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In an effort to improve the public image of the measures taken by Economy minister Domingo Cavallo to revert Argentina's three-year recession, the government released an opinion poll taken last weekend that showed 70 percent support for them. But how flawed this poll was-taken among 300 residents of the capital, Buenos Aires-became evident on Monday, when protests at growing unemployment in the province of Salta, 1,000 miles northwest of Buenos Aires ended with two people dead and 36 wounded, as military police tried to open a highway that had been blocked by a group of unemployed workers for more than two weeks.
As unemployment has climbed to near 15 percent, in recent months, unemployed workers have increasingly blocked highways around Buenos Aires and in the provinces, demanding unemployment subsidies and improved social conditions-and though the measures taken by minister Cavallo might bring some relief in the long run, their immediate effect on unemployment and living conditions for the great majority of Argentines is nil.
Things are no better for Cavallo in the international financial markets. Initially he charmed them with his past reputation of having extracted Argentina from hyperinflation in the 90s and this time around he dazzled world markets with a blizzard of measures designed to restore "competitiveness" abroad for Argentine businesses, cutting taxes and tariffs for those industries most hurt by the overvaluation of the peso.
Ironically, this is a problem of his own creation. The dollar-pegged currency-one peso equals one dollar-that he introduced 10 years earlier was useful in stopping hyperinflation but has made the country deeply uncompetitive. The obvious solution-to devalue-appears to be out of the question, as most public and private debt in Argentina is denominated in dollars. His solution: to "devalue without devaluing".
But Cavallo's latest package, introduced last Friday, which includes a complex and unorthodox trade tariff system which replicates a dual exchange rate system, has prompted the question expressed by one market participant: does he have a grand plan to rescue Argentina or is he making it up as he goes along?
The new system effectively devalues the currency for foreign trade while leaving it untouched for every one else. By adjusting trade tariffs based on the value of the euro and the dollar, Argentina will simulate the new convertibility for foreign trade, giving exporters preferential exchange rate of 1.08 pesos for every dollar of goods that they sell abroad.
However, except for the introduction of the euro into the equation-a risky thing in itself given the new currency's uncertain future-the new measures are nothing more than the rehash of a system developed in the 40s under then president Juan Peron and later revived under military regimes in the 70s, which in both cases proved to be a failure in stimulating Argentina's exports but a personal bonanza for exporters, who drained the fiscal coffers by abusing the system with grossly overpriced or even phantom exports to their own offices abroad.
Foreign investors responded to the new measures by running for the exits, selling Argentine bonds the day after they were announced and driving up interest rates. The benchmark 2008 global bond was down 4 points, or 4.9 percent. Argentine country risk-the premium the government must pay to lure investors away from safe-haven U.S. Treasuries-ballooned to the psychologically unattractive 1,000-basis-point level. Markets improved somewhat since then but investors are wary, because they see all this as a possible precursor to a devaluation.
Cavallo berated international markets for selling Argentine assets saying they had failed to comprehend his new exchange rate measures. Showing his exasperation, he said foreign investors were wrong to confuse his new foreign exchange subsidy for exporters with an attempt to devalue the country's peso currency, even as the sell-off that rocked markets in Spain, Brazil and Chile on Monday continued.
"Since Friday, we have been trying to explain these measures abroad, and obviously we haven't been very successful," he said in a speech to local businessmen.
The International Monetary Fund appears to have understood the measures but doesn't like them. Senior sources at the Fund said the lender's point man on Argentina, Claudio Loser, had told Cavallo in April that the timing was wrong to alter the currency peg and that doing so by targeting one sector of the economy ran counter to the IMF's principles.
Does all this mean that Cavallo might be on the way out? Not really, because not even his adversaries within Argentina can come up with a substitute for running the country's economy that can equal his stature in world financial markets, even though his reputation as a miracle man is beginning to be somewhat tarnished. The uncertain factor, however, is whether new violent protests like the one in Salta province could trigger the need for "restoring order," the magic words that have in the past opened the gates of the military barracks.
Claudio Campuzano (claudio-campuzano@hotmail.com) is U.S, correspondent for the Latin American newsweekly Tiempos del Mundo and editorial page editor of the New York daily Noticias del Mundo. He writes weekly for World Tribune.com