FACTBOX-Key political risks to watch in Argentina

BUENOS AIRES Thu Jan 3, 2013 10:59am GMT

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BUENOS AIRES Jan 3 (Reuters) - Argentine President Cristina Fernandez is under pressure in an important election year as sluggish economic growth and high inflation fuel labor unrest and middle-class discontent with her combative style.

Tight finances have prompted the left-leaning president to pursue increasingly heavy-handed policies, such as a virtual ban on foreign currency purchases, which have hurt her approval ratings over the last year and ruffled financial markets.

Several large anti-government protests, trade union marches and a wave of supermarket looting late in 2012 have set the tone for what looks like a testy run-up to October's mid-term legislative elections.

Investors will be closely watching the next steps in Argentina's efforts to fight a U.S. court ruling that could eventually force the country to pay "holdout" creditors owning bonds in default since 2002.

A U.S. appeals court granted Argentina a reprieve in late November that quelled fears of an imminent default and scheduled oral arguments in the case for Feb. 27.

That court ruling, and a separate decision ordering the release of a naval ship seized in Ghana on behalf of holdout creditors, were bright spots for Fernandez's government as it wages several noisy political battles at home.

Her efforts to force Argentina's largest media conglomerate, Grupo Clarin, to start selling off broadcasting licenses to comply with a controversial anti-monopoly law have been frustrated by the courts.

An appeals court is currently considering Clarin's argument that the law violates property rights enshrined in the constitution. A ruling that is unfavorable for the government would likely fuel tensions with the judiciary and could lead to government-backed reforms of the courts.

Here are some of the issues investors are watching:

LEGAL BATTLE WITH HOLDOUTS

U.S. Judge Thomas Griesa ordered Argentina in November to make provisions to fully pay so-called holdout creditors who rejected two restructurings of defaulted bonds and continue to seek full repayment in the courts.

It was a sharp blow to Argentina's efforts to put the 2002 default behind it. A subsequent appeals court stay on Griesa's payment order brought temporary relief to financial markets and to the government, at least until the hearing in February.

Argentina's next payment on the exchange bonds will be $180 million due on March 31, according to court filings.

The U.S. 2nd Circuit Court of Appeals has already backed an earlier Griesa ruling that Argentina violated the "pari passu" bond provision requiring it treat all creditors equally when it paid the exchange bondholders without paying the holdouts. He said they should all be paid simultaneously.

Participants will present their arguments in written filings in the run-up to the Feb. 27 appeals court hearing. Argentina filed its presentation on Dec. 28, with exchange bondholders and other interested third parties due to file by Jan. 4 and the holdouts by Jan. 25.

In its filing, Argentina stressed the potential impact of Griesa's order on U.S. banks and clearing houses involved in payments on the country's restructured debt, as well as its possible implications for future restructurings.

It also said it was willing to ask Congress to suspend the so-called Lock Law and reopen the restructuring, allowing holdouts to be paid under the same terms offered in the swaps of 2005 and 2010.

If the appeals court upholds Griesa's payment order, Argentina's last remaining option would be to appeal to the U.S. Supreme Court. An unfavorable ruling would revive default fears.

What to watch:

- Government asking Congress to amend the Lock Law to allow the restructuring to be reopened. Argentina would only reopen the debt swap to the holdouts if the appeals court said that would be an acceptable payment option.

- Details of remaining filings to the appeals court.

POPULARITY AND ELECTIONS

Fernandez has not anointed a political heir and analysts say she may want to keep speculation alive about a re-election bid in 2015 to maintain her grip on the notoriously fractious Peronist party and ward off "lame duck" syndrome.

Her approval ratings suggest she would be unable to secure the two-thirds congressional majority needed to convoke an elected constitutional assembly to reform the constitution to run for a third consecutive term.

The outcome of legislative elections in October could prove decisive, either allowing her to clinch the two-thirds support or weakening the current congressional majority that has let her pass controversial legislation with ease.

