Political Climate Report

POLITICAL CLIMATE REPORT international finance markets is the only way for the the for to way returning only the deficit, is the t strategy economic markets gradualist government’s monetizing finance further international of option late bondholders in February (see below). the on As such, pressure extra put government to reach a swift program resolution of the holdouts dispute. austerity aggressive decision The widespread provoked opposition social not have unpopular, while these measures, far, So spending. total affect will policy tax income to year the of by end the to 4.8percent uncertain) is magnitude real (the 6 from deficit subsidies fiscal the gas reduce to expects natural of reduction the b to those as public well 80,000 around for as introduced, already measures the Through workers. sector contracts of suspension the and the reduction of subsidies on public utilities (mainly electricity) PCR reducing Argentina’s fiscal deficit. As discussed in our previous new decisio its stated the publicly speculation, of weeks several After Edging towards economic normalization remain. challenges significant however, expectations, of favor has community international the government has had little success on this front so far. although challenge, key further a represents inflation Curbing avoid to be crucial will these imbalances markets. Correcting capital p challenges: steps to address gover new Macri’s Mauricio February, In March Political Climate República Argentina (C1425APO) Ciudad de Autónoma 3791 Cabello +54.11.4807.6807 (ARG) (USA) +1.646.233.3204 www.cefeidas.com [email protected] CONTACT INFORMATION rotracted rotracted , me ,

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IN THIS ISSUE IN THIS key milestones key - participation participation Page 7 Page 6 Page Europe 5 Page Page Page Page system salary salary

4 3 2

Badlar* Interest Rates since Macri took office Peso depreciates further despite

Central Bank intervention ARGENTINA 33 - 31 One of the first monetary policy measures

PCR PCR the Macri administration passed was the 29 lifting of foreign exchange controls on the US 27 dollar, or ‘cepo’ (‘clamp’) (see our previous PCR for further information). Initially, the 25 rate experienced minor fluctuations, but 23 remained relatively stable. Towards the end of February, the peso began to depreciate 21 further against the dollar. The Central Bank intervened in the foreign exchange market to

stabilize the rate six times between February

4 Jan 16 Jan 4 16 Jan 7

2 Feb 16 Feb 2 16 Feb 5 4 Mar 16 Mar 4

1 Mar 16 Mar 1 24 and March 3. Until this point, the peso had

12 Jan 16 Jan 12 16 Jan 15 16 Jan 20 16 Jan 25 16 Jan 28

12 Feb 16 Feb 12 16 Feb 17 16 Feb 22 16 Feb 25

15 Dec 15 Dec 15 18 Dec 15 Dec 18 15 Dec 23 15 Dec 29 10 Dec 15 Dec 10 been allowed to float freely. In a further bid to prevent the peso from surpassing the Source: BCRA government’s unofficial ‘ceiling’ of 16 to the dollar, the Bank hiked interest rates to 37 *The Badlar rate is a wholesale rate, an average of the interest rates for deposits of over ARS 1 million with a percent (up from 31.15 percent) on March 2. maturity of 30-35 days offered by commercial banks. The same day, it also sold almost USD 500 million to stabilize the currency.

As of March 9, the rate had settled at 15.06 Argentina reaches preliminary pesos to the dollar. The currency lost 12.2 percent of its value in February, and at the agreement with holdout creditors end of the month, foreign exchange reserves were down by approximately USD 1.5 billion, On February 29, US Court-appointed from USD 30.1 billion to USD 28.6 billion. It mediator Daniel Pollack announced that the is likely the peso will continue to be four largest and most intransigent holdout considered weak while high inflation persists. creditors had signed an “Agreement in Principle” with the Argentine government. Together, these creditors hold approximately 65 percent of Argentina’s percent of the country’s disputed debt. The defaulted sovereign bonds. If the new government’s willingness to settle is in agreement is approved by Congress, sharp contrast to the previous Argentina will pay USD 4.65 billion to the administration’s ‘no-pay’ stance (for a hedge funds, which include Elliot timeline of the holdouts dispute, see page Management, Aurelius Capital 7). Management, Davidson Kempner and Bracebridge Capital. This figure represents The agreement is contingent on several a 25 percent haircut on the funds’ original factors. First, the Argentine Congress must demands, and excludes a payment to settle repeal two laws: the 2005 Lock Law (‘Ley claims outside the Southern District of New Cerrajo’) and the 2014 Sovereign Payment York, as well as certain legal fees and Law (‘Ley de Pago Soberano’). The former expenses incurred over the protracted blocks Argentina from offering a more dispute. Reaching a settlement with this favorable deal to the main bondholders group, led by NML Capital (a subsidiary of than to the ‘me-too’ bondholders, while the Elliot Management), represents a good latter allows the country to make payments outcome for the holdouts, who are likely to to bondholders without having to clear receive a 341 percent return on what they payments through the US. If Congress originally paid for the bonds. Argentina has approves the repealing of this legislation, now reached resolution with holders of 85 the payment to the four main bondholders

