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Argentina in economic high wire act

By JOSHUA MELLARS, UPI Correspondent   |   Dec. 7, 2001 at 10:31 AM
BUENOS AIRES, Dec. 7 (UPI) -- Argentina 's government is walking the tightrope and appears to be one step closer to losing its balance and falling into a deep economic chasm.

The government worked desperately to re-group after the International Monetary Fund announced on Wednesday the lender had no immediate plans to approve a disbursement of $1.3 billion in aid seen as crucial to help Argentina avoid default on its $132 billion in debt.

Argentina's Economy Minister Domingo Cavallo continued to show optimism the IMF would grant the disbursement of funds, downplaying the IMF announcement.

"I always fight, and fight, and fight to get the results. So the disbursement, this one or another, or a bigger one, will arrive in an opportune moment," Cavallo said at a news conference before leaving for the airport.

The Economy Minister said he will travel to Washington for a meeting with IMF officials on Friday in which he plans to outline Argentina's economic measures and seek backing for the country's plan.

"In a particular moment, an accord is not reached, but this can be reached some days after, some weeks after. What I can guarantee is that it will be reached and Argentina will resolve its problems," Cavallo said.

President Fernando de la Rua's inability to turn around a nearly four-year recession has hurt his popularity and the government's credibility. Strong criticism of the government's economic policy from both opposition party leaders and members of De la Rua's own party have created heightened uncertainty during his tenure.

In the midst of the crisis, the government came out once again to deny possible resignations by the president or key ministers.

"There are not any resignations of any kind," the president's spokesman Juan Pablo Baylac said.

De la Rua met with opposition leaders, cabinet members, and labor representatives on Thursday as the government analyzed what action to take in response to the IMF's denial of the funds.

"We have worked to inform all of the leaders, there is the (IMF) statement, this is the reality. We will work for the national unity...and show all the country's fronts are working towards the same goals," he told reporters at the Government House.

De la Rua said political leaders should work together to approve spending cuts in next year's budget and legislation to cut federal funding to the country's provinces to show Argentina's commitment to turning around the economic crisis.

In a sign of the difficulties the government faces on all levels these days, Cavallo was forced to cut short an earlier briefing for reporters in Argentina's Government House after his microphone stopped working and could not be fixed.

Argentina's sizeable debt servicing costs and high interest rates have been a "heavy burden" for the country and have created a "crisis of confidence" among investors and consumers that has aggravated the country's economic woes.

Economy Minister Cavallo said he remained confident the government's plan to significantly reduce interest payments through a major debt swap would help solve the country's economic problems.

"We hope in 60 or 90 days to conclude the debt re-structuring, that has already been 50 percent successfully completed, which will leave behind all of these payment uncertainties," he said.

Argentina has swapped some $50 billion in debt with local investors and creditors, which will reduce interest payments by $3.5 billion a year, he said. The government would like to attain backing from multi-lateral lending agencies in order to help convince international investors to participate in a similar planned swap.

Argentina has failed so far to comply with a zero deficit austerity program in which the government vowed to spend no more than it receives in tax revenues. The government enacted the measures in an effort to balance its budget deficit and acquire access to the country's most recent IMF bailout package.

"If we would have complied with the zero deficit plan, this (the IMF decision) wouldn't have happened," economist Roberto Alemann said. The government's failure to eliminate its budget deficit has greatly contributed to investors' lack of confidence and higher interest rates, which have further paralyzed the economy, he added.

The government has insisted the country will not default on its debt obligations or devalue its currency. Argentine officials said even without the IMF fund disbursement the country still had other options available to pay its upcoming December debt obligations.

However, pensioners and state workers complained they had not received overdue pay checks and payments.

A currency devaluation could make Argentina more competitive with neighboring countries, but it would also have dramatic consequences for most Argentines who have debt in dollars.

Argentina's government has stood firmly behind its Convertibility Plan, which has made Argentina's local currency, the peso, equivalent to the dollar since 1991. Analysts believe the country may soon have to ditch the peso/dollar peg plan opting either to formally declare the dollar as the country's currency or devalue the peso.

Many Argentines seem more inclined to accept a dollarization of the economy rather than a devaluation.

"Devaluation would cut me in half," said advertising executive Diego Mendez. "Dollarization would not hurt me because I have all my loans in dollars."

Dollarization could boost investor and consumer confidence, but would force the government into an even more rigid monetary policy, and would not help the country fulfill its debt obligations or balance its accounts.

"You cannot use reserves to pay debt and dollarize," said economist Roberto Frenkel.

International credit rating agencies and analysts questioned whether the country's decision to impose emergency banking restrictions over the weekend did not already compromise the decade old Convertibility Plan.

"Already convertibility does not exist," said Frenkel. Argentina's government was forced to impose strict banking controls last weekend to stop a run on local banks by Argentines withdrawing money as panic over the country's economic crisis deepened. Some analysts argue that after these measures the country is already "virtually" dollarized.

Cavallo announced on Wednesday the country would loosen the controls, allowing Argentines to take out up to $1,000 in one fell swoop from their bank accounts each month. The original measures did not allow Argentines to take out more than $250 a week in cash.

Argentines waited in long lines for hours outside banks in downtown Buenos Aires on Thursday to take advantage of the new limits and find out the implications of the new measures.

"They do not let me take out my salary. The bank is packed, but they do not give you the money," accountant Adriana Villarosa said. She was told in several banks she would not be able to take out over $250 until next week, and added she was worried the government could devalue the currency by that time.

Argentina's unemployment rate has soared to over 16 percent and many workers in the country's informal economy and small businesses fear the new cash limits will make it even more difficult to stay in business and keep their jobs. Many local businesses have already gone bankrupt due to the economic crisis as demand has fallen and high lending rates have made it impossible to

re-finance debt.

Several protest marches, demonstrations and road-blocks sprang up on Thursday throughout the country in protest of the new banking restrictions and austerity cuts. Protestors threw eggs and stones and doused water and paint on public buildings, scrawling anti-government graffiti on walls and sidewalks in downtown Buenos Aires. Meanwhile, the country's labor unions are planning a strike for Dec. 13 to protest the measures.

Topics: Juan Pablo
© 2001 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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