April 2003 Prepared for presentation at the XVIII Meeting of the Latin American Network of Central Banks and Finance Ministries Special Focus: Brazil and Argentina Special Focus: Brazil and Argentina

OUTLINE i.Brazil Recent Developments Debt Dynamics Liquidity Analysis ii. Argentina Recent Developments Debt Restructuring, Debt Dynamics and Bank Solvency

Lula’s Policy Iniciatives  Primary surplus target increased from 3.75% of GDP to 4.25% for 2003  Benchmark interest rate hiked from 25% to 26.5% by the COPOM since the beggining of Lula’s administration  Revenue raising iniciatives such as the renewal of the CPMF Macroeconomic policies  Social Security reform in order to reduce the deficit of Public Sector Social Security System (currently at 4.1% of GDP )  Foster Central Bank autonomy Structural Reforms  “Zero Hunger” (“Fome Zero”) social plan, cost limited to BRL 2 billion (0.15% of GDP) in 2003 budget  Employment plans mainly aimed at young people Social Policies

OUTLINE i.Brazil Recent Developments Debt Dynamics Liquidity Analysis ii. Argentina Recent Developments Debt Restructuring, Debt Dynamics and Bank Solvency

Debt Dynamics: Benchmark Scenario Assumptions  Domestic real interest rate: 13%  Interest rate on external debt: 11.3%  Average real interest rate on public debt: 10.3% (includes monetary base)  Growth rate: 2.5%  Target surplus: 4.25% of GDP  Initial debt ratio in Jan-03: 55.9%

Public Debt Dynamics: Benchmark Scenario RequiredTargetObserved * *Last 12 months ending in January 2003 Primary Balance % GDP 4.08% 4.26% 4.25%

Public Debt Structure January 2003 Fixed Rate 1% Others 18% External or FX indexed Public Debt 39% Indexed to the Interest Rate 42% Public Debt Stock: US$ billion (55.9% of GDP)

External Financial Conditions and the Exchange Rate R$ per dollar basis points exchange rate EMBI+ Brazil

External Financial Conditions and Domestic Interest Rates (C-Bond Spread in b.p. and 360-day Interest Rate Swap in %) C-Bond Spread Interest Rate interest rate C-Bond spread

Public Debt (% of GDP) Interest Rate Growth Rate Incremental Fiscal Effort Fiscal Impact of: 10% real depreciation 57.3% 10.3%2.5% +0.1% 1% increase in the domestic interest rate 55.9% 10.8%2.5% +0.3% Debt Dynamics: Sensitivity Analysis 1% reduction in the growth rate 55.9% 10.3%1.5% +0.6%

Public Debt Composition (in % of total, January 2003) Domestic 74% External 26%

Domestic Public Debt by Holder (31 st January 2003, % of total) Banks 34% Investment Funds 34% Other 4% Reserve Requirements 20 % Non-financial private sector 8%

Banks’ Exposure to the Public Sector Public Bond Holdings, March % 50% 100% 150% 200% 250% 300% 350% In % of Banks’ AssetsIn % of Banks’ Net Worth Source: JP Morgan

OUTLINE i.Brazil Recent Developments Debt Dynamics Liquidity Analysis ii. Argentina Recent Developments Debt Restructuring, Debt Dynamics and Bank Solvency

Liquidity Requirements of the Public Sector (Billions of US dollars) 2003 I. FISCAL DEFICIT (est.)17.8 II. PUBLIC DEBT AMORTIZATIONS* 86.8 Domestic Debt64.7 External Debt22.1 III. POTENTIAL LIQUIDITY REQUIREMENTS (I +II): *Amortizations were converted to dollars at an XR of 3.6 Reales per dollar Note: Total Available Liquid Funds are International Reserves plus expected disbursements under the IMF agreement Total Available Liquid Funds of the public sector in % of Potential Liquidity Requirements 60%

Liquid International Resources of the Public Sector (billions of US dollars) I. International Reserves (January 2003) III. Total Available Liquid Funds ( I+II) Note: Under the new IMF agreement there is an agreed floor for reserves of US$ 5 billion In % of Liquidity Requirements II. IMF Disbursements under the new agreement (during 2003) %

Liquidity Requirements of the Private Sector (billions of US dollars) 2003 EXTERNAL DEBT AMORTIZATIONS17.0 Medium and Long Term 12.4 Short Term4.6

