ARGENTINA: Financial Crisis Will Send Bill to Real Economy

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Oct 31 1997 (IPS) - After the experience of the Mexican crisis, which hit Argentina particularly hard, this Southern Cone country is in a more solid position to face the turmoil shaking the global financial markets today.

But analysts fear a slowdown of economic activity, a rise in unemployment, a tightening in fiscal spending and losses for private pension funds.

President Carlos Menem gave his assurances Friday that “Argentina will weather” the crisis which this week triggered a 30 percent fall in the Buenos Aires stock exchange.

Menem said he was confident that Brazil “will not devalue” its currency, because “that would be madness.”

“The Argentine economy is solid as never before. The banks have liquidity and there will be no kind of difficulty,” said the president.

But other sources believe Argentina will have to pay certain costs.

Engineer Alberto de las Carreras, with Argentina’s Chamber of Exporters, told IPS he agreed with Menem that Brazil would resist the pressure on its currency, the Real, but admitted that his sector was worried that a solution to the crisis would bring recession.

“Brazil can avoid devaluation. But if it is confirmed that its Central Bank sold 10 billion dollars – close to 15 percent of its foreign exchange reserves – and that it already had a large fiscal deficit, we have to expect it to buy much less and export more,” said De las Carreras.

Brazil is Argentina’s leading trading partner, and its associate in Mercosur (Southern Cone Common Market) along with Paraguay and Uruguay. In 1996 it bought 6.6 billion dollars in goods from Argentina – 30 percent of this country’s total exports – a figure expected to rise to eight billion dollars this year. Recession in Brazil would thus hit Argentina hard.

Analysts in Argentina point to the rise in interest rates – from 20 to 40 percent in Brazil and seven to 15 percent in Argentina – to predict a rise in the cost of credit and a drop in activity and