Sunday, 15 July, 2001, 02:19 GMT 03:19 UK

Argentine anger at spending cuts

Protesters demand the government cancel its economic measures

By Tom Gibb in Buenos Aires In Argentina, there has been strong public criticism of government spending cuts announced on Wednesday, designed to stave off bankruptcy.

The cuts are expected to reduce public sector salaries and pensions by up to 13%, although exact details still have to be announced.

Jose Troido, pensioner President Fernando de la Rua is holding meetings through the weekend to try to muster political support for his measures, but the public mood is making that harder.

On the streets there is widespread criticism of the latest plan to save Argentina from bankruptcy and balance the government's books.

Corrupt politicians

The most common criticism is that the poorest section of society - particularly pensioners - will pay for the errors of politicians, who many Argentines regard as universally corrupt.

"Why don't they make the rich pay?" 66-year-old pensioner Jose Troido complained.

"Everyone here avoids paying taxes, that's why the government is broke," he said.

Another criticism is that the measures will cut people's ability to spend, making it even harder to pull the economy out of a three-year recession.

Unions to strike

The public mood is making it difficult for President de la Rua to build political support within his own government alliance.

Many of his political allies want the plan changed to protect those on low incomes and the government still has to get support from opposition provincial governors.

The president is finding it hard to build support

However, it remains to be seen whether the unions, who have called a 24-hour strike next week, will be able to mobilise enough support to stop the plan.

Many people also appear fatalistic and fearful that the future could get worse if the government is forced to devalue the currency.

That would put many Argentinians hopelessly into debt.

http://news.bbc.co.uk/hi/english/world/americas/newsid_1439000/1439426.stm

-- Martin Thompson (mthom1927@aol.com), July 14, 2001

Answers

July 15, 2001

RECKONINGS A Latin Tragedy By PAUL KRUGMAN

Nn the 1990's Argentina staged a dramatic recovery from decades of economic mismanagement, and in the process became an icon of the new world order. But last week the Argentine government found that it could roll over short-term debt only by offering a 14 percent interest rate, five points higher than a month earlier. And the buzz on Wall Street is that the question about an eventual Argentine debt default is no longer whether, but when.

Both the markets and the Argentine government are treating the issue as mainly one of deficit spending. Indeed, in a desperate effort to regain market confidence, President Fernando de la Rúa has called for draconian spending cuts.

But Argentina's fundamental problem isn't fiscal; it's monetary. Ten years ago Economy Minister Domingo Cavallo, the nation's economic hero, introduced a much- acclaimed monetary system, the nation's "currency board." Now he finds his handiwork threatened by that system's tragic flaw.

First, a word about the dire budget numbers you may have heard. Argentina, we are told, has a public debt equal to 45 percent of its G.D.P.; it has a budget deficit of more than 2 percent of G.D.P. Gee — the budget numbers are almost as bad as they were in the United States when the elder George Bush was president!

Why does a level of debt and deficits that caused only tut-tutting here create panic in Argentina? To some extent it's a vicious circle: because investors believe default is likely, they demand usurious interest rates that may well push the country into default. But the main answer is that behind a mildly troubled budget lies a deeply troubled economy.

Argentina's economy surged between 1990 and 1998, but it has been steadily contracting ever since. Unemployment, which stayed high even during the good years, has risen above 16 percent. This dismal performance contributes to the budget problem in at least three ways. A depressed economy means low tax receipts; it's hard to slash spending or raise taxes when the populace is already feeling a lot of economic pain; and it's hard to convince lenders that you will grow out of your problems when your economy is, in fact, shrinking. It's easy to criticize Argentina's political leadership for its inability to eliminate the budget deficit. But when did you last see our own leaders raise taxes and cut spending in the face of a nasty recession?

So why is Argentina's economy depressed? Basically it comes down to the currency board, which pegs the value of the peso at one dollar and ensures (technicalities aside) that each peso in circulation is backed by a dollar in reserves. When it was introduced this system offered a welcome guarantee that hyperinflation would not return, and contributed to a stunning economic recovery. Now, however, the system's fatal flaw has become obvious. Argentina's international competitiveness has been undermined by devaluation in neighboring Brazil and by the weakness of the euro; domestic demand has fallen as consumers and companies lose confidence; but because the currency board allows no flexibility in monetary policy, policy makers cannot respond, Greenspan-style, by opening the monetary spigots.

Mr. Cavallo, whom I know and admire (though I can't claim to have a sense of his soul) understands this very well. Yet he is understandably unwilling to abandon his creation. It would be a humiliating blow to his and his government's credibility. Also, because much of the debt of Argentina's private sector is in dollars, any devaluation of the peso would risk major financial disruption.

Yet if the latest desperate round of belt-tightening does not succeed, something will have to give.

Some Wall Street analysts believe that the Argentine government will default but try to keep the peso pegged at one dollar. Maybe — but that would be a bizarre strategy, choosing the worse of two evils. Advanced countries — the status to which Argentina aspires — regard default on debt as a mortal sin, but a sliding currency as at most a mild embarrassment. And default without devaluation, while easing Argentina's budget pressures, would do nothing to help its economy.

Meanwhile, the opposite strategy worked for Argentina's biggest neighbor. Two years ago Brazil was forced into a devaluation that many predicted would lead to economic ruin. It didn't.

