IMF Ready To Help Argentina Avert Crisis

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IMF Ready To Help Argentina Avert Crisis

By Steven Pearlstein and Anthony Faiola Washington Post Staff Writers Saturday , November 11, 2000 ; Page A21

Argentina and the International Monetary Fund yesterday announced a series of measures intended to calm financial markets and avert an economic crisis that could have rippled through the rest of South America.

In Buenos Aires, Argentine President Fernando de la Rua went on television last night to announce a package of economic measures designed to convince international investors the country intended to rein in a burgeoning budget deficit that casts doubt on its ability to repay nearly $20 billion in foreign loans that come due next year.

Hours later, in a calculated show of support, the International Monetary Fund announced it was prepared to add "significantly" to a previously announced $7 billion line of credit for Argentina as part of an overall refinancing package. Horst Koehler, the IMF's managing director, said de la Rua's commitments amounted to a "significant strengthening of Argentina's economic policy framework" and would allow negotiations on additional assistance to be completed by the end of the year.

A senior IMF official last night acknowledged that the fund had decided to signal its willingness to participate in the financing out of fear that the Argentine crisis would spread to the rest of South America, which is only beginning to recover from a two-year recession. Fears about an Argentine bond default had driven down the value of stocks, bonds and currencies in neighboring countries such as Brazil. Argentina is South America's second-largest economy.

Although de la Rua was sketchy on the details of the forthcoming economic measures, the senior IMF official said the package would include a commitment by all levels of government, including the nominally independent provinces, to balance their budgets by 2005. The government will also push through a controversial plan to privatize the social security system, restructure the country's bloated civil service system, streamline the public health system and reduce tax evasion.

"Argentina is in bad shape," de la Rua said in his televised address. "Unemployment, social fragmentation, poverty, the domestic political crisis, coupled with an unfavorable commercial and financial situation, is a combination that could lead our economy to a veritable catastrophe if we don't act well and quickly."

De la Rua said he had summoned provincial governors and political leaders to an emergency meeting this weekend to work out details of the new economic policies.

The announcements yesterday came in the wake of a wave of strikes and protests by the unemployed and state workers that left one protester dead and dozens injured in the northern province of Salta. Unemployment in Argentina is now above 15 percent while underemployment is estimated at nearly 50 percent.

At the heart of the country's woes is a slow-growing economy and its effect on government finances. A severe two-year recession has so drained the treasuries of local governments that many cannot pay their workers or their pensioners, while the federal government has been forced to run deficits of more than 4 percent of the nation's gross domestic product.

In addition, the country is in the midst of a deep political crisis that began last month when de la Rua's vice president, Carlos "Chacho" Alvarez, resigned in anger over what he viewed as the president's soft handling of a major bribery scandal in the senate. The resignation, which prompted two other high-profile resignations and a sharp decline in de la Rua's approval ratings, sparked worries that the governing center-left coalition might fall apart.

Responding to the political and economic crises, investors have been reluctant to buy Argentina's stocks and bonds. The leading stock index has fallen 20 percent since the summer. And in a $1.1 billion auction of treasury bills this week, investors demanded interest rates of 16 percent, up from 9 percent when similar bonds were floated in July. Overnight bank lending rates reached as high as 21 percent before falling sharply yesterday when rumors began to spread that the IMF would bolster the country's line of credit.

IMF officials, stung by criticism that past "rescue" packages hurt countries more than it helped them, took pains yesterday to stress that they were not demanding immediate budget cuts from the Argentine government. They noted that yesterday's economic package included a number of tax cuts designed to spur business investment and consumer spending. Their emphasis, they insisted, was not simply to cut government expenses but to increase government revenue by boosting economic growth.

The IMF official, who spoke only on condition that his name not be used, stressed that any final plan to refinance Argentina's external debt would also have to include "substantial" participation by foreign banks and investors, with whom negotiations reportedly have already begun. He declined, however, to speculate on how much of the package would come from the private sector and how much from public institutions.

Faiola reported from Buenos Aires.

B) 2000 The Washington Post

http://www.washingtonpost.com/ac2/wp-dyn/A64221-2000Nov10?language=printer

-- Martin Thompson (mthom1927@aol.com), November 11, 2000


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