August 7, 2001 atimes.com Global Economy

Argentina's troubles leave everyone at risk By Marcela Valente

BUENOS AIRES - A mixture of impotence and resignation is clouding the mood of Latin American countries as they feel the effects of the financial crisis in Argentina, which hovers like a specter without any possibility of exorcism in sight.

The pessimistic forecasts by some investment banks about Argentina's future stand in contrast to the remaining hopes held by the region's presidents, who are resolute in supporting President Fernando de la Rua's plans aimed at avoiding currency devaluation and a default on a debt that surpasses US$128 billion.

Meanwhile, analysts at the stock brokerage BCP Securities and at the Deutsche Bank have calculated that there is an 80 percent chance Argentina will have to interrupt its debt payments. Argentine officials have blamed this and other similar predictions on speculative maneuverings.

Along the same lines, the JP Morgan investment bank on Friday put the brakes on a favorable trend for the Brazilian "real", which has shown a daily depreciation on the dollar. The bank recommended that its clients get rid of their Brazilian foreign debt titles to protect themselves from the effects of a potential contagion from the Argentine crisis.

Last week, after winning congressional approval of its latest economic austerity plan, the Argentine government charged that the bond-holders - who had staked their bets on a debt default - are now seeking a decline in value of these papers so that they do not lose money with an eventual economic recovery. The alleged speculative maneuver consists of selling off the bonds, which caused the drop in value, in order to recover them at a lower price. A positive evolution of the crisis that slows the decline in prices on the titles would put an end to the profitability of such dealings, which even economists at the Argentine Fundacion Capital admitted to.

Since he took office nearly two years ago, De la Rua's government has implemented six emergency plans in failed attempts to stave off economic crisis or at least prevent it from deepening. The latest initiative consists of prohibiting the state from spending more than it takes in each month. According to the recently passed legislation, pensions and public employee salaries will be slashed by at least 13 percent, and cuts could reach 20 percent if tax revenues remain on their current downslide.

The fear of an international crisis arises from the fact that Argentina represents 22 percent of the emerging economy foreign debt titles traded in the world. Together with Brazil, the portion totals one-third of all such papers. If investment flight occurs for fear of crisis contagion, it would be a blow to all of South America.

Emerging economies proved in the 1990s that they were very vulnerable to financial problems originating in other countries. The Mexican devaluation in 1994 had negative impacts on Latin America and Asia. The same occurred as a result of the financial crisis that began in July 1997 in Southeast Asia, Russia's suspension of payments in 1998 and the depreciation of the Brazilian real in 1999.

Now the spotlight is on Argentina. All the tools the government could wield in response to today's situation would have negative consequences: a default on payments, devaluation, or, in the case of new financial backing, a deepening of adjustment measures, of the three-year recession and of unemployment, which currently hovers around 16 percent.

Though there is no certainty about the unfolding of events, Argentina's partners in Mercosur (Southern Common Market), Brazil, Uruguay and Paraguay, and the bloc's associate members Bolivia and Chile, are already feeling the effects of the lack of investor confidence. In fact, the Economic Commission for Latin America and the Caribbean (ECLAC) released its revised forecast on Thursday, indicating that the region's economic growth for this year would be just 2 percent, half what it was in 2000.

The decline would be due in large part to the slowing of activity in the industrialized North, but also to the crisis in Argentina - where ECLAC says the economy will shrink by 1 percent in 2001.

Already the Argentine austerity measures have caused the depreciation of currencies in Brazil, Chile, Uruguay and Paraguay, to varying degrees. The country that has suffered most in this respect is Brazil, with a 20-percent decline on exchange with the US dollar so far this year.

Chile, South America's most stable economy, once again scaled back its economic growth predictions for this year - from four to 3.5 percent - due to the situation in Argentina. The Chilean peso has lost 2 percent of its value since July. President Ricardo Lagos expressed concern last week about the Argentine crisis, but said he is confident that the De la Rua government would achieve positive responses from multilateral financial institutions - such as the International Monetary Fund (IMF) and World Bank - and from the United States Treasury.

In Uruguay, meanwhile, the Ministry of Industry calculated the losses that each of its export sectors would suffer if Argentina were to recover its competitiveness through currency devaluation. Currently, the Argentine peso maintains its one-to-one exchange on the dollar, a regimen that has been in place for a decade. A 20-percent drop in the Argentine peso would mean that Uruguay would lose sales in textiles to Argentina and Brazil, beef exports to the United States, rice sales to the Dominican Republic, milk to Venezuela and Mexico, and fish to China and Europe, according to a ministry report.

Uruguay's President Jorge Batlle, Chile's Lagos, and Brazilian President Fernando Henrique Cardoso have repeatedly expressed support for the series of measures enacted by De la Rua and his Economy Minister, Domingo Cavallo, to avoid a worsening of the crisis in Argentina. But their attitudes often resemble pressure tactics more than supportive gestures. The neighboring countries are pleading for the Argentine crisis to stay within its borders so that it does not spread throughout the rest of the region, damaging the growth of the other countries' economies, exports, employment levels or fiscal account balances.

Bernardo Kosacoff, an economist at ECLAC (a United Nations regional agency), told IPS that the problem with the Argentine crisis is that investors seeking profits in emerging nations make no distinction between the countries, but rather assess the entire region to which they belong. As a result, when there are doubts about the trajectory of one country in the region, what tends to occur is a so-called "flight toward quality". In other words, capital is deviated toward other safer and more profitable markets in other regions.

"The IMF [International Monetary Fund] assured last week in Australia, through its president James Wolfensohn, that there is no danger of contagion of Argentina's problems. But that clarification in itself confirms the existence of a dangerous situation in Argentina that is on the verge of ending up as a regional crisis," Kosacoff said.

Although Argentina continues in its three-year recession and the "best" prospects are that it will continue on that route at least until 2002, he believes that the larger problem is the country's inability to gain access to further financing, which also jeopardizes its neighbors.

Access to capital is becoming more expensive for everyone. Investments are lagging behind and growth is waning in all countries of the region. In Paraguay, which is highly vulnerable economically, speculative reactions have been observed in financial markets over the last few months. The depreciation of the Paraguayan currency, the "guarani", has been constant since early July, and the monetary authorities have been helpless to do anything about it. "The Central Bank cannot row against the current if the entire region is unstable," said an editorial in the Asuncion daily Noticias.

The currency decline is already causing price hikes for products of mass consumption, and it foreshadows a scenario of recession and higher unemployment in the middle term.

Paraguay's Treasury Minister, Raul Vera, met last month with representatives from the IMF, World Bank and Inter-American Development Bank to renegotiate goals above the level of international reserves that Asuncion had promised to maintain. "The IMF recognized the harm implied for our country by the evolution of the economies of our leading trade partners," said Vera, alluding to Argentina and, to a lesser extent, Brazil.

(Inter Press Service)

http://atimes.com/global-econ/CH07Dj02.htm

-- Martin Thompson (mthom1927@aol.com), August 06, 2001

Answers

It looks like the domino theory is about to be proven, on a world-wide basis.

Don't forget, during the other recent shakiness periods of the recent past - I mean the Asian financial crisis of 1997, the Russian debt default in 1998, and the 1999 Brazilian currency crisis - the spend-happy U.S. consumer was always there to take up the slack, buy everything in sight, stop the domino fall, set things right again.

Not this time.

-- Wayward (wayward@webtv.net), August 07, 2001.