With a re-election bid looking less likely, several Peronist party figures are being tipped by local media and analysts as potential presidential candidates in 2015.

The most prominent is Daniel Scioli, governor of the province of Buenos Aires. Scioli remains loyal to Fernandez although he has admitted he would like to run for the presidency if she did not.

Scioli has received a nod from former Fernandez ally Hugo Moyano, who leads the anti-government faction of the CGT labor federation that has led several large labor protests in recent months. Fernandez blamed Moyano and other Peronist rivals for fomenting the supermarket looting in December.

Cordoba governor Jose Manuel de la Sota, an opposition Peronist, bills himself as a possible challenger.

Fernandez's approval rating slipped by 1 percentage point to 30.6 percent in November from a month earlier while her rejection rating rose 3.6 points to 62.9 percent, according to the latest poll by the Management & Fit consultancy.

What to watch:

- Any clearer signs of government thinking on strategy for the elections and on whether constitutional reform is still considered an option.

- Key economic indicators showing that the slowdown may have bottomed out, which could lift Fernandez's popularity.

CURBS ON DOLLARS, IMPORTS

Sweeping controls on imports and foreign currency purchases are angering some trade partners and hitting investment.

The crackdown on dollar-buying shook financial markets in October when the central bank refused to let Chaco province buy dollars on the foreign exchange market, so the northern province repaid creditors about $260,000 in pesos on dollar bonds issued under local law.

The currency controls have succeeded in keeping dollars in the country, however. Argentina's capital outflows came to a halt in the third quarter from a year earlier.

Early last year, Fernandez's government also launched a system to pre-approve, or reject, nearly every purchase from abroad as part of a broader crackdown on imports. The policy aims to protect the trade surplus and local jobs.

November's trade surplus widened by 74 percent as imports fell 6 percent.

The government has been pushing importers to match their purchases abroad with exports, leading to quirky deals such as carmakers exporting rice or wine and prompting several complaints against Argentina at the WTO by trade partners who were also rattled by the sudden nationalization of leading energy firm YPF this year.

Despite investor jitters over the takeover, YPF signed two preliminary investment deals with Argentina's Bridas and U.S. oil major Chevron last month to develop shale resources in Patagonia.

What to watch:

- Trade balance and any sign import controls are being eased to boost local industry.

- The black market exchange rate as the summer hemisphere holiday season boosts demand for dollars.

- YPF's progress in attracting foreign capital to fund its multibillion dollar plan to boost output by a third. Further details of two preliminary farm-in agreements.

THE ECONOMY

The government said in its 2013 budget that the economy should grow 3.4 percent this year and 4.4 percent in 2013. Those levels would trigger payments on the country's growth-linked GDP warrants.

An improved economic outlook would be good news for the government as it gears up for the election to renew half the seats in the lower house and a third in the Senate.

However, most analysts expect the government to end up reporting economic growth below the 3.26 percent warrant payment threshold. The central bank has lowered its growth forecast for 2012 to 2.0 percent, with a rebound of 4.6 percent seen this year.

Falling short of the payment threshold would free up some $4 billion for spending in an election year, although Economy Minister Hernan Lorenzino has said it would only be used for capital spending.

Despite sluggish growth and an ever-tougher business environment, consumer confidence rose 8.7 percent in December compared with November. But it was down 11.7 percent year-on-year, according to the latest survey by Torcuato Di Tella University.

Inflation, which private estimates say is running at about 25 percent per year, will come in focus again as wage negotiations begin over the next few months.

What to watch:

- Industry and economic growth data over the coming months for clarity on GDP-warrant payment.

- Changes to tax regime such as a raising of income tax floor, a central demand of opposition unionists such as Moyano, that might avert further labor protests.

- Union comments on wage demands, signs of differences between government and allied labor groups. (Editing by Kieran Murray and Lisa Shumaker)

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