Argentina's Economic Woes Worsen

Anthony Faiola Washington Post Service Monday, October 8, 2001

PUERTO IGUAZU, Argentina Six weeks after an $8 billion bailout to ease Argentina's financial crisis, the third-largest Latin American economy has taken a sharp turn for the worse, renewing concerns about the government's ability to defend the currency and service its $132 billion debt.

New statistics show that Argentina fell deeper into its three-year recession last month. The lost ground produced investor panic that made last week one of the worst in the history of the Buenos Aires stock market and sent the interest rates that Argentina must pay to raise money soaring to record levels.

The recession worsened, economists said, partly because of the effects of the Sept. 11 attacks in New York and Washington but also because of a deepening political crisis in advance of congressional elections next weekend that has undermined consumer confidence.

Fears that an economic collapse here could spread through Latin America and beyond led the International Monetary Fund to bolster its aid program to Argentina on Aug. 21. Although that restored confidence temporarily, the fears sprang back to life last week as September tax revenue came in 14 percent below the level seen last year. The result has rekindled concern that Argentines might stage a new run on local banks.

A run on the banks, according to economists, is now the largest danger to the central bank's liquidity and could yet force a devaluation of the peso and trigger a default on debt payments. The turmoil is again buffeting other countries in Latin America, especially Brazil, which has seen its currency and stock markets dive and interest rates soar.

The international effect has been particularly strong in Puerto Iguazu, on Argentina's border with Brazil near Iguazu Falls, one of Latin America's most important tourist attractions. As the Brazilian currency has fallen by 30 percent since the beginning of the year, tourists have moved to cheaper restaurants and hotels on the Brazilian side of the border, prompting some businesses in Puerto Iguazu to close. Even residents of this town of 18,000 people drive to Brazil to shop for groceries and clothing.

The embattled government of President Fernando de la Rua tried Saturday to reassure Argentines and foreign investors that neither a default nor a devaluation was in the making. Economists said the IMF money had put Argentina on a far better financial footing to withstand the crisis than it was before August. And Mr. de la Rua's cabinet chief, Chrystian Colombo, added that in the event of a run on the banking system, the government would be willing to take the radical step of adopting the U.S. dollar in a last-ditch effort to prevent a devaluation.

"Dollarizing would be the least costly move for the people," Mr. Colombo said. "Devaluation is the worst measure any government can take."

Dollarization, a route recently taken by Ecuador and El Salvador in an effort to stabilize their economies, has long been debated in Argentina as an alternative to its "convertibility plan." That system, in which the central bank keeps enough reserves in dollars to match every peso in circulation and maintain a 1-to-1 exchange rate, was created 11 years ago to stabilize the currency and end hyperinflation.

The idea of going a step further and doing away with the peso has been dismissed in the past because of public opposition and a heated economic debate over whether it might make things worse. But it is suddenly finding new support.

Under the current system, Argentines earn their salaries in pesos, but 85 percent of private and corporate debt - from automobile to construction loans - is denominated in dollars. This means a devaluation would very likely lead to bankruptcies and spark an even deeper recession in the country that had long enjoyed the highest standard of living in Latin America.

One thing not in debate, however, is that Argentina is in deep trouble again.

With the global economy slowing further after Sept. 11, chances of a quick recovery seem remote. In addition, new doubts have arisen about the government's ability to stick to its zero-deficit plan. Severe cuts in government salaries and retiree pensions last month to meet those targets caused a wave of protests and cost Mr. de la Rua dearly in political support.

Now, with the dropoff in tax revenue, even deeper cuts would have to be made. Not only could that provoke new waves of social unrest, but many doubt that Mr. de la Rua has the political strength to push through new austerity measures.

Mr. de la Rua, a lifelong politician elected president in 1999, has become isolated, and his center-left coalition is on the verge of collapse. That is largely because of the looming figure of the economy minister, Domingo Cavallo, the capitalist firebrand who created Argentina's convertibility plan, and with whom Mr. de la Rua has cast his lot. Mr. Cavallo's free-market policies go against the beliefs of powerful left-leaning politicians within Mr. de la Rua's party, and they have been clamoring for Mr. Cavallo's resignation.

http://www.iht.com/cgi-bin/generic.cgi?template=articleprint.tmplh&ArticleId=34802

-- Martin Thompson (mthom1927@aol.com), October 08, 2001

Answers

How much worse can Argentina's problems get before blowing sky high?

-- Steve Simon (ssimon@interlude.net), October 09, 2001.