblico dello Stato Argentino
8. Comitato per la Tutela dei Risparmiatori Italiani Portatori di Titoli Obbligazionari
della Republica Argentina
9. Daiwa Securities SMBC Co. Ltd.
10. Deutsche Bank
11. DekaBank
12. Fintech
13. Global Committee of Argentina Bondholders (GCAB)
14. Interessengemeinschaft Argentinien e.V (IGA)
15. JP Morgan Fleming
16. Mitsubishi Securities Co. Ltd.
17. Nikko Citigroup Limited
18. Nikko Cordial Securities Inc.
19. Nomura Securities Co. Ltd.
20. Sindacato Italiano Tutela Investimento e Risparmio (SITI)
21. Swiss Bankers Association (Swiss Banking)

Addendum to the Technical Memorandum of Understanding

All elements of the Technical Memorandum of Understandings (EBS/03/130, Attachment II) issued on September 12, 2003 remain in force, except for the revisions noted below.

I. Quantitative Program Targets

End-September performance criteria are being added for: (i) the cumulative primary balance of the federal government; (ii) the federal government debt stock; (iii) the stock of net international reserves of the central bank; and (iv) the stock of net domestic assets of the central bank, as follows:

Quantitative P erformance Criteria and Indicative Targets
(In millions ofArgentine pesos, unless otherwise noted)




Performance Criteria

Indicative targets

Fiscal targets


1. Cumulative primary balance of the federal government (floor)



2. Cumulative overall cash balance of the federal government (indicative target)



3. Federal government debt stock (ceiling, in billions of pesos) 1/



4. Stock of federal government arrears (indicative target)



5. Cumulative primary balance of the provincial governments (indicative target)



6. Consolidated public sector debt stock (indicative target, in billions of pesos)



Monetary targets


7. Stock of net international reserves of the central bank (in millions of U.S. dollars)
(floor) 1/



8. Stock of augmented monetary base (indicative target) 2/



9. Stock of augmented net domestic assets of the central bank (ceiling)



10. Consultation mechanism on projected end-2004 inflation (indicative target)


    Upper limit (in percent)



    Lower limit (in percent)



1/The following accounting exchange rates apply: Arg$/US$2.9, US$/SDR=1.3875, Euro/US$=0.869, CAD$/US$=1.347, CHF/US$=1.351, JPY/US$=119.78, GBP/US$=0.604, Gold (U.S.$ per ounce)=371.0.
2/Includes quasi-monies in circulation.

II. Other Revisions

• The following adjustor is added to the performance criterion on the stock of federal government debt (Section I). The debt ceilings will be adjusted:

"g.      Upward (downward) by the difference in the value of the  "Argentine peso-denominated bond" maturing on September 19, 2008 calculated at the program exchange rate and the value of the bond calculated at the exchange rate specified in the original contract arising from the embedded option in the contract. This adjustment includes the valuation of interest arrears and interest payments on this bond."

• The continuous structural benchmark on below the line reporting (item (e) of Section III) is modified as follows:

"The Secretaria de Hacienda and the BCRA will provide data from below-the-line on the financing flows of the provinces no later than 55 days after the end of the test date, or the following business day, if the 55th day falls on a Saturday, Sunday, or on a public holiday in Argentina."

The requirement on the kind of information to be provided for this benchmark remains unchanged.