Brazil mum on Argentina, columnists pessimistic Friday November 2, 1:47 PM EST

By Axel Bugge

BRASILIA, Brazil, Nov 2 (Reuters) - With All Souls' Day being observed in Brazil, there was no official response Friday to Argentina's new economic package. But the local media reacted with their usual scepticism about the southern neighbors' ability to avoid defaulting on its debt.

Argentina's financial crisis has battered Brazil's economy for months, pushing the real sharply lower throughout the year and forcing interest rates higher. Many economists fear Brazil will be the hardest hit by any contagion caused by a default.

As Brazil shut down for the national holiday, the government of Latin America's largest economy had no comment about the Argentine measures, which are centered on an offer to swap billions of dollars in bonds for lower interest debt backed by tax revenues.

Argentine President Fernando de la Rua also announced Thursday evening measures to boost consumer spending and he pledged to retain the country's fixed peso currency peg of one-to-one to the dollar.

With Brazilian markets shut Friday, there was no immediate way to gauge how Argentina's move to end years of recession would impact local sentiment.

President Fernando Henrique Cardoso was spending the long weekend at his ranch outside the capital and will return to Brasilia Sunday.

But Brazilian media commentators were unimpressed by the package, pointing out the lack of new funds from the International Monetary Fund to support the debt swap. They also highlighted the deadlock in talks between provinces and the central government over cuts in tax transfers, regarded as a key to reducing the fiscal deficit.

EVERYTHING BAD HAPPENED TO ARGENTINA

The respected commentator of daily O Globo, Miriam Leitao, wrote Friday that, "everything bad happened to Argentina this week."

She said there was little hope the latest moves would pull Argentina out of its "quagmire."

"(The measures) are (doing) nothing to resolve Argentina's abysmal crisis, which is heading inexorably toward a forced debt restructuring and (a) change to the currency regime," Leitao wrote.

Sonia Racy, a columnist at daily Estado de Sao Paulo, was equally pessimistic, saying the loss of confidence in the country's currency peg by Argentines, "appears not to be resolved with the new package."

Racy said what was needed were new controls on government spending and a solution to Argentina's lack of competitiveness caused by its fixed currency.

"As long as this does not happen, economic activity will remain subdued and Argentina will remain at the mercy of the markets," she said.

Squabbling repeatedly delayed the announcement of the new measures over recent days and speculation about them grew sharply, driving financial markets lower. Argentine markets fell further Friday.

Some thought the debt swap could work because the announcement had rid investors of uncertainty.

"I think the measures can contribute to Argentina moving out of recession and entering a virtuous cycle," said Ernan Hickman, an economist at the Fundacao Getulio Vargas think tank.

Brazilian financial markets rose Thursday because traders had already priced in potentially bad news from Argentina.

Brazil is trying to 'decouple' itself from Argentina's troubles, a move that was helped this week when Poland agreed to pay back early $2.5 billion in debts owed to Brazil from the 1970s. News Brazil had already met strict IMF fiscal targets for the full year also gave the markets boost.

http://money.iwon.com/jsp/nw/nwdt_rt.jsp?cat=USMARKET&src=201&feed=reu§ion=news&news_id=reu-n02334728&date=20011102&alias=/alias/money/cm/nw

-- Martin Thompson (mthom1927@aol.com), November 02, 2001

Answers

Sounds good, but there is still a great big fat question mark here.

-- Wellesley (wellesley@freeport.net), November 02, 2001.