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It is said that a nation cannot actually go bankrupt as a business enterprise could, but Argentina's economy minister Domingo Cavallo, his bag of financial tricks exhausted, is now acting as the administrator of a bankruptcy that, like all bankruptcies, is paying its creditors only a percentage of what they are owed.
In an unprecedented move, after a local auction of government bonds on Tuesday found few takers, even at record interest rates of up to 16 per cent, Cavallo announced the government was slashing state salaries, pensions and payments to suppliers by the sum necessary to balance the state budget. Salaries will be cut by 10 to 13 percent and pensions over 300 pesos-already grossly insufficient to make ends meet-will be cut by similar percentages. It is not clear yet how much will be cut from payments to suppliers.
These measures aim at eliminating the $1.5 billion federal deficit by year's end, a condition for receiving help from the International Monetary Fund which, in turn, would serve to head off a default on Argentina's $130 billion foreign debt.
After tense negotiations, the government headed by presidente Fernando de la Rua got reluctant support for these measures from the 23 provincial governors, 13 of them-including the one from the largest and richest province of Buenos Aires-from the opposition Peronist Party of former president Carlos Menem. The governors pledged to take similar steps to reduce provincial budget deficits.
But it remains to be seen if popular protest against the salary and pension cuts, the seventh round of them since de la Rua took office in December 1999, will be contained by this agreement.
Three of Argentina's largest unions announced plans for a 24-hour strike this week to protest the latest measures put forth by Cavallo. One union leader decried them as "unacceptable," stating that "Cutting salaries and pensions won't solve the economic problem."
A politically strong government could get away with such hard measures to seek reversion of a three-year-old recession, but de la Rua has become the incarnation of weakness, a popular view that is being constantly reinforced by critical comments in the media as well as by cruel cartoons and television comedians' jokes that depict him as a lightweight who doesn't know what's going on.
When he was appointed Economy minister in March, Cavallo enjoyed the aura of his masterful perfomance a decade earlier, when he laid four-digit inflation to rest, launched an aggressive privatization plan and pegged the Argentine peso one-to-one with the dollar, pushing Argentina's economic growth to as much as 9 percent annually, one of the highest rates in the world. But it shouldn't be forgotten that he achieved this with the backing of President Menem, a politically strong and charismatic president.
Also, there was a certain amont of smoke and mirrors in Cavallo's achievements as Economy minister between 1991 and 1996. The gaping hole in Argentina's balance of payments, that was-and continues to be-caused by a chronically underperforming export sector, was covered with a constant flow of financial capital and help from multilateral financial institutions. In a way, the current recession is a consequence of not having dealt with this issue at the time by Cavallo nor later by Menem's government.
This time around general confidence in Cavallo's efforts to improve the economy appears to be dropping quickly. Only 32 percent believe he can improve the economy, down from 57 percent in April, a month after he took office, according to a recent poll.
He is not getting much sympathy in the press, either. The cover of Veintitres magazine featured a picture of Cavallo, his face made up with sad clown paint and a big frown. The lead article called his new austerity plan a "farce."
If Cavallo's plan fails, what's next for Argentina?
Privately, even some Wall Streeters-the very holders of the bonds Argentina has issued to cover its debt-agree that the most sensible thing Argentina could do is declare it must seek an agreement with its creditors for a negotiated reduction in the amount it owes. But the costs of such a move might be considerable. Not only would the Argentine government and Argentine companies have to pay much higher interest rates for years to obtain foreign capital, but the confidence Argentines have in keeping their money at home would almost certainly erode.
Also, a debt renegotiation by Argentina would increase even more the great impact its crisis is having in the region, at a time when economic sluggishness in Chile, recession in Peru, increasing economic softness in Mexico and an energy crisis in Brazil is prompting economists to further slash their growth forecasts for almost all Latin American countries.
There's speculation whether already weak President de la Rua would be able to survive these events, but for now there is no answer to the question of how the political crisis could be solved without an interruption of the constitutional process.
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