Announcement of World Bank Supports Debt Reduction and Public Enterprises Reform in Argentina on January 5, 1993

FOR IMMEDIATE RELEASE World Bank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. * Telephone: (202) 477-1234 BANK NEWS RELEASE NO. 93/46LAC Contact: Ciro Gamarra (202)473-8721 WORLD BANK SUPPORTS DEBT REDUCTION AND PUBLIC ENTERPRISES REFORM IN ARGENTINA WASHINGTON, D.C., January 5, 1993 -- The World Bank has approved today two loans to Argentina, totalling $750 million. The first loan, of $450 million, will support the debt and debt service reduction agreement with the commercial banks. The second, of $300 million, will assist an additional stage of reform of public enterprises, in particular those under the ministry of Defense. One hundred million of the second loan will be set aside to be used also in support of the debt and debt service reduction operation, together with up to $200 million from a future financial sector adjustment loan. With these set-asides, the total participation of the World Bank in the restructuring of Argentina's public external debt will amount to up to $750 million. Debt and Debt Service Reduction The $450 million World Bank loan will support the implementation of a debt agreement between the Argentine Republic and its commercial bank creditors on the restructuring of about $29 billion in public external debt, including about $8 billion in past due interest. The World Bank's support will be part of a concerted effort involving the International Monetary Fund, the Inter-American Development Bank and the Export- Import Bank of Japan. Under the agreement commercial banks will exchange eligible debt for new, collateralized instruments to be issued by Argentina, respectively discount bonds with a discount of 35 percent of face value and par bonds bearing interest at predetermined below-market interest rates. Note: Money figures are expressed in U.S. dollar equivalents. 2 The commercial banks will also exchange eligible claims to past due interest at par for uncollateralized Argentine bonds bearing market interest rates following receipt of a downpayment of $700 million on interest in the same amount. In support of the agreement, the World Bank will provide a $450 million loan to finance interest and principal collateral for the par bonds; and a waiver of the negative pledge restriction in the World Bank's loan and guarantee agreements standing with Argentina of up to $3.7 billion. The waiver will allow the government to pledge collateral for the discount bonds and par bonds. The World Bank will also provide $100 million in set-aside funds from a $300 million Second Public Enterprise Reform loan approved at the same time, to finance interest and principal collateral required for the discount bonds. In addition, the World Bank intends to present to the Board of Executive Directors a $400 million Financial Sector Adjustment loan, with up to $200 million set- asides for the debt reduction operation, in the first quarter of 1993. The World Bank loan and the related measures will help achieve a commercial debt reduction equivalent of about $11 billion, or 37 percent of the face value of the eligible principal debt and past due interest to the commercial banks. The agreement will materially improve Argentina's development prospects by reducing external payments, freeing resources for public investment, placing the government's relationship with the international financial community on a firm basis, and contributing to confidence in the sustainability of the economic program. The loan and the set-aside funds will be disbursed for the purpose of acquiring collateral required for the par bonds and the discount bonds. The government will purchase the collateral instruments ahead of the closing date of the agreement, expected during the March-May 1993 period, as soon as the reconciliation process is completed. The whole amount of the $450 million loan and set-asides of up to $300 million from the proposed adjustment loans are therefore expected to be disbursed in the first semester of 1993. Public Enterprise Reform The $300 million loan is an integral part of the World Bank's support for the Argentine's adjustment programs and will assist in privatizing and restructuring of public enterprises in the ministry of Defense, reducing public finance deficits, and improving the environment for competitive private sector activity and investment. The loan will support the privatization of 24 of the 45 public enterprises under the Ministry of Defense, which account for 97 percent and 91 percent respectively of all sales and employment. * 3 The 24 industrial-oriented enterprises are grouped under four sectoral activities: Steel, petrochemicals, shipyards and other manufacturing enterprises. Amongst them, the steel sector is the most important, accounting for about 50 percent or more of the employees, assets and sales of the combined Defense enterprises. Among the main enterprises being privatized is SOMISA (Sociedad Mixta Siderurgia Argentina), the largest integrated steel mill in Argentina with an installed capacity of 2.2 million tons producing both flat and non-flat steel products, or about 60 percent of the country's total capacity. The project is expected to bring an improvement in public finances resulting from governmental labor reductions and the elimination of subsidies to public enterprises. The enterprises losses in the Defense complex were almost $500 million in 1991, after subsidies of about $200 million. The loan will also stimulate growth in industrial activity stemming from increased and more efficient private sector output and investment under a competitive business environment. The World Bank loan will be disbursed in two tranches of $200 million and $100 million. The first tranche, to be available following loan effectiveness, includes a set- aside of $100 million in support of Argentina's debt and debt service reduction operation. With the exception of the set-aside funds, the loan will finance general eligible imports, excluding luxury goods, military equipment, petroleum products and foodstuffs above $50 million, environmentally hazardous products. The loan is expected to be disbursed by June 1994. This is the second Public Enterprise Reform loan of the World Bank to Argentina. On February 1991, the World Bank approved a $300 million loan to support reforms of public enterprises, particularly in the telecommunications, railways and hydrocarbon sectors. Performance to date is very satisfactory. The $450 million loan for debt service made to the Republic of Argentina is for 15 year, including 5 years of grace. The $300 million loan for public enterprise reform was also made to the Republic of Argentina and is for 17 years, including 4 years of grace. Both have a variable interest rate, currently 7.6 percent, linked to the cost of the Bank's borrowing. They also carry an annual commitment charge of 0.25 percent on the undisbursed balances. -0-