Total Liquidity Requirements (billions of US dollars) Fiscal Deficit (est.)17.8 Public Debt Amortizations 86.8 III. TOTAL POTENTIAL LIQUIDITY REQUIREMENTS (I +II) Total Available Liquid Funds of the public sector in % of Potential Liquidity Requirements 52% I. PUBLIC SECTOR BORROWING REQUIREMENTS II. PRIVATE SECTOR EXTERNAL DEBT AMORTIZATIONS

OUTLINE i.Brazil Recent Developments Debt Dynamics Liquidity Analysis ii. Argentina Recent Developments Debt Restructuring, Debt Dynamics and Bank Solvency

Nominal Exchange Rate Pesos per Dollar, Free Exchange Rate Market Ene-0213-Feb-0207-Mar Abr-0225-Abr May Jun Jul-0229-Jul Ago Sep Oct-0229-Oct Nov Dic Ene-0331-Ene-0324-Feb-0318-Mar-03

Currency Forward Premium 1 year NDF 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 02-Ene Mar May Jul Sep Nov Ene Mar May Jul Sep Nov Ene Mar-03 Financial Crisis

Liquid International Reserves of the C.B 6,000 9,000 12,000 15,000 18,000 21,000 24,000 27, Ene Feb-0113-Mar Abr May Jun Jul Sep Oct Nov Dic Ene Feb Abr May Jun Jul Ago-0224-Sep Oct Dic Ene Feb-0318-Mar-03 IMF disbursement of U$S 4 bn. Cavallo and De La Rúa resign Implementation of the “Corralito” US$ 10,515 million Repayment to IMF of US$ 1 bn. US$ millions

Interest Rate Time deposits, 30 days 2% 12% 22% 32% 42% 52% 62% Ene-01 Mar-01 Abr-01 May-01 Jun-01 Jul-01 Ago-01Sep-01 Oct-01 Nov-01 Dic-01 Ene-02 Feb-02Mar-02 Abr-02 May-02 Jun-02 Jul-02 Ago-02Sep-02 Oct-02 Nov-02 Dic-02 Ene-03 Feb-03

Total Deposits: Evolution since Implementation of the Corralito Dic Dic Ene-02 1-Feb Feb-0213-Mar-02 2-Abr Abr May-02 1-Jun Jun Jul-0231-Jul Ago-02 9-Sep Sep Oct-02 8-Nov Nov Dic-02 7-Ene Ene Feb-03 8-Mar Mar-03 Implementation of the Corralito - AR$ 23,396 million + AR$ 8,443 million A$ millions

Consumer Price Inflation (Yearly and annualized monthly rates) -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Ene-01 Mar-01 May-01 Jul-01 Sep-01Nov-01 Ene-02 Mar-02 May-02 Jul-02 Sep-02Nov-02 Ene-03 Mar % 0% 50% 100% 150% 200% 250% yearly rate annualized monthly rate yearly rate annualized monthly rate

Industrial Production (s.a. index, 3-month moving average, June 1998=100) Jun-98 Oct-98 Feb-99 Jun-99 Oct-99 Feb-00 Jun-00 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Feb-03 Russian Crisis Financial Crisis

Consumer Confidence Index (Capital Federal) Source: Universidad Torcuatto Di Tella Financial Crisis

Macroeconomic Assumptions  Real GDP growth rate of 2% to 3% in 2003 (compared with an expected decline of 11% in 2002).  Consumer Price inflation at 35% yoy in 2003 (implied average inflation rate of 26%). Argentina’s Letter of Intent with the IMF  Federal Government: Primary surplus of 2.1% of GDP for  Provinces: Primary surplus of 0.5% of GDP for Fiscal Targets Monetary Targets  Net International Reserves (floor): US$ -3,900 million (gross reserves of US$ 10 bn.)  Net Domestic Assets of CB (upper limit): AR$ 51,415 at end June.  The XR will continue to float but the BCRA will intervene to avoid excessive volatility. *Quasimonies are estimated at AR$ 7,450

