WASHINGTON, Jan. 16 (UPI) -- The International Monetary Fund -- with the backing of the U.S. government -- threw Argentina a billion-dollar lifebelt Wednesday.
Just hours before President George W. Bush was to spell out his own proposals to rescue the stricken Argentine economy after its default in its $140 billion foreign debt, the IMF said it would postpone for 12 months the $933 interest payment Argentina was due to make Thursday.
This does not solve the Argentine problem, but it buys time, and even more important, sends a signal that Argentina is cooperating again with the international financial institutions -- a crucial development now that the financial markets and many Argentines have lost faith in the Argentine government's capacity to clamber unaided from the wreckage.
A new IMF team is now expected in Buenos Aires later this month to try and salvage the healthy bits of the Argentine economy. There are many, from its thriving wine industry to the long prosperous agricultural sector, despite the fall in demand for beef and the steady decline in commodity process.
Argentina's problem was threefold. First, it stuck to its inflation-beating policy of linking its currency to a string and rising dollar -- even when this priced Argentine goods out of the markets of its main trading partners in Latin America.
This alone would not have been enough to cause the financial collapse, since exports account for only 10 percent of the Argentine economy. But the second problem was critical. Because Argentina had beaten inflation, and because its currency was seen as strong and stable thanks to the dollar link, the international markets were happy to lend it money.
This meant the governments. Both national and regional, were able to avoid hard choices, maintain an over-generous welfare state and delay the reform of labor markets that were needed to sustain Argentina's neo-liberal strategies. Instead of cutting public spending, and instead of imposing a reliable taxation regime, Argentine governments simply borrowed more money.
The third problem explains why the politicians did this. Argentina has been let down by its political class for most of the 20th century. In 1913, the country was more prosperous, in income per head, than France or Germany. Its relative prosperity has declined ever since, thanks to a series of disastrous policies and political leaders, from the Fascist-admiring military dictator General Juan Peron to the military junta that seized power in the 1970s and lost it after the disastrous invasion of the British-owned Falkland Islands in 1982.
Peron took part in his first military coup against an elected government in 1930. In 1943, he led another, and made himself president from 1946-55, and again from 1973-74. The legacy of Peron, the military strong man who despised democracy and wooed the labor unions with strong job guarantees and generous pensions and health services, warped Argentine politics for a generation.
Peron's courtship of the labor unions prevented the emergence of a moderate, social democratic left, and the left in the 1960s and 1970s became synonymous with urban guerillas and violent revolution. His impatience with democracy undermined the parliamentary system. His example led another generation of the Argentine officer corps astray. Above all, the Peronist party, which governed Argentina throughout the 1990s with nominally conservative economic policies that were then undermined by barely restrained public spending, hindered the emergence of a conventional two-party system of moderate left and moderate right. The Peronists claimed to both left and right, while also being essentially a patriotic party, above such ideological labels.
The Peronists are now back in charge of what still looks like a disaster. Amid renewed public protests and violent attacks on foreign-owned banks, President Eduardo Duhalde declared Tuesday that Argentina was now "one step away from anarchy."
And even while negotiating desperately with the IMF for debt relief and more help, Duhalde played the traditional Peronist game of telling the Argentine public something rather different.
The country would abandon the failed policies of free trade and overmuch dependence on the United States, and would instead protect Argentine industries and jobs and reforge its links with Latin America, and launch a new common currency with Brazil. (This came as news to Brazil.) Together, the South Americans would confront their region's economic "domination" by the industrialized world, Duhalde asserted.
Duhalde's priority is to stabilize Argentina, after the previous government defaulted on part of the crushing $142 billion national debt and was forced to cut the peso's link to the dollar. The peso immediately fell 40 percent. This need not have been a disaster. But because so much of Argentina's debt had been taken out in dollars, the devaluation threatened to bankrupt the country's middle class, effectively doubling the cost of their mortgages and bank loans.
Rather than risk that, Duhalde preferred to bankrupt the banks instead, by announcing a double exchange rate and a bizarre new system under which dollar borrowings of less than $100,000 are turned into pesos at a pre-devaluation rate, while dollar deposits remain as they were. So banks have to pay out in dollars, while getting their loans repaid only in heavily devalued pesos. This will cost the banks, many of them foreign-owned, up to $10 billions. Either this policy changes fast, or Argentina loses its banking system.
The signs from the latest IMF agreement are that President Duhalde is soon to return to more orthodox ways, whatever his telling the Argentine public. If he does not, as Duhalde himself stressed, anarchy is just a step away. And to prevent that, a reluctant Argentine military may be forced back onto the disastrous Peronist path.
