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Argentinas's political problems come home to roost . . . On its economy


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By Claudio Campuzano
SPECIAL TO WORLD TRIBUNE.COM

November 20, 2000

Exactly one month ago we said here that Argentine President Fernando de la Rua, whose popularity was bursting over 70 percent earlier this year as his government made big corruption sweeps, nailing former public officials for ill-gotten gains, had suffered with the resignation of vice president Carlos Alvarez, who led the junior partner in the governing coalition, throwing into question its future. The vice president resigned 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 leftist Frepaso party and de la Rua’s Union Civica Radical, an old and traditional center-left party, had promised to keep working together, but investors were watching to see how this potentially volatile situation developed. For them, we said “the danger is not that the government will fall, but that the president may be left without enough supporters to pass important legislation.”

The crunch came last week, when de la Rua’s efforts to unlock billions of dollars in international credit were dealt a blow on after Peronist opposition leaders postponed talks aimed at clinching an austere public spending pact at a time when the president was seen as having to deal with tensions and division inside the government coalition; President de la Rua has asked the country’s 23 provincial governors to freeze primary spending alongside the federal government the next five years in hopes of rebuilding investor confidence in Argentina’s stagnant economy. He also unveiled a raft of investor-friendly reforms to the nation's pensions, retirement and tax systems, and said the International Monetary Fund was preparing an aid package aimed at quashing fears Argentina will be unable to pay next year’s debt obligations. The IMF-led package, which will also include credits from the Inter-American Development Bank and other lenders, is rumored to be worth up to $20 billion.

A week after de la Rua’s announcements, eight provinces governed by the ruling Alliance coalition signed the pact. But the country’s 14 opposition Peronist Party governors, who control Argentina’s most important provinces, postponed negotiations with the government until this week.

The delay hit Argentine bonds and stocks, especially after the IMF said it would not dispatch a mission to finalize the new aid package until De la Rua hammered out a final deal. Worse still, all 99 Peronist congressmen in the lower house, the Chamber of Deputies, have filed petitions to have the 2001 budget bill sent back to the committee level in order to make the alterations necessary for next year's fiscal assumption to be incorporated in the bill —and the Frepaso lawmakers who are supposed to be part of the governing alliance are mostly sitting on their hands, reinforcing the idea of a weakening presidency.

Under the current terms, provinces would receive an extra $225 million next year to be used for social services in exchange for freezing their spending. But Peronist leaders have called for more leeway in social spending.

The budget and reforms must also pass through the Peronist-dominated Senate and their passage is seen as a key test of de la Rua’s ability to govern after last month’s political crisis.

All this is taking place as Argentina’s economic stability, up to now underpinned by a solid banking system and a steady currency, is beginning to be put in doubt by the financial markets.

For the best part of a decade, Argentina has been an emerging markets success story. The country's enthusiastic embrace of privatization, fiscal austerity and liberal economic reforms has won it friends on Wall Street and made it a favorite of the International Monetary Fund, but in recent weeks investors have sold Argentine bonds, fearful that the country may have trouble raising the funds it needs next year to service its foreign debt. There are now worries in financial markets that the country could be heading towards a crisis just as dangerous as those that hit Mexico in 1994 and Brazil early last year.

The stakes are high. If Argentina’s problems get worse, other Latin American countries could be affected. Brazil's currency is at its weakest level in more than a year and its bond yields have risen. But a potential crisis could also have repercussions far beyond the region. Argentine debt accounts for between a quarter and a fifth of tradable emerging market debt, because its debt is widely held by investors all over the world. In the extreme case that Argentina was unable to meet its obligations, the effect could eclipse even the financial panic produced by Russia’s debt default two years ago.

“If something were to go horribly wrong in Argentina, I believe it would be the end of emerging markets as we know them," says Arturo Porzecanski, Latin America economist at ABN Amro, who is nevertheless not predicting such an outcome. Nor do Argentine political sources predict it.

Their hopes are based upon former economy minister Domingo Cavallo, now a congressman and head of his own political party, who has taken upon himself the thorny task of mediating between the ruling Alliance and the opposition Peronist Party. His attitude has been quite rightly described as “statesmanlike.” But it might not be unrelated to his scarcely-hidden aspiration of running for the presidency in 2003. If he succeeds in his task, he will have shown that not only he is the man with the legendary fiery temperament who shook Argentina by its lapels, halted its runaway inflation and engineered its 1990s economic boom by masterminding the bold “convertibility” strategy that linked the Argentina’s peso to the dollar, but also the persuasive negotiator that can bring the country together at a critical moment.

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

November 20, 2000


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