must be made in full by April 14, although Macri courts opposition elements this date may be jointly reviewed by the government and the holdout creditors.

ARGENTINA Gaining approval of the legislative

- measures needed to resolve the holdouts Since Pollack’s announcement of the dispute is the Macri administration’s first PCR PCR bondholder deal, Finance Minister Alfonso major challenge in Congress. During Prat-Gay has announced Argentina will lawmakers’ summer recess, the emit USD 15 billion worth of bonds to cover government made certain decisions that all its financing needs, and that the funds alienated the opposition. The nomination of for this are already “in place”. USD 11.7 two justices for the Supreme Court without billion of these bonds will be issued to cover the Senate’s approval, and the unilateral the country’s debt. Finance Secretary Luis decision to increase tax co-participation for Caputo has stated that he expects the the City of Buenos Aires only did little to international lenders will demand a 7 help the government build congressional percent annual payment rate for the loans support. Despite these political errors, we Argentina will receive. expect the government will be able to garner the support needed in Congress to On March 2, US District Judge Thomas repeal the debt laws and approve the Griesa announced he will lift the injunction settlement with the creditors. This is due to known as the ‘stay’, in place since the government’s recent political 2014.This stay has blocked Argentina from maneuvering with opposition members paying other bondholders until it had (see below for further analysis), and the settled with the group of holdouts led by Frente para la Victoria (FPV) alliance NML Capital. The injunction will only be recently having lost the support of 17 of its lifted if Argentina and the main Lower House bloc members. As a bondholders meet the conditions imposed consequence, Cambiemos is – for now – by Griesa (see above). The ruling will be the largest congressional bloc in the Lower delayed until mid-March to allow time for House. appeals, although since Argentina now has the support of multiple bondholders, After the rupture in the Peronist Party in plaintiffs will find it difficult to reverse early February, there are now four Griesa’s decision. Peronist-led blocs in the Lower House (see graphic, below). These blocs are the FPV The Lower House’s Finance and Budget (down from 95 seats to 82), Sergio Massa’s committees have approved an amended Unidos por una Nueva Alternativa (37 settlement bill for debate in the coming seats), the breakaway Justicialist Party days. The alterations, put forward by members (around 17) and the non-aligned opposition parties, included the placing of (some of whom have already joined the limitations on the debt to be issued by the new splinter). In spite of the recent government, and on certain banking and defections, FPV remains the second largest legal fees. If Congress approves the voting bloc in the Chamber of Deputies. legislation, the country will exit default and Cambiemos now has 89 deputies. return to the global bond market as early However, the alliance remains much as later this month. With the ability to weaker in the Senate, where the Peronist borrow internationally, Argentina will be Party is well-represented. able to replenish foreign reserves, cover its budget deficit and finance its gradualist strategy. The Macri administration hopes that this will help to curb inflation and make the country more attractive to foreign investors, thereby stimulating economic growth.

Meanwhile in the Senate, we expect there to be broad support for the holdouts bill.

