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A not-so-friendly rivalry exists between Brazil and Argentina. Not that they are about to go to war as they did in 1825, when Argentina supported a rebellion in Brazil’s Cisplatine Province, now Uruguay as the result of the Brazilians’ defeat in 1827. It is rather the love-hate relationship between the largest economy in Latin America, Brazil, and the second largest in South America, Argentina, who happen to be each other’s largest trading partner and vie with each other for world recognition as leader in the region.
So when last week Brazil’s economy won a long-awaited vote of confidence with the upgrading of its sovereign debt by Moody’s, the credit-rating agency, from B2 to B1, Argentine financial circles were distressed. Spreads on Brazilian bonds are still slightly wider than on Argentine paper, which now has the same rating from Moody’s as Brazil. But economists say that difference could disappear if Brazil also receives an upgrade from Standard & Poor’s, another ratings agency, which many investors expect to happen before the end of the year—and there’s even the danger that Argentina’s debt may be downgraded.
In a further reflection of the optimistic sentiment surrounding Brazil, Moody’s said that the current economic recovery with low inflation would be sustainable in the medium-term, while tighter fiscal policy had improved the government’s debt position.
The pace with which Brazil rebounded from last year’s currency crisis surprised many observers and the economy is now expected to grow by up to 4 percent this year. While the recovery was led initially by investment and exports, falling interest rates are beginning to spark consumer demand.
Argentina squeezed thorough last month when Standard & Poor's surprised markets by maintaining its rating on the country,s economy, which it said had shown resilience, pointing out that during the past decade it has developed into a stable economy, with a strong currency, solid financial system and no inflation. Also, the difficult external situation it faced over recent years—a strong dollar, high U.S. interest rates and low commodity prices—is starting to improve.
But global investors don’t much seem to care. What they see is that, while Latin America as a whole has rebounded from a bruising recession in 1999, Argentina has been struggling to restart its economy. After a 3 percent contraction last year, Argentina's economy is expected to grow by less than 2 percent this year. The government hopes for 4 per cent next year, but economists are skeptical.
But it is the difference in the political scene in both countries more than the economic picture that explains investors’ contrasting views.
In Brazil, the recovery is beginning to boost the opinion poll rating of president Fernando Henrique Cardoso—a recent poll showed his approval rating up from 18.8 per cent in June to 23.4 per cent in September—which will increase his ability to influence the election of a successor in 2002.
Argentine President Fernando de la Rua’s popularity was bursting over 70 percent earlier this year as his government made big corruption sweeps, nailing former public officials for ill-gotten gains. But the resignation of vice president Carlos Alvarez has thrown into question the future of the governing coalition and de la Rua’s approval rating has fallen below 30 percent, the lowest of his tenure.
Alvarez, who led the junior partner in the coalition, had made a crusade of clearing up a simmering scandal involving the Senate, some of whose members allegedly took bribes for passing a law urged by the administration. He resigned two weeks ago to protest a cabinet reshuffle by President de la Rua that left in place two ministers implicated in the alleged bribing of senators. At that time, Alvarez’s center-left Frepaso party and de la Rua’s Union Civica Radical, an old and traditional center party, have promised to keep working together but investors are watching to see how this potentially volatile situation develops. For them, the danger is not that the government will fall, but that the president may be left without enough supporters to pass important legislation.
If that were to happen, reform efforts would stall, endangering Argentina's fragile recovery. The plus side of all of this was that de la Rua now had a far more unified cabinet on economic matters and a strengthened economy minister, Jose Luis Machinea. But last week this long-term view suffered a setback.
Although no hard evidence surfaced, one of the men who immediately came under suspicion for the alleged bribery was Fernando de Santibanes, head of the government’s intelligence service and a close friend of the president. Other suspects were removed from government by de la Rua, but he kept Santibanez by his side
Finally, after this story was played up in the media for all it was worth, de Santibanez resigned las Friday, But the damage was done. For now, investors see little reason to take a chance on Argentina, and no shortage of other countries on which to place their bets.
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