CAPITAL MARKET
VII
Capital Market
!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
1
 CAPITAL MARKET
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,
2
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
 CAPITAL MARKET

TABLE 7.1
International Capital Markets Indicators

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.

May, and both the Dow Jones and the NASDAQ increa- indicated that the stocks decline would continue, in view of the
sed up to levels near 10,500 points and 2,100 points res- successive warnings of lower returns of leading technological
pectively. However, at the closing of this report, perspectives companies, including telecommunications.

3
 CAPITAL MARKET

GRAPH 7.1
Yield of US Treasury Bonds

7.0%
1 aæo

5 aæos 6.5%

30 aæos 6.0%

5.5%

5.0%

4.5%

4.0%

3.5%
04/06/1999

08/07/1999

13/08/1999

17/09/1999

22/10/1999

26/11/1999

30/12/1999

04/02/2000

10/03/2000

12/04/2000

19/05/2000

23/06/2000

28/07/2000

01/09/2000

06/10/2000

10/11/2000

15/12/2000

19/01/2001

23/02/2001

30/03/2001

04/05/2001

08/06/2001
Europe
cents of dollar. This reaction diluted again by March, toge-
ther with the fall of world stock exchanges. Besides, the
In the first quarter of 2001, the pace of GDP growth in
European Central bank reduced short-term interest rates
the zone of the euro amounted to 2.5% year-on-year, with a
by the end of May to 4.5% p.a., in view of the clearer
remarkable fall with respect to the variation of the same quarter
evidences of slowdown in the main economies of the re-
of the previous year, when it was 3.5%. Simultaneously, the
gion. Thus, the euro went back to 86 cents of dollar by
decline of unemployment rate seemed to stop, at levels near
mid June. However, in the last meeting of June 7, the ECB
9%. Wholesale inflation remained relatively high (5% p.a.),
decided to maintain interest rates constant, with the aim of
due to the weakness of the euro and the rise of oil price in the
defending the value of the euro in view of the fears of an
last year. Both exports and imports of countries outside the
acceleration of inflation. Retail prices grew 3.4% in May
zone of the euro grew 12% p.a. After the general fall of
(from 2.6% in March), exceeding the limits established by
European stock exchanges in 2000 (in Germany, the DAX
the bank itself as target for the zone of the euro. In Ger-
index had lost 30% and technological papers more than
many, inflation recorded a peak of the last seven years.
50%), in the last months, there is a certain generalized
recovery (3-4%).
Recently, the labor government in Great Britain was
re-elected and, consequently, the debate opened in said
By December 2000, in view of the fall of U.S.
country about its future incorporation to the zone of the
growth, the euro had recovered part of the place lost against
euro. This inclusion is particularly supported by big in-
the dollar in the last two years, exceeding the quote of 90
dustrial corporations and the government, and resisted by

4
 CAPITAL MARKET

GRAPH 7.2
Dollar Quotation compared to main currencies

1.2

1.1

0.9

0.8

0.7
Euro/U$S
0.6
29/12/1995
15/03/1996
31/05/1996
16/08/1996
01/11/1996
17/01/1997
04/04/1997
20/06/1997
05/09/1997
21/11/1997
06/02/1998
24/04/1998
10/07/1998
25/09/1998
11/12/1998
26/02/1999
14/05/1999
30/07/1999
15/10/1999
30/12/1999
17/03/2000
02/06/2000
18/08/2000
03/11/2000
19/01/2001
06/04/2001
22/06/2001
150.00

140.00

130.00

120.00

110.00

100.00

90.00 Yen / U$S

80.00
29/12/1995
15/03/1996
31/05/1996
16/08/1996
01/11/1996
17/01/1997
04/04/1997
20/06/1997
05/09/1997
21/11/1997
06/02/1998
24/04/1998
10/07/1998
25/09/1998
11/12/1998
26/02/1999
14/05/1999
30/07/1999
15/10/1999
30/12/1999
17/03/2000
02/06/2000
18/08/2000
03/11/2000
19/01/2001
06/04/2001
22/06/2001

a great part of the population. Consequently, there was Brazil

a deterioration of the quotation of the sterling pound of
3% against the dollar, which amounts to 9% compared
After a first quarter with a growth of 4.1% y/y of GDP,
to one year before. It is estimated that the fall of the
during the second quarter of 2001, the Brazilian government
pound could continue in the event there is a voting
implemented measures to limit energy consumption, due to
about the adoption of the euro, and the definite incor-
the lack of electricity derived from the drought in a great part of
poration could take place in two years’ time.
its territory. The country strongly depends on hydroelectric

5
 CAPITAL MARKET
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.
6
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.
 CAPITAL MARKET

