Announcement of the First World Bank's Five Hundred Eight point Five Million Dollar Loans to Argentina for Capital Market Development on March 1, 1994

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. 94/65LAC Contact: Ciro Gamarra (202) 473-8721 WORLD BANK LENDS $508.5 MILIO N TO ARGENTINA FOR CAPITAL MARKET DEVELOPMENT WASHINGTON, March 1, 1994 -- The World Bank has approved two loans to Argentina, totalling $508.5 million to support a project to accelerate capital market development to help the country meet growing investment demand. A $500 million World Bank loan will support a "backstop" facility that would offer prime-rated commercial banks the option to sell to the facility U-S-dollar-denominated securities issued to refinance specifically identified bank debentures issued to support longer term loans. This is the first World Bank loan that supports a facility offering commitments to purchase commercial bank debentures. The "backstop facility" will support long-term lending for productive purposes, by ensuring liquidity to banks in the event of bond market disruptions. This facility will be implemented through a corporation established and owned by the government of Argentina. The reforms supported by earlier World Bank loans ($325 million in July 1991 for public sector reform and $400 million in February 1993 for financial sector adjustment) are expected to improve the banking policy framework for this project. An agreed policy and institutional development program, including macroeconomic stability, freely determined interest rates, the removal of existing rate subsidies, and strengthened capital market regulation, supervision and enforcement, will help to increase market confidence. A complementary $8.5 million loan for technical assistance has also been approved to help finance improvements in capital market supervision and regulation; to train commercial banks' staff in undertaking project financing; and implement the new. reformed pension system. The main benefit of the project will be development of the capital market, including increased availability of long-term financing for private sector investment, longer bond maturities, development of rating agencies, increased liquidity of the bond market, and improved quality of commercial banks. NOTE: Money figures are expressed.in U.S. dollar equivalents. -2- The project is designed to introduce and consolidate the necessary capital markets infrastructure which, along with developing indigenous skills, can produce a sustainable and orderly national market. This includes the development of standardized debt securities and the further development of existing national credit rating agencies. Furthermore, the facility is designed to inject confidence and provide leadership for the development of a longer term debenture market -- without detracting from the natural growth of local and related international markets and without masking the market's pricing signals. The "backstop facility"s assurance of future liquidity will assist banks to issue debentures in local or international markets, and to offer loans with even longer maturities with the assurance that debentures can be sold in the future. The Argentine government will onlend the proceeds of the $500 million World Bank loan to the Fund, an independent corporation to be established. The financial manager of the Fund will be an international financial institution with a proven successful record. The Banco dc Inversion y Comercio Exterior (BICE), a Government-owned second-tier bank, will perform administrative and oversight functions. The main beneficiaries will be prime-rated commercial banks, medium and small private enterprises in all sectors, and buyers of new commercial or residential buildings. The operation will assist small- and medium-size businesses, which traditionally have had little access to term lending from the banking system. Participating banks will use the facility to increase their portfolio of long-term finance for productive purposes. It is estimated that 15-20 banks will be eligible. The 18 top commercial banks, which had a portfolio of $6.7 billion in 1992, have been increasing their long-term operations, including bond issues of more than $500 million in 1993 alone. The World Bank loan is only a small part of expected investment demand, and is consistent with the domestic resources that commercial banks and final borrowers are expected to provide, as well as with the intermediating capacity of eligible banks. The $500 million World Bank loan to the Argentine Republic is a single currently loan in U.S. dollars and could be disbursed over 11 years. It will be repaid in 15 years, including seven years of grace, at the Bank's standard LIBOR-based interest rate for U.S. dollar single currency loan. The loan will be disbursed only to the extent that commercial banks find it necessary to sell bonds to the fund under the facility's commitments. Unlike other World Bank operations, the success of this loan does not depend on the amount disbursed. The $8,5 million technical assistance loan to the Argentine Republic will be disbursed over 4 years. It is for 15 years, including five years of grace, at the World Bank's standard variable interest rate, currently 7.27 percent, linked to the cost of the Bank's borrowings. It also carries an annual commitment charge of 0.25 percent on the undisbursed balance. -3- BACKSTOP FACILITY PARTICIPANTS AND FINANCIAL FLOWS THE WORLD BANK Lends to THE ARENTINE REPUBLIC On-lends to BACKSTOP FUND S.A. Owned by: The Argentine Republic Financial Manager: Internationally recognized finanwiaal insitution hircd by RICE Makes backstop commiuncrs on bonds with initial mauritici of at loat 3 years PARTICIPATING BANKS slcted under financial pcrformance and minimum rating criteria Extend medium to long WvM (minimum 6-year) loans for Investments undertaken by their borrowers