Costly Kirchner-Lavagna bond: $5 BL

It's the only Argentine bond linked to GDP attracting investors. It pays 18 per cent out of initial investment and, in 2009, it will double this year's profits. A monster of the times of former president Néstor Kirchner and his economy minister Roberto Lavagna, backed by INDEC inflation rigging.This manipulation will cost Argentines $5 billions, figure with which the country could have paid to Paris Club. More nonsensical is to see Argentine president Cristina de Kirchner disclosing information as if it were an exclusive, making official data less open, which should be unveiled by another organization and which, in another country, would lead to legal actions.

Cristina de Kirchner

Argentine president Cristina de Kirchner opted for announcing in advance 2007 GDP growth figures so as to recover prominence, difficult task for her, given high profile her husband decided to keep during the first 60 days outside power.

However, in this desire to give good news and win newspapers' front page, Argentine president might have failed to think about the consequences of such an announcement: in other countries, telling in advance data directly hitting quotes is considered a crime, which has deserved prison. It's called "inside information" or use of privileged information, which access may benefit a group to detriment of most investors.

Disclosure of 2007 growth was expected for February 19, through the Monthly Economic Activity Estimator (EMAE, in its Spanish acronym) of December. Anxious, Argentine state chief preferred to reveal it more than one week before. Such attraction is pretty understandable: private handling of information does not need the uncomfortable necessity and emergency decrees (DNU, in its Spanish acronym) as it happens with budget amounts.

Argentine as well as foreign investors, holding GDP coupons, were automatically affected (and in a positive manner) by such announcement. The thing is that these units pay annual rate exclusively linked to economic growth.

Readings

Confirmation of robust economic expansion in 2007 generates, at the same time, other readings, which we should analyse carefully:

An instrument created by the duo Lavagna-Nielsen during Néstor Kirchner's administration has a billionaire cost for Argentina: in view of 2007 growth, payment of GDP coupons will involve $1.36 billion. In three years, $2.55 billions have been accumulated. However, the structure created in 2005 debt swap is wicked, because it stipulates exponential payments if growth continues. This year, the cost will hit 70 per cent higher than the previous one. And 2009 would double this year's payment. As a consequence, in four years, the new "great Argentine invention" has cost more than $5 billions to Treasury. Debt to Paris Club no less! The argument used by then was that GDP coupon would attract swap investors. However, none of that happened, because there's still nearly 24 per cent in default. Unpaid bonds sum $25 billions, which thwart any attempt of Argentina to try to recover financing in foreign markets. Wouldn't it have been better for Argentina's reputation to save such sums to allocate them to cancel debts to creditors countries, like US, Germany, France and Italy, than to use billionaire amounts to reward investors who are afterwards underestimated by government? Such service to homeland is, of course, compensated: Guillermo Nielsen will be Argentine ambassador in Germany (one of the countries to which he denied renegotiation of Argentine debt in default), while Roberto Lavagna has been invited to return to the kirchnerist ranks. It's really surprising to see by now that no judge has ever thought of asking these two men accounting proceedings for their participation in swap.

Argentine Statistics and Census Institute (INDEC, in its Spanish acronym) fall again under suspicion due to data manipulation: underestimation of official inflation to less than half of real one generates suspicion in other indicators made by the entity. For example, although poverty keeps on sliding for official indexes, it's believed that it has actually grown in 2007, given sharp rise in basic basket cost, which INDEC fails to reveal. In the same way, by estimating a price rise lower than real, the entity underestimates amounts made in economy. It's not by chance that industry grows for government twice as much as estimates of a reliable institute like FIEL. The same happens with GDP expansion. Real increase would at least be one point lower and it may even reach to two points (i.e. a bit less than 7 per cent against the official 8.7 per cent).

Government discloses information her own way: this was a bad habit of former Argentine president Néstor Kirchner, which her wife adopted as her own. A fine tooth comb should be used not only with presidential couple performance, but also with INDEC aides spreading information beforehand. On the other hand, if data come up with so much advance (in this case related to GDP), why wait more than a week to officially unveil them? US news channels have reached extremes: on the right side of the screen, a clock is put with a countdown before disclosure of key data for market, like retail inflation or new home sale development. Nobody would dare think of revealing these data one hour, one day or one week before, since they are extremely important for investors.

An appealing deal lies ahead for investors: exponential payments of GDP coupons hit public finances, making this product highly attractive...as long as government honors the respective payments. Something to take into account: at current prices, payment to be made on December this year represents a direct dividend of 18 per cent. What's more, during the next four years, holders will be able to recover total investment and then they would receive as pure profits all rise that GDP may post above 3 per cent. Yet, all these estimates are blown with the wind if economy expansion is lower than this floor.