II. Evolution of the Argentine Stock until again reaching lows of 400 points at the end of March. It
Market is worth adding as explanation the persistence of the recession
during the first quarter, when GDP went back again to 2.1%

In 2000, the Argentine stock market had shown a fall y/y.

of business volume, continuing with the trend evidenced in

In almost all the second quarter, the indicator conti-
1999. In this process, stock transactions lost economic signifi-
nued an erratic course. There was a soft recovery after the appro-
cance compared to the last years, accounting for only 5% of
val of the Competitiveness Law in April. Afterwards, the MER-
GDP. The average stock’s price also declined during 2000. In
VAL fell again until the approval of the debt swap in June.
December last year, the indicator had not yet been able to take
Thus, the average of the local stock exchange during April and
off the area of 400 points.
May still remained below 440 points. At the closing of this

In the first quarter of 2001, after obtaining the loan Report, after the approval of the debt swap and the measures

known as “financial shield” and the better expectations, there taken to advance wide convertibility to the external sector, the

was an important recovery, thus the MERVAL was near 540 index recorded 420 points, slightly above the 2000 close, but

points by the end of January. This rise was enough for the some 20 points below the last day of March. A similar evolu-

quarterly average to be 471 points, 12% above the fourth quar- tion followed the BURCAP indicator during the first quarter,

ter of the previous year. Nevertheless, at the end of February, which with 790 points average in May was 14% below the

the stock exchange returned to falling, which became deeper average of 2000.

after the Turkish crisis and the domestic political problems,

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

GRAPH 7.3
Merval Index
Weekly closing

700

600

500

400

300
02/01/1998

20/02/1998

08/04/1998

29/05/1998
17/07/1998

04/09/1998

23/10/1998

11/12/1998

29/01/1999

19/03/1999

07/05/1999
25/06/1999

13/08/1999

01/10/1999

19/11/1999

07/01/2000

25/02/2000
12/04/2000

02/06/2000

21/07/2000

08/09/2000

27/10/2000

15/12/2000

02/02/2001
23/03/2001

11/05/2001

7
 CAPITAL MARKET
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 and
Public Debt Placements
1. Evolution of sovereign risk
In the first quarter of 2001, there was in average
a minimum decrease of sovereign risk 1 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
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 bonds
of similar term.
8
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
 CAPITAL MARKET

GRAPH 7.4
Sovereign Risk
In basis points

G LO BA L BO N D S

RA 03
1200
RA 17
1050

900

750

600

450

300
12/30/99
01/19/00
02/08/00
02/28/00
03/19/00
04/08/00
04/28/00
05/18/00
06/07/00
06/27/00
07/17/00
08/06/00
08/26/00
09/15/00
10/05/00
10/25/00
11/14/00
12/04/00
12/24/00
01/13/01
02/02/01
02/22/01
03/14/01
04/03/01
04/23/01
05/13/01
06/02/01
06/22/01
BRA D Y BO N D S
PAR
STRIP 1,500
DISC.
STRIP
FRB
1,100

700

300
12/30/99
01/19/00
02/08/00
02/28/00
03/19/00
04/08/00
04/28/00
05/18/00
06/07/00
06/27/00
07/17/00
08/06/00
08/26/00
09/15/00
10/05/00
10/25/00
11/14/00
12/04/00
12/24/00
01/13/01
02/02/01
02/22/01
03/14/01
04/03/01
04/23/01
05/13/01
06/02/01
06/22/01

beginning of January, which allowed a soft fall of risk the resignation of the minister of economy, expecta-

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
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