Composition of the House of For one, senators are more exposed to the ARGENTINA

Representatives following FPV split - provinces’ and governors’ agendas than the Lower House. Secondly, the Kirchnerist

PCR PCR 89 bloc is too small to provoke any kind of split 17 which would potentially block the bill from 37 81 being approved. 8 25 Quorum: 129 Provisional agreement reached FPV+allies Cambiemos over changes to co-participation Justicialist Bloc Dissident Peronists system Progressives Others (left) As part of a move to strengthen relations with Peronist governors, and as an overall Source: Ministry of the Interior attempt to divest more power to the provinces, the government intends to increase funding allocations to Argentina's provinces. On February 25, the Bicameral Commission approved an Emergency Although Cambiemos is now the largest Decree (DNU) signed by Macri that will see congressional bloc in the Lower House, it the state return 15 percent of federal tax does not have enough deputies to pass revenue to Argentina’s provinces. This had legislation. The ruling alliance also lacks a previously been retained by the federal majority in the Senate. As such, certain government to fund the National Security government actors (namely Speaker of the Administration (ANSES). Congress must House Emilio Monzó and Interior Minister decide whether the law remains in force. Rogelio Frigerio) have recently been Sergio Massa’s Frente Renovador played an making efforts to build support among important role in negotiating the finer Argentina’s Peronist governors. San Juan details of the agreement. 15 percent of tax Governor Sergio Uñac and Salta Governor revenue will be divested gradually, and in Juan Manuel Urtubey have been installments, through to 2021. Instead of demonstrating particular support for the removing funds from ANSES, cuts will be Macri government in recent weeks, with made over time in other areas, including Urtubey, along with Tierra del Fuego public works and social programs. Governor Rosana Bertone, accompanying the President to the Vatican in late February to meet with Pope Francis. Many Government negotiates salary other Peronist governors, who exert considerable influence over their provinces’ increases with labor unions congressmen, have also initially demonstrated willingness to cooperate with On February 18, Macri passed a decree to the Cambiemos’ legislative agenda. There double the income tax floor to ARS 30,000 is one key reason for this. The provinces (around USD 1,900), a campaign promise. are in need of financial assistance from the If the decree is passed by Congress, it will federal government, and will benefit from provide tax breaks to 180,000 workers and being able to issue debt. will cost the government ARS 49 billion (USD 3.17 billion). At the same time, the government eliminated a regulation that had exempted certain workers from paying

income tax since 2013. The measure was a move to boost taxpayers’ purchasing New government moves closer to US, power ahead of wage negotiations with

ARGENTINA Europe

- major unions – which represent the first key test of the new government’s ability to As part of a changing policy agenda, the PCR PCR manage the social and political dynamics Macri administration is making efforts to generated by recent fiscal and monetary form closer bilateral ties with Europe and the adjustments. It remains to be seen if the United States. Italian Prime Minister Matteo tax breaks offered by Macri will balance the Renzi and President Francois Hollande of loss of purchasing power stipulated by France visited Argentina in late February on salary raises in line with inflation (20-25 separate state visits, with both pledging to foster closer ties between the two countries. percent). It is most likely tax breaks will only benefit high earners at this stage. The US has been particularly receptive to Argentina’s more pragmatic internationalist Collective wage bargaining typically begins stance – since Macri and US Vice-President with negotiations between the federal Joe Biden’s constructive meeting at the government and teachers’ unions prior to World Economic Forum in late January, it has the start of the school year, which begins been announced President Barack Obama will at the end of February. As we predicted, visit Argentina on 23-24 March 2016. This the unions demanded a larger increase will mark the first time a US President has visited the country since George Bush in than the government was prepared to 2005. Argentina’s foreign minister Susana offer. On February 26, the federal Malcorra has stated that Obama's trip is likely government reached an agreement with to focus on investment in renewable energy, the teachers’ unions to increase wages by agriculture and tourism. On May 9, Macri and 32 percent for the majority of teachers. The Malcorra received High Representative of the initial increase was 25 percent. However, European Union for Foreign Affairs and the national Teacher’s Fund (FONID) was Security Policy Federica Mogherini in Buenos also increased in order to reach the Aires. This visit is expected to be key to average of 32 percent (and 40 percent for advancing an EU/Mercosur trade and cooperation agreement. Mogerhini is the lower-income teachers). The agreement highest-ranking EU official to visit Argentina was communicated as a 40 percent raise, in over a decade. and set the tone for future negotiations. On March 3, national mining union AOMA (La Separately, on February 27, Macri met with Asociación Obrera Minera Argentina) Pope Francis at the Vatican. The President reached an agreement with national mining was accompanied by Governors Juan Manuel chamber CAEM (Cámara Argentina de Urtubey (Salta) and Rosana Bertone (Tierra Empresarios Mineros). Workers at a group del Fuego). Macri and the Pope touched on of metal mining companies will receive a 22 various social issues, including poverty and drugs trafficking. Macri stated after the percent increase to their salaries, which will meeting that while a date was not confirmed be reviewed after six months. On March 4, for a future Papal visit to Argentina, the Pope SEC (Sindicato de Empleados de will visit the country “as soon as possible”. Comercio), which represents around one million commerce workers, agreed to a 20 percent raise for the next six months, plus a fixed non-wage payment of ARS 2000 (USD 140) per worker.

