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Testo completo della lettera del 23 aprile di Domingo Cavallo ai mercati - in inglese 

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di Redazione GirlPower 28 ott 2005 ore 09:12
An Open Letter to the Markets

In the four weeks since I became finance minister I have been working on a comprehensive program to get Argentina moving again. I would have never thought four weeks ago that we could have made so much progress in such a short period of time. However, this progress does not seem to be reflected in the market valuation of Argentine assets. In fact, last Friday, prices continued to drop reflecting ongoing concerns on Argentina's solvency.

This note is to clarify what we have done, to explain where we are in terms of our financing program, and to clarify what our intentions are.
When I was appointed minister I realised that we had to solve quickly three very critical problems that the economy was facing. On the one hand, we had a serious problem of credibility regarding our capacity to run an effective government.

Second, we had to tackle the issue of fiscal solvency, which had critically aggravated in the months preceding my appointment. Finally, we had to get the economy going again, reverting three years of economic stagnation.

The first couple of days I devoted my energy to help President Fernando de la Rua in rebuilding the Alianza as an effective governing coalition and in bringing other political forces to play cooperatively in building a working government. I believe we were effective in attaining this objective and the results are clearly evident.

I started my appointment with two important legislative initiatives: the competitiveness law and the creation of a new tax on financial transactions. This tax received strong support from all of society because it was a mechanism by which the tax burden was paid by the society at large. An effective mechanism to have the effort shared by all economic agents and not just those already "in the system." In addition, the tax will open the ground for long run fiscal solvency, as it will be one of our critical instruments for curtailing tax.

But beyond those considerations, the tax, which is expected to collect about 1% of the GDP coupled with the $700 million decline in government expenditures decided upon last week, put the fiscal numbers back on track.

Today we do not risk compliance with the Fiscal Responsibility Law. In short, with creativity we overcame the shortage of tax revenues that we were anticipating for the remainder of the year (about $2bn).

I want to emphasise that this was the first thing I did, and my role was to make this a feasible possibility. With the problem solved I moved to the important task of stimulating growth, both selling Argentina to the Argentines and to potential foreign investors, leaving the polishing of the numbers to my technical staff. In the next few days we will be able to get a seal of approval from the IMF.

To be honest, I am a bit surprised by how little credit was have been given for getting the fiscal numbers back on track. If markets are concerned about long run fiscal solvency, you can bet we will be working on both ends of the equation: revenues and expenditures in order to assure its achievement. In terms of revenues we will be developing a more efficient, simpler and better-controlled tax system. But I should not dwell into this until we have real and concrete achievements.

In my previous tenure as finance minister, the number of public employees was reduced in 300,000, and public accounts were balanced after forty years of chronic deficits and inflation financing. Yet, you have never heard in those years a single announcement regarding expenditure rationalisation.

We prioritise action over announcements. And there is still so much to be done. Who can believe I will settle for anything less than attaining long run fiscal solvency in Argentina? As a proof of my determination, in the last few days the administration has signed decrees reducing expenditures for more that $380 million. More, obviously, is coming. In fact, the programme considers an additional expenditure reduction of close to $320 million for the remaining of the year, for a total of the $700 above mentioned. This would bring the expenditure level back to that implied in the 2000 budget.

At the same time, much greater emphasis is being placed on the discipline of the provinces where transfers are now conditional on fiscal performance, as illustrated by the reduced transfers to four non-performing provinces. Or the fiscal pact with the province of Buenos Aires that implies sizeable annual deficit reduction of more than $400 million over the next 5 years. Expenditure control is practised, not declamated.
In the last couple of weeks you have heard lots of talk about the possibility of a default. This talk, truly surprising given the strengthening of our fiscal situation, was, I believe, stimulated by the opinion of some uninformed people. I have thought a lot as to why honest people may dare write a recommendation as to how Argentina may default. Who could conceive such a destructive idea for a country, and be bold enough to propose it?

My reading is that there is an ongoing debate, regarding the role of the IMF in helping emerging economies. Many would like to see Argentina default as a way of proving the IMF wrong it its attempt to smooth out the instabilities of world capital markets. We are not sorry that we will prove these predictions wrong. In the analyses that I have seen on this alternative, there is a complete misunderstanding (almost omission) of the costs that a compulsory restructuring of our debt would have. For those with more experience, and who have lived in a country which has exposed itself to this kind of alchemy, the costs are so clearly evident that it just doesn't make sense to spend a minute thinking about it. We know of the magnitude of the costs of default. Particularly for a country such as Argentina with over 8,000 dollar per capita income and a fairly well developed domestic financial market.

On the contrary, in the context of a stronger fiscal situation, we have our external financing program nearly completed for the year. The domestic financing is based on the placement of programmed debt in pension plans, the placement of some Bontes plus the rollover of short term instruments through local market makers. Given the quantity of economic news that are hitting the markets and the advance execution of our financing program, we decided to postpone next Tuesday's auction.

We are already working on 2002, not only in terms of putting together our financial program but in terms of improving our fiscal solvency. We will soon be announcing a reorganisation of the government, which will allow a much tighter control of the social security system that today accounts for half of the national government expenditures.

With the financial program covered for the year, I believe the main concern of the market is not Argentina's ability to pay (in this regard we are in much better shape than a month ago), but its willingness to pay. Well, being the person responsible for the Argentine economy, I reaffirm our commitment to the continued improvement of our public credit. I believed we had moved this way, given the fiscal measures taken with my first piece of legislation. I thought the market would acknowledge the bold move and that they would interpret correctly what had done. I have since been concerned with pumping Argentine consumers and investors confidence to get the economy going, in selling the substantial upside that Argentina has and by pushing and motivating foreign investors to undertake business opportunities in Argentina.

On Thursday, when apparently market rumours were commenting my resignation, I was working with British CEOs in order to get the commitment for new foreign direst investment projects.

For those who are holding Argentine assets, I can only congratulate you for your judgement. It is clear that you have kept your eyes focused on fundamentals. The truth is that what is important is the final product, not the packaging. For your sake and that of your clients, keep your sight on the contents but let me choose the packaging. As any good economist knows, in the end it is only the fundamentals that matter.


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