Other Conditions  Gradual elimination of exchange rate controls.  Debt restructuring with the technical assistance of the IMF and the aid of an external advisor.  Financial System Reform (including measures designed to deal with problem banks). A new specialized unit will be created for bank restructuring.  Tax System Reform (including elimination of tax excemptions and preferences, suspension of the remaining competitivity plans, substantial reduction in the regional promotion regimes and other measures)  Reform of intergovernmental relationships.  During the program period no new laws nor judicial instruments that amount to involuntary suspensions of creditor rights will be passed (the Government will implement a program to backup extrajudicial agreements between creditors and debtors).  Independence of BCRA Argentina’s Letter of Intent with the IMF

Amortization Schedule with Multilaterals (in millions of US$, previous to IMF agreement) II-03 Multilaterals2336 o/w IMF640 World Bank832 IADB773 Jan-03Feb-03Mar III-03IV

OUTLINE i.Brazil Recent Developments Debt Dynamics Liquidity Analysis ii. Argentina Recent Developments Debt Restructuring, Debt Dynamics and Bank Solvency

Federal Public Debt plus Contingent Liabilities (in billions of US$, September 2002) Federal Government Debt129.8 Sept 02 Contingent Liabilities Asymetric indexation* Compensation to Banks Amparos* Bond for restitution of 13% salary & pension cut* (1) does not include federalization of Provincial Debt estimated at US$ 13.6 billion Federal Government Debt including contingencies (1)134.7 * = in the process of recognition 13.6

Argentina’s Public Debt and the Equilibrium Real Exchange Rate (% of GDP) Equilibrium Real Exchange Rate Debt (%GDP)

Federal Government Debt Structure September 2002 Bonds 41% Guaranteed loans 17% Multilaterals 29% Other 1% In default: US$ 52.1 billion* * LMW estimate BODEN 12%

Implied Expected Loss (EL) in Bond Prices V M  V F (1-EL) where:  V M is the market value of a risky bond  V F is the discounted present value of the risky bond assuming both coupon and principal are fully paid where i is the risk free interest rate. Definition: Example: Bond which pays constant coupon payments c until its maturity at time T: VMVM c (1+i) s   s =1  (1+i) T 1 EL  1  1  VMVM VFVF

65% 70% 75% 80% 85% 90% Yield Curve of EL on External Bonds February 2003 Global Bond Expected Loss Weighted average

Argentina’s Public Debt After a Hypothetical 70% Haircut on Defaulted Debt (% of GDP) Debt (%GDP) Equilibrium Real Exchange Rate

Interest Payments on Public Debt After a Hypothetical 70% Haircut on Defaulted Debt (% of GDP) Debt (%GDP) Equilibrium Real Exchange Rate 7.1% 6.3% 5.4% Note: Imputed interest rate of 5.6%

%5.4%6.3%7.1% 2%3.3%4.0%4.6% 4%1.4%1.8%2.1% Real Exchange Rate Growth Rate Debt Sustainability (required primary surplus in % of GDP, with 70% Haircut on Defaulted Debt)

Redollarization Costs: Alternative Scenarios Contingent Liability in % of GDP Contingent Liability in AR Pesos Elegible for redollarization (at current XR)* Elegible for redollarization (at 1.4 plus CER) (a) (b) (b-a)(c) * The XR prevailing in April 1 st (2.98 Pesos per Dollar) was used in these calculations. "Corralón" 11.5 (in billions of AR$) % Best Case "Corralón" % Transactional "Corralito” 14.3 (in billions of AR$) Intermediate Case 13%13% Dollar deposits (as of Jan 02 before pesific., in billions of US$) Accumulated "Amparos” (in billions of US$) Worst Case

%5.8%6.8%7.8% 2%3.6%4.3%4.9% 4%1.5%1.9%2.2% Real Exchange Rate Growth Rate Debt Sustainability (required primary surplus in % of GDP, with 70% Haircut on Defaulted Debt, includes redollarization costs under worst case scenario)

Fiscal Revenues under Alternative Recovery Scenarios (in real terms, Feb 01=100) Jun-98 Oct-98 Feb-99 Jun-99 Oct-99 Feb-00 Jun-00 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 total revenues with full recovery primary expenditures total revenues with no recovery

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% Primary Surplus under Alternative Recovery Scenarios* (% of GDP) No recovery of revenues Full recovery of revenues to Feb 2001 levels * Primary expenditures at current levels

Assets of Argentina’s Financial System August 2002 Other net assets 5% Reserves 6% Loans 32% Claims on to the public sector 57% Total assets: ARG$ millions