The government’s inflation target of 20-25 percent by the end of the year is unlikely YPF chief Galuccio resigns to be reached if salary raises are set above

ARGENTINA

- that figure. The government has agreed to On March 8, it was confirmed that Miguel annual raises of 30-35 percent, and bi- Galuccio will step down from his roles as CEO

PCR PCR annual raises of 20 percent, which are and chairman of YPF, Argentina’s state-run likely to fuel inflation. Further, given the energy company. This is reportedly part of number of public employees implicated, the Macri administration’s plan to reorganize the company. Galuccio will remain in his the raises will mean a significant increase posts until the company’s shareholder in federal spending. The government has meeting in April. When he steps down, YPF prioritized lowering inflation and will separate the chairman of the board and decreasing federal spending as part of its CEO positions. On March 9, it was announced economic reform agenda. The outcome of that current YPF director and former the wage negotiations therefore represents Telefónica executive Miguel Angel Gutierrez a major setback for the Macri will become YPF’s new chairman. administration.

Monthly Inflation* (%), December/January

7 6

4 3

1 0 December January

IPCBA IPCSL

*In the absence of INDEC data, San Luis (IPCSL) and Buenos Aires City (IPCBA) indexes have been used as proxies

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Holdouts Dispute – Key Milestones

December 2001 Argentina defaults on around USD 100 billion

2003 NML Capital initiates legal

ARGENTINA

- action against Argentina in NY March 2005 Argentina district courts completes first round of March 2006 Argentina settles PCR PCR debt restructuring; 76% of debt with IMF (USD 9.5 billion) bondholders accept May 2010 Argentina completes second round of debt restructuring; 93% accumulated acceptance February 2012 Griesa orders Argentina to pay holdouts USD 1.3 billion

March 2012 Griesa issues a stay on that order October 2012 NML seizes pending an appeal Argentine naval training vessel off November 2012 Appeals court the coast of Ghana reissues stay; asks Argentina to propose alternative payment plan

March 2013 CFK government offers to pay holdouts 20 cents on every USD owed March 2013 Holdouts reject the proposal

August 2013 Court of Appeals says proposal insufficient

February 2014 Argentina appeals to US Supreme Court to overturn ruling

May 2014 Argentina reaches agreement with Paris Club to June 2014 Supreme Court pay overdue debts (USD 9.7 billion) denies Argentina’s request to hear the case

June 2014 Argentina announces it wants to settle; Griesa allows until July 30

July 2014 Parties fail to reach an agreement; Argentina enters partial default

July 2015 Holdouts attempt to block Argentina from making bond payments to non-US investors

10 December 2015 Mauricio Macri takes office December 2015 Holdouts threaten legal action if international banks lend money to Argentina

January 2016 The Macri administration reopens negotiations in New York

5 February 2016 Argentina makes initial offer to US holdouts and ‘me-too’ bondholders of USD 6.5 billion

18 February 2016 Four out of six bondholders of the group led 19 February 2015 Griesa announces willingness to lift ‘stay’ that prevents Argentina by Elliot Management reject paying other bondholders without paying the group led by NML Capital proposal

29 February 29 2016 Four largest bondholders sign “Agreement in Principle for USD 4.65 billion. Dependent on Argentina repealing debt laws, and making payment by April 14

2 March 2015 Griesa announces he will ‘stay’ despite requests for a 30- day extension from ‘me-too’ bondholders. Ruling delayed until mid-March to allow time for appeals