9
 CAPITAL MARKET

TABLE 7.2
Evolution of sovereign risk
In basis points

DATE BRADY BONDS GLOBAL BONDS

PRE 4 PAR DISCOUNT FRB RA 08 RA 17 RA 27
STRIPPED STRIPPED
31-Mar-99 583 805 953 706 676 621
25-Jun-99 730 938 1,080 799 741 690
30-Sep-99 689 892 1,075 665 609 562
30-Dec-99 591 714 767 589 514 457
31-Mar-00 394 795 832 436 581 550
30-Jun-00 480 945 940 687 693 684
29-Sep-00 520 929 928 587 710 656
29-Dec-00 823 1048 1066 681 789 691
5-Jan-01 468 916 943 628 732 646
12-Jan-01 476 933 959 609 717 622
19-Jan-01 532 929 948 566 714 628
26-Jan-01 506 896 918 561 676 609
02-Feb-01 488 898 941 533 676 607
09-Feb-01 514 939 973 571 685 640
16-Feb-01 566 934 937 632 725 655
23-Feb-01 695 1010 1001 706 756 683
02-Mar-01 678 1015 1003 760 775 713
09-Mar-01 619 988 979 704 751 684
16-Mar-01 900 1132 1114 924 855 724
23-Mar-01 1758 1381 1384 1318 933 849
30-Mar-01 1258 1233 1155 1048 889 805
06-Apr-01 1223 1116 1135 957 867 760
13-Apr-01 1015 1119 1109 934 815 725
20-Apr-01 1065 1300 1138 1418 994 902
27-Apr-01 1591 1432 1191 1192 1137 813
04-May-01 1401 1268 1254 1160 914 866
11-May-01 1480 1306 1298 1248 1013 902
18-May-01 1247 1164 1223 933 915 833
24-May-01 1210 1098 1115 816 886 816
01-Jun-01 1545 1223 1142 893 974 881
08-Jun-01 1200 1061 1061 825 922 878 762
15-Jun-01 1253 1130 1187 984 1012 920 839
22-Jun-01 1483 1267 1176 1127 1106 956 850
Source: Public Credit National Office, Ministry of Economy.

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

10
 CAPITAL MARKET

TABLE 7.3
International market issues in 2001
Date of Currency Amount Amount Term Coupon Spread
Security issue issued in d ollars -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) 1,092
Global 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 ones
Source: Public Credit National Office, Ministry of Econom y.

points, although with a downward trend. It is esti- 2. Public debt placements

mated that, to the extent the fiscal situation is con-
solidated and growth returns, sovereign risk should International market
fall significantly.
Placement at the international market during

TABLE 7.4
Bond placements in the international market
Issues Amount Average Spread
Year Volume in dollars Life
(1) (years) (2)
1994 (*) 19 2,600 3.3 238
1995 18 6,370 4.0 371
1996 30 10,413 8.2 395
1997 18 10,214 14.9 310
1998 24 11,664 13.3 429
1999 40 11,869 7.6 594
2000 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 duration
Source: Public Credit National Office, Ministry of Economy.

11
 CAPITAL MARKET

TABLE 7.5
Public Debt Issues in the domestic market
In 2001
Treasury Bills (LETES)

Placement Date Currency Amount (1) Term Disc. Rate N.A.Rate Status
09-Jan-01 DOLLAR 369.1 94 8.29% 8.47% Cancelled
09-Jan-01 DOLLAR 362.9 182 8.76% 9.17% Cancelled
23-Jan-01 DOLLAR 356.9 91 6.64% 6.75% Cancelled
06-Feb-01 DOLLAR 350.0 91 6.60% 6.71% Cancelled
06-Feb-01 DOLLAR 354.0 182 7.09% 7.35% Cancelled
20-Feb-01 DOLLAR 350.0 91 6.74% 6.86% Cancelled
13-Mar-01 DOLLAR 350.0 182 8.50% 8.88% Outstanding
13-Mar-01 DOLLAR 506.7 364 10.50% 11.75% Outstanding
27-Mar-01 DOLLAR 353.0 91 10.67% 10.96% Cancelled
10-Apr-01 DOLLAR 350.0 88 10.09% 10.35% Cancelled
10-Apr-01 DOLLAR 350.0 179 11.24% 11.91% Outstanding
08-May-01 DOLLAR 350.0 91 12.06% 12.44% Outstanding
22-May-01 DOLLAR 350.0 92 11.73% 12.09% Outstanding
22-May-01 DOLLAR 150.0 169 11.75% 12.44% Outstanding
12-Jun-01 DOLLAR 350.0 91 7.74% 7.89% Outstanding
12-Jun-01 DOLLAR 350.0 182 9.43% 9.90% Outstanding
TOTAL 5,602.6

Treasury Bonds (BONTES)

Placement Date Currency Amount Term Interest Spread
(1) Rate
7-Feb-01 (*) DOLLAR 2,608.1 5.2 11.75% 657
30-Mar-01 DOLLAR 420.0 4.1 12.13% 982
TOTAL 3,028.1

Other transactions ("Promissory notes" bonds)

Placement Date Currency Amount Maturity Interest Spread
(1) Rate
13-Feb-01 DOLLAR 150.0 13-Feb-04 (2)+435 bp 603
19-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.

the first half of 2001 amounted to U$S 31,910 millions, a were made for U$S 3,539 millions (Table 7.3), including two

peak record for Argentina. This amount includes the swap mega issues of Global Bonds for U$S 2,094 millions. Maturities of

transaction for U$S 28,371 millions, analyzed in detail in an these debt instruments were agreed upon between 6 and 30

Annex to this chapter. Additionally, other placements of debt years. In the first semester, the average spread of all these securi-

