Argentina plans debt cut, investment spur

Argentina has an ingenious plan to improve its foreign-payments balance -- and, the government hopes, to spur investment at the same time. Banking reaction to the Argentine plan has generally been muted, but one banker thinks it could raise as much as $1 billion a year, thus cutting in half Argentina's chronic foreign deficit.

The plan is part of a package of measures, including an amnesty for tax evaders, that is expected to be approved quickly by the Argentine Congress.

``You can't run a country with less than 30,000 taxpayers paying 84 percent of all taxes,'' Finance Ministry spokesman Santiago del Puerto said in an interview after explaining the measures to a meeting of international bankers in New York recently.

He cited government figures showing that only 13 percent of those on the tax roll paid any tax at all in 1984. The key to the amnesty's success, he said, will be the credibility of a tougher and more equitable tax system, for which the government has already abolished banking secrecy.

Argentine tax evasion has often been accompanied by capital flight, estimated at $10 billion to $30 billion, much of it during the last years of the 1976-83 military regimes. The new program is designed to encourage Argentines to trade their dollars to the central bank, with no questions asked.

Based on this amnesty, the Argentine government is proposing a double-barreled debt-reduction plan.

In debt-reduction plans, debtor governments offer investors local currency to discharge foreign debt that the investors have bought at a deep discount from banks.

Often, governments require that the proceeds be used in approved investment projects. But the system always gives the investor a large, immediate profit between what he has paid in dollars to obtain the debt and what he receives in local currency from the government.

The Argentine proposal stipulates that for each dollar of debt that is presented for local currency, the investor must trade to the government at least one ``fresh dollar,'' also in exchange for local currency.

The amnesty would protect the origin of the fresh funds from government investigation.

Bankers have pointed out that the one-for-one provision greatly diminishes the financial attractiveness of the program, because the investor has to put up twice as much money to achieve the same immediate profit.

``That's exactly what we are trying to do,'' Mr. del Puerto said. ``The one-for-one provision will cut down on the speculative uses of the program, but not on real investment. We want genuine, productive investment, not an emphasis on short-term profits.''

Asked for the bankers' reaction, del Puerto said, ``I'd say they didn't like the idea.''

In fact, the bankers' reaction to the proposal was mixed.

A banker active in trading Latin American debt, who was represented at the meeting and asked not be identified, said, ``The one-for-one requirement is going to be a very serious constraint, because it cuts the profitability in half.

``In addition, the government is saying that all the proceeds have to be used to buy plant and equipment in projects that are export-oriented. These are good aims in themselves, but all these constraints reduce the attractiveness of the system. There aren't that many attractive investment possibilities.''

He said that without these additional requirements, traders could make money in local currency at the same time that the foreign debt was reduced.

``Why not let them do it?'' he asked.

Argentina will be the third Latin American country, after Chile and Mexico, to set out a program for debt reduction of this type. The Mexican system calls for case-by-case approval by the government, while the Chilean plan includes the possibility of the investor's using the local currency proceeds as he sees fit.

One banker specializing in Latin America said that despite some bankers' concerns about the Argentine proposal, the evolution in Argentina and elsewhere in Latin America will generally be toward what he called the ``more open'' Chilean model.

``It's more attractive; there will be more activity under the open model, once people see the results of the Chilean system.''

The banker added that Argentina faces a current-account deficit averaging $2 billion each year and that the one-for-one requirement for fresh dollars could produce up to $1 billion annually, thus cutting the deficit in half.

He said the one-for-one requirement would not cut down the use of the system, because the program will be more flexible than it appears.

Harry Brautigam, a vice-president and economist with the San Francisco-based Bank of America, says that his institution takes ``a positive view of what the Argentines are proposing.

``What they are trying to do is diminish their foreign debt without producing a large-scale shift in ownership, and in particular a substantial shift from Argentine to foreign ownership.''

Mr. Brautigam says that in the future, dividends could present the same problem that interest rates do now and that the foreign-exchange problem would still exist.

``Besides,'' he said, ``what the Argentines have presented is a first version. They are interested in getting feedback.''

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