VIII. TRADE AND PROJECT FINANCING BRIEF DESCRIPTION OF BANKING SYSTEM The Argentine banking industry is still reestablishing itself as a reliable financial intermediator after decades of imprudent management. The extreme economic instability which Argentina endured during the 1980s -- culminating with the hyperinflationary episodes of 1989-90 -- led to a sharp decline in the public's confidence in the system. In 1980, there were 214 banks operating in Argentina; by the end of 1993, 164 remained. (The number of non-bank financial entities dropped from 255 in 1980 to 40 over the same period.) The overall banking system may be characterized in several ways: - It is highly concentrated: only nine banks hold 50 percent of all deposits, while 39 banks hold 80 percent.- it is dominated by public sector banks, which control 46 percent of all deposits. - It has evolved just recently into a true bi-monetary system: 97 percent of all deposits were held in pesos in 1988; today, only 51.5 percent are. - The public sector is no longer a net user of new credit now that the federal government has achieved a structural fiscal surplus. - Its cost of intermediation has dropped by about half since 1991, although it remains quite high due to systemic inefficiencies which are most evident in public sector banks. U.S.-based banks have long been very active in the local banking market, in both retail and wholesale operations. Two U.S. banks -- Citibank and Bank of Boston -- are among Argentina's oldest; many others are well-established and have served Argentine clients for decades. Still more are returning or just setting up shop, attracted to the boom Argentina has enjoyed these last three years. Of the 164 banks presently licensed, nine are branches or fully owned subsidiaries of U.S. institutions. These nine U.S.-based banks operated 77 branches in Argentina and hold $2.3 billion in deposits (about six percent of total deposits). Profile of Argentine Banking System (in US$ billions/equivalent or as indicated; as of November 1993) All All No of No of Deposits Loans Banks Branches U.S. Banks 2.3 N.A. 9 77 All Foreign Banks 5.9 7.5 32 535 All Private Banks 20.8 23.3 60 1287 All Banks 38.6 43.9 165 4064 Source: Central Bank of the Argentine Republic (BCRA) Only two of the U.S. banks licensed to serve the Argentina market remain active in retail banking: Citibank (with 33 offices) and Bank of Boston (with 39). Three banks are deeply involved in custodial services (Citibank, J.P. Morgan and Chase). All U.S. banks operate wholesale banking operations, with varying emphases. FOREIGN EXCHANGE CONTROLS AFFECTING TRADE Today there are no controls on the access to foreign exchange in Argentina. WHAT IS GENERAL FINANCING AVAILABILITY? Commercial banks are prepared to offer financing to credit worthy clients in Argentina. Interest rates are high by international standards, typically 8.5 pct. Both the World Bank (IBRD) and the Interamerican Development Bank (IDB) are actively financing projects in Argentina. Eximbank is on cover except for long-term credits for the public sector. Argentine private banks are offering loans to creditworthy borrowers for their import transactions at high interest rates. There are a number of banks with facilities from U.S. banks, guaranteed by Eximbank. These facilities are competitive with other locally available financing sources, and do not offer much of an advantage in terms of interest rates. HOW TO FINANCE EXPORTS/METHODS OF PAYMENT With Eximbank on-line for Argentina, U.S. exporters should consult with their local banks and with Eximbank as to the availability of medium term financing and the requirements for access by their Argentine clients. TYPES OF AVAILABLE EXPORT FINANCING AND INSURANCE Eximbank's short, medium, and long-term programs are available to support U.S. exports to Argentina when the obligor or guarantor is a highly creditworthy private sector entity. Long-term cover is not available for public sector risk. A public sector entity may be the end-user, but not the obligor or guarantor. Most of Eximbank's recent medium-term Argentine business has been supported through Credit Guarantee Facilities (guaranteed private sector bank-to-bank lines of credit). These are medium-term lines of credit extended by U.S. based banks to Argentine banks, which are in turn guaranteed by Eximbank. Companies in Argentina wishing to purchase U.S. goods or services may approach participating Argentine banks for credit. If the Argentine bank agrees to extend the local buyer credit, it will execute a transaction under the credit facility it has with a participating U.S. bank. The Argentine company can then advise its U.S. supplier that financing arrangements have been concluded. The U.S. supplier can then present its export documentation to the funding U.S. bank and receive payment. The Argentine bank is the obligor under these facilities, and the party responsible for repayment to the U.S. bank. Argentina is listed in Country Category II in the OECD's "Arrangement on Officially Supported Export Credits." Support for sales to Category II countries may be provided through guarantees or credits offered at CIRRs. These facilities should approximate the market rate of interest charged in the various OECD members' currencies for fixed-rate loans to first-class borrowers. The bases for the U.S. dollar CIRR are: three year government bond yields with repayment terms of up to and including five years; five year government bond yields for over five years up to and including 8.5 years; and, seven year government bond yields for over 8.5 years plus a spread of 100 basis points for transactions booked. For transactions where a committed rate is to be held for up to 120 days, an additional premium of 20 basis points is added to the rate. For transactions with an authorized value of $5 million or less and a repayment term of five years or less Eximbank will offer an intermediary loan to an intermediary lender at rates below CIRR or OECD. Loans to the Argentine buyer must be at the CIRR or OECD rate. Multilateral development banks are not commonly a source of financing for export/import transactions. Their activities in Argentina are almost entirely limited to project financing for the public sector. Local banks are currently very liquid and are offering credit to local borrowers, albeit at rates which would be considered high internationally. PROJECT FINANCING AVAILABLE Both the International Bank of Reconstruction and Development and the Inter-American Development Bank are very active in Argentina, with loans provided for a broad range of public sector projects, including administrative reform and institutional reinforcement, power projects, transportation, mining, water and sanitation, and many other uses. For information on multilateral bank related business opportunities, please contact: Office of Multilateral Development Banks U.S. & Foreign Commercial Service U.S. Department of Commerce, Room H-1107 Washington, DC. 20230 Tel: (202) 482-3399 Fax: (202) 273-0927 The IBRD, a member of the World Bank group makes long-term loans at market-related rates primarily to developing countries. Loans are extended to promote broadly based economic growth and frequently focus on structural adjustment, sectoral reform and individual project lending. Typically, the World Bank does not finance the entire cost of a project, but instead covers components of a project purchased with foreign exchange, which on average is about 40 percent of the total project cost. Each project may cover a wide variety of sectors and can involve anywhere from one to hundreds of separate contracts providing export business opportunities for suppliers worldwide. For further information on IBRD business opportunities please contact: U.S. Department of Commerce Liaison Office of the U.S. Executive Director International Bank for Reconstruction and Development 1818 H Street, NW, Room D-13004 Washington, DC. 20433 Tel: (202) 458-0118 Fax: (202) 477-2967 The Inter-American Development Bank (IDB) provides funding to primarily public sector entities for the design and execution of projects. IDB projects afford U.S. suppliers of goods and services significant export opportunities, mainly in the transportation, environment, health, education, urban development, tourism, agriculture, and energy sectors. U.S. firms seeking information on IDB-financed commercial opportunities should contact: U.S. Department of Commerce Liaison Officer Office of the U.S. Executive Director Inter-American Development Bank 1250 H Street, NW, 10th Floor Washington, DC. 20005 Tel: (202) 942-8265 Fax: (202) 942-8275 BANKS WITH CORRESPONDENT U.S. BANKING ARRANGEMENTS. Most U.S. banks are active in Argentina, either through subsidiary offices or via representatives. U.S. exporters usually will have to do no more than contact their local bank and ask how to finance their exports to Argentina.