12
 CAPITAL MARKET
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
13
 CAPITAL MARKET

TABLE 7.6
Private pension funds investments
In thousand Pesos
% 31-Dec-98 31-Dec-99 30-Apr-01
Limit Amount % Amount % Amount %
(1) Fund Fund Fund
I. Cash and Cash Equivalents 175,239 1.5 163,040 1.0 157,243 0.73
II. Investments 11,351,155 98.5 16,624,059 99.0 21,474,982 99.27
Public 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 1.97
Short term Corporate Bonds 14 83,223 0.7 105,466 0.6 90,776 0.42
Convertible Corporate Bonds 28 11,839 0.1 14,245 0.1 0 0.00
Fixed 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 14.90
Variable return fixed term deposits 1,997,045 17.3 512,601 3.1 146,312 0.68
Prepayable 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 10.96
Public companies stocks 14 292,170 2.5 249,218 1.5 257,538 1.19
Mutual 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 0.00
Foreign corporate securities 7 28,700 0.2 61,263 0.4 927,150 4.29
Foreign corporate stocks 830,483 3.84
Foreign corporate securities 28,364 0.13
Mutual Funds according to article 3 Instruct. 18/00 68,303 0.32
Regional Economies (*) 163,809 1.4 236,802 1.4 305,701 1.41
Real Estate Mortgage bonds and bills 28 40,365 0.4 14,151 0.1 10,069 0.05
Futures and Options 2 - - 40,780 0.2 12,479 0.06
Direct Investment Funds 10 21,497 0.2 32,586 0.2 38,853 0.18
III. Total Pension Funds 11,526,393 100.0 16,787,099 100.0 21,632,225 100.00

(* ) Th is type of in vestm ent o nly app lies to Naci n A.F.J.P. an d h as a m a xim um of 50% o f the total.
(1 ) Maxim um percen tag e per in stru m ent th e p ension fund s is authorized to invest.
So urce: Secretary of Econ om ic Policy, b ased o n S.A.F.J.P. [Pension fund Su perinten den t]

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-

14
 CAPITAL MARKET

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 possibility
of 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 the
security 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 funds
try 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).

15
 CAPITAL MARKET

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).

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

6,41% 53.76%
Mutual Funds Government Securities

6.71%
Others

2,27%
Corporated Bonds

16.08% 12.15%
Term Deposits Shares

16
 CAPITAL MARKET

ANNEX

The June 2001 Debt Swap

On June 1º, 2001, a public debt securities swap tran- compress the Government’s short-term financial needs, so as to
saction took place that, due to its size, received the name of dilute any type of uncertainty about the Argentine State’s capa-
“mega swap” and it is the first example of a mechanism to solve city to comply with its obligations. On the other hand, the
a debt crisis. The basic objective of this transaction was to de- transaction releases pressure on capital markets, which allows

TABLE 7.7
Description of the new bonds

PROMISSORY NOTE GLOBAL $ / US$ GLOBAL GLOBAL GLOBAL

PORTFOLIO
2006 2008 2008 2018 2031
Term (in years) 5 7.25 7.5 17 30
Maturity 19-Jun-06 19-Sep-08 19-Dec-08 19-Jun-18 19-Jun-31
Nominal Value Issued 2,060.41 930.80 11,456.13 7,463.25 8,520.69 30,431
monthly bi-annual bi-annual bi-annual bi-annual
Coupon 10% 1º al 3º year 7% 1º to 3º year 12.25% 12% 10,28% (b)
(a)
12% 4º year at maturity 15,5% 4º year at maturity
Interest up to jun-
Compounding 580 pb up to jun-03 NO NO Interest up to jun-06 06
5 bi-annual
Amortization 6 bi-annual installments Bullet (c) 6 bi-annual installments installments Bullet (c)
Average life 3.75 7.25 6.3 16 30 15.15
Yield at maturity 15.38% 15.99% 15.95% 15.24% 14.90% 15.29%
Duration 3.13 4.99 4.81 10.91 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-31
Schedule 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 100 78.32 78.55 73.25 70.7

Listing Buenos Aires Buenos Aires and Luxemburgo
Legislation Argentina New York State
CRYL Euroclear - Clearstream - DTC
Custody and Registratio
Caja de Valores Caja de Valores
(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

17
 CAPITAL MARKET

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

Years Principal Interests Total

2001 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

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

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

5,000

4,500

4,000 Interests
3,500 Principal

3,000

2,500

2,000

1,500

1,000

500

-
2001 2002 2003 2004 2005

18
 CAPITAL MARKET

TABLE 7.9
Debt average term and yield

Variation of Variation of
Security averge 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

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-
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$

re in 2008, 2015 and 2031, and there is a fourth security NV 30,431 millions. The transaction generated a reduction

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-
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.

19