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After the eight months of misguided ministrations by economy minister Domingo Cavallo that president Fernando de la Rua allowed him to carry out-which only served to sink Argentina deeper and deeper into an economic and political quagmire that made both their resignations inevitable after Argentines made their disgust known with unusual and widespread rioting-a new government, chosen through the constitutional process and presided by interim president Adolfo Rodriguez Saa, appears to be getting a grip on reality and has a fighting chance of eventually getting Argentina back on its feet.
Cavallo's determination to avoid a technical default on its foreign debt had become immoral, politically unsustainable and economically insane. After four years of recession, it was clear that Argentina simply could not export enough to pay its debts. The country's total public debt, internal and external, is about $155 billion, more than five times its annual exports. The 30 per cent spread between Argentine debt and U.S. Treasury bonds reflected the markets' belief that some form of default was virtually certain.
But for much too long default was staved off by the transfer of wealth from Argentine taxpayers to foreign bondholders. Only two weeks ago, the government paid $900 million in interest on its foreign debt, in part by using money confiscated from private pension funds and by pressuring domestic banks to roll over Treasury bills.
But avoiding a foreign debt default did not mean that Argentina was meeting its commitments. Pensions were cut by 13 per cent. Many state employees were not paid for months. Bank depositors had their accounts partially frozen. Unemployment reached about 20 percent. The most vulnerable sectors of society have been hardest hit: the old, the poor, those who work in the domestic sector of the economy, young individuals looking for work. Every day, many more people joined the 14 million already living in poverty on less than $4 a day-something that was unthinkable in a country rich in resources like Argentina.
Seeking a balanced budget for 2002, to bend to the IMF demands for continuing help, Cavallo was about to inflict further pain on ordinary Argentines with spending cuts of $7 billion combined with tax increases of $4 billion. In U.S. terms, such measures would have been the equivalent of a $400 billion-a-year tax increase and spending-cuts package; perhaps $2,500 a year for every family. The result would have been many more lost jobs, unpaid pensions, cuts in social services and in education-all so that the government could postpone the inevitable a little longer and service its foreign debts for a few more months.
This was economic and political lunacy. Certainly, Argentina has some structural fiscal weaknesses. Yet the problem is not the budget deficit but the recession, which is causing that deficit.
Neither the IMF nor anybody else would advise any country to adopt such masochistic and self-destructive policies; no one is suggesting that because recession has pushed the U.S. into deficit in 2001, taxes must go up. Quite the opposite. Argentines understood what Cavallo appeared to be unable to grasp and argued with him in the only way they could: by taking to the streets to say that enough was enough.
Foreign bondholders-investment banks, mutual funds, rich individuals and vulture funds, which buy distressed debt in the hope of making a quick killing-were well aware of the risks when they bought Argentine debt. After all, a 30 per cent spread implies that these bondholders were obtaining six times what they would get by holding U.S. Treasury bonds. Only a big risk of default could justify this.
The new interim government recognized that it was not just economically foolish to prioritize the debts owed to foreign bondholders over those to domestic workers and pensioners; it was politically unsustainable and socially unjust.
The new interim government has taken the only sane measures possible. It has suspended payments on the country's public foreign debt, and all funds earmarked in the budget for foreign debt payment during the moratorium will be used for job creation and social programs. It will not devalue the peso, which has been pegged to the dollar for over the last decade-a measure that would have the effect of wrecking the banking system and the many companies that have loans tied to the dollar-nor dollarize the economy, but will introduce a new currency alongside the peso.
Elections for a president to complete de la Rua's unfinished term are called for March 3. Rodriguez Saa, the 54-year-old center-Peronist who has proved himself as a good administrator as governor of a small state, has three months to steer Argentina away from the brink of social disaster. Argentines are already showing signs of renewed hope.
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