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The International Monetary Fund’s latest $8 billion aid package for Argentina fails to address the country’s fundamental economic problems, including an unsustainable debt burden, overvalued currency and a stagnant economy in its fourth consecutive year of recession.
Government efforts to eliminate the budget deficit will help the Peronist opposition party take control of Congress, and the country will still likely default on its debts by early next year.
The International Monetary Fund announced last week that it will provide an $8 billion emergency aid package to Argentina, raising the IMF’s total outlays to the country since last December to $22 billion. The funds may enable the country to limp along financially until congressional elections on Oct.14, after which the government likely will seek to initiate debt-restructuring talks with its foreign creditors.
Although the aid package has calmed global financial markets momentarily, it fails to address Argentina’s fundamental problems, and it will not keep the country from defaulting on its foreign debts by next year, if not sooner.
The $8 billion aid package is intended to shore up Argentina and to prevent the rest of Latin America from plunging into economic and political turmoil. Of the total package, $5 billion will be disbursed in September, and the remaining $3 billion will be used in what Argentine Economy Minister Domingo Cavallo described as a “voluntary swap mechanism” for reducing the cost of debt service.
But the $3 billion earmarked for voluntary debt reduction is woefully insufficient, according to financial analysts such as Walter Molano, head of economic and financial research at BCP Securities. During a recent presentation in Bogota, Colombia, Molano said a restructuring of Argentina’s public sector foreign debt is inevitable and would take at least three years to successfully complete.
He also said such a process would involve writing off about $47 billion of principal on the country’s public sector foreign debt, which he estimates as now totaling $127 billion.
Cavallo continues to insist that Argentina will not devalue its currency or restructure its foreign debt, but the country’s monetary system is already disintegrating. Since his appointment last March, Cavallo has tinkered with the peso-convertibility plan he created in 1991, which legally pegs Argentina’s currency to the U.S. dollar at one-to-one parity.
First, Cavallo announced the future creation of a “basket” linking the peso to the U.S. dollar and EU euro. He subsequently established a special exchange rate for exports and imports. But instead of strengthening confidence, these measures are viewed as a creeping devaluation.
Moreover, since Cavallo announced a “zero deficit” plan a month ago, more than half of the country’s 23 provincial governments have begun making plans to issue bonds, which will complicate the federal government’s efforts to achieve planned spending cuts.
The provincial government of Buenos Aires, the country’s wealthiest province, has in fact already issued a new emergency currency as a substitute for lost peso tax revenues doled out by the federal government.
With the IMF’s package in hand, President Fernando de la Rua must now persuade the country’s political establishment — including his own ruling political alliance, the Peronist opposition party and 23 cash-starved provincial governors — to support steep spending cuts designed to eliminate the fiscal deficit immediately.
Such cuts will raise unemployment, depress growth and likely fuel more social protests. Argentina’s politically weak and unpopular president will have a very difficult time gaining the across-the-board support needed for the successful implementation of the highly unpopular “zero deficit” plan ahead of the October congressional elections.
The entire 72-member Senate is up for election, plus half of the 257-member Chamber of Deputies. The Justicialist Party of the Peronist opposition likely will retain control of the Senate and win control of the Chamber of Deputies, where the ruling left-of-center Radical Civic Union has a slim majority. Peronist leaders expect to win control of Congress by capitalizing on widespread public discontent with de La Rua.
For Peronist leaders, however, the happy prospect of controlling both the Senate and Chamber of Deputies is dampened by concerns about the economy’s deepening crisis and the fact that de la Rua’s presidency doesn’t end until 2003.
Senior Peronist leaders have already held talks with government officials on the post-election formation of a “national unity government” that would bring Peronists into de la Rua’s Cabinet.
A three-way alliance between de la Rua, Cavallo’s small political organization and the Peronist opposition would provide the president with enough political support to reach the end of his term in 2003. For the Peronists in control of Congress as of Oct. 15, an alliance with de la Rua’s government would give them more direct influence over the government’s economic and social policies.
The Peronists will most likely carry out the same unpopular reforms as de la Rua, but they will use the alliance as political cover and focus any resulting social discontent at the president and his party. The reforms will help Argentina in the long run, but neither the Peronists nor the IMF funds will keep the country from defaulting on its debt possibly by early next year.
The financial contagion from such a default will spread quickly to Brazil, Mexico and Turkey and will rock other emerging markets around the world. If Argentina’s government seeks to restructure its foreign debts, other governments in the region may quickly follow suit. And in Washington, already weak political support for expanding trade with Latin America will fade quickly.
