-----Original Message-----
From: 	Koepke, Gwyn  
Sent:	Tuesday, June 26, 2001 12:32 AM
To:	Kaminski, Vince J
Subject:	FW: Argentina FX and CPI curves, dated 6/20/01

Vince,

FYI.  We will provide updates to the Argentine situation in the GMM, on which RAC is copied each week.  Also, we wrote the attached report for our internal purposes along with the forecast below.  

Gwyn

 

 -----Original Message-----
From: 	Koepke, Gwyn  
Sent:	Wednesday, June 20, 2001 7:45 PM
To:	Hudler, Cindy; Shahi, Pushkar; Stuart III, William; Mujica, Mitra; Raymond, Maureen
Subject:	Argentina FX and CPI curves, dated 6/20/01

Cindy,

Please find attached the Argentine peso and CPI forecast.

It should be noted that a vote is pending in the Argentine Congress (had been expected today) to adjust the convertibility law in Argentina to allow a basket of euros and U.S. dollars in equal weights (once parity is reached for euro-dollar) that would replace the existing one-for-one peso to US dollar currency board.  The economy ministry took a first step toward this new basket regime by introducing this week a dual-exchange rate system for the traded sector that allows Argentine exporters to benefit from the weaker euro by receiving export earnings in line with a mixed basket of 50% euros and 50% US dollars.  At today's spot rates, this implies an 8% depreciation of the peso vis-a-vis the basket.  An 8% devaluation at this juncture does not gain the kind of competitiveness needed by Argentine exporters to help boost economy when a major trading partner, Brazil, has depreciated 21% vis-a-vis the USD since the beginning of this year.  Initial reports indicate that consumer and corporate borrowers, however, would still pay debt service at the dollar peg exchange rate (one-for-one).  

With such a change in currency regime as being contemplated in the Argentine Congress, investor confidence could wane if the plan is approved and as the implications of the new plan are interpreted by the market and as the sustainability of the existing currency board arrangement outside the export sector is analyzed.  A loss of investor confidence will put additional pressure on the peso, pressure which has not existed previous to this new announcement by economy chief Cavallo, especially now that the government's debt swap (exchanging short-term goverment paper for longer-term bonds) has been successfully executed.  As a consequence, although our forecast attached below assumes a one-for-one peso peg to the US dollar at this point to allow the quarterly revaluations to be completed in a timely fashion, this curve is subject to change upon knowledge of the Congressional vote and an analysis of the details announced with the vote as to the mechanics of this new basket regime for exporters and for the economy as a whole.

Gwyn Koepke and
Maureen Raymond-Castaneda