Weekly Report - 17 February 2004

ARGENTINA | Movement on the debt front. Last week economy minister Roberto Lavagna appointed Merrill Lynch, UBS and Barclays Capital to handle the international portion of the slow-moving debt-restructuring operation. Bondholders say they are unsure whether this marks the beginning of a more `flexible' approach by Buenos Aires (meaning willingness to offer a smaller `haircut'). Lavagna has yet to reply to an invitation to meet the Global Argentina Bondholders' Committee (which the government has refused to recognise) on 24 February in New York. Three local banks (Francés, Galicia and Nación) had previously been selected to manage the domestic portion of the operation.

World bank president James Wolfensohn, whose institution has been holding up a US$5bn lending package for Argentina since the IMF dragged out the first review of its standby deal, told the press last week, `All the signs are there will be an agreement with the Fund but it is important that there be that agreement before we proceed. 

The IMF's chief spokesman, Thomas Dawson, said later that it was too soon to judge whether the second review of the programme can be completed in time for the government to avoid having to make a large upcoming payment out of reserves (which it has vowed not to do). He said that the IMF review mission will not arrive in Argentina until this week.

BRAZIL | Enlarging the budget cuts. The government's adjustment to the more cautious policy adopted by the central bank will be more energetic than at first anticipated. Last week planning minister Guido Mantega announced that spending cuts this year would reach US$2.4bn. Two weeks ago finance minister Antônio Palocci had announced cuts of US$1bn. 

Mantega did his best to minimise the effect of the greater cuts, noting that the government would still be spending `98% of what congress authorised' and claiming that the shortfall `will not cause any practical consequence in the execution of the budget.' Mantega said that investment in infrastructure would reach US$5.17bn, and that US$14.6bn would go to the social area (with health taking 68% of that).