I hate to suggest that Argentina should emulate Brazil; indeed, I have been reluctant to say anything that would make Mr. Cavallo's job harder. But he and his country are rapidly running out of options.

http://www.nytimes.com/2001/07/15/opinion/15KRUG.html

http://www.nytimes.com/2001/07/15/opinion/15KRUG.html

-- Martin Thompson (mthom1927@aol.com), July 14, 2001.

Monday, 16 July, 2001, 21:05 GMT 22:05 UK Argentine press sounds alarm over crisis

President de la Rua: Emergency measures

Argentina's leading newspapers have pulled no punches over the latest economic crisis, warning that the country faces a bleak future unless it pulls together. The leading daily Clarin slammed the government and opposition for failing to come together to tackle the situation.

"The crisis demands consensus," the paper said.

Political leaders must formalize their accords quickly and get to work immediately La Nacion, Buenos Aires "The failure to reach an accord in recent days has only led to an increase in uncertainty, putting the country in danger of suffering an even worse crisis," it said.

Clarin warned that there was an almost unprecedented urgency in the need to put aside differences and work for the national good.

Action not words

La Nacion newspaper urged politicians to reach agreement on the emergency austerity package announced by the government and move from talk to action.

"The slow and protracted negotiations that have taken place in these past days between the government and political parties... show that deliberation, and not action, continue to be, regrettably, the hallmarks of national life," it said.

Political leaders "must formalize their accords quickly and get to work immediately."

"The insuperable fact that we have before us today is the black hole of a paralysing and destructive fiscal breach," it said.

Praise for president

One prominent commentator in the Buenos Aires daily La Razon hailed President Fernando de la Rua for his "heroic" decision to introduce austerity measures in a bid to keep the nation from defaulting on its debt.

"The president took a decision which reveals exceptional courage - a game for all or nothing, like Hernan Cortes when he burned his ships, " the columnist wrote, in a reference to the Spanish conquistador who torched his own boats to force his soldiers to forge ahead with the conquest of Mexico.

"Everything now depends on the decision taken being maintained with firmness," the commentator concluded.

BBC Monitoring, based in Caversham in southern England,

http://news.bbc.co.uk/hi/english/world/monitoring/media_reports/newsid _1442000/1442382.stm

-- Martin Thompson (mthom1927@aol.com), July 16, 2001.

In crisis, Argentines keep cool, juggle savings Updated: Mon, Jul 16 6:31 PM EDT By Alistair Scrutton BUENOS AIRES, Argentina (Reuters) - As yet there are no runs on the banks or lines of quiet desperation at cashiers, but Argentines who are no strangers to financial storms are juggling deposits to safeguard their hard-earned savings.

Spooked by hyperinflation and devaluation from the 1980s, a majority of Argentines over the last decade have already taken up deposits in dollars, a traditional safe haven for rocky emerging market economies.

But with President Fernando de la Rua's government struggling to control Argentina's worst financial crisis in a decade and emerging market investors switching to sell-off mode, Argentines are looking at other ways to safeguard their earnings.

"These days are mad. No one is happy how they have invested their money," said one bank executive, who asked not to be named.

Argentina's local peso currency has been fixed one-to-one to the dollar for the last 10 years, helping to reduce the fear of hyperinflation which plagued the country in the 1980s and ate into savings.

But in times of crisis, Argentines still remember that decade when the government made local currency holders change deposits for 10- year-government bonds. Many savers lost huge amounts and they do not want the same thing to happen again.

"Those that have a fixed rate pesos account want it in dollars, those that have it in dollars want to transfer it to savings accounts, and those that have it in savings just want to withdraw (the cash)," the banking executive added.

The banking system is now one of the most solid in Latin America, but when the government said last week it would not be able to afford new loans to pay debt obligations due amid high interest rates, it sparked region-wide financial turmoil.

De la Rua has tried to soothe global markets -- worried of a contagion effect such as the Tequila regional financial crisis of 1995 -- with enough spending cuts to ensure Argentina had enough cash to meet payments on its $128 billion public debt.

But while newspapers devote pages of print each day to debating whether De la Rua and Economy Minister Domingo Cavallo can pull Argentina from the brink, many savers are not waiting patiently for the result.

In Buenos Aires' financial district, many banks have run out of safe deposit boxes amid heightened demand from savers.

While most Argentines kept their faith in banks, many were changing their peso accounts into dollars, according to banking officials who asked not to be named.

Official data show that total bank deposits on July 11 were $80.215 billion, down 1.87 percent from the start of the month -- a slip that pales in comparison with a roughly 20 percent fall in Argentina's deposits in Mexico's 1995 crisis.

More recent data from last Thursday and Friday -- when investor panic in Argentina was at a peak -- were not available.

But the Central Bank said Monday international reserves fell to $25.515 billion on Thursday, down 5.51 percent compared with Wednesday, the biggest daily fall since March and a sign of dollar demand in the economy, according to traders.

Under the dollar peg, the Central Bank must back each peso in circulation with a U.S. dollar so that a fall in peso deposits sees an equivalent fall in dollar reserves.

One executive of a medium-sized company in Buenos Aires said one of the reasons that businesses were not withdrawing huge amounts from banks was that after three years of economic stagnation, recession- hit companies had little liquidity to use.

"Businessmen cannot withdraw much money because the crisis means there is little room to maneuver," said the business executive.

"It is one thing change money into dollars, something that many people are doing, but it is another thing to take it out of the country -- something difficult because of the liquidity crunch that many firms are suffering from," he added.

http://news.excite.com/news/r/010716/18/economy-argentina-savers

-- Martin Thompson (mthom1927@aol.com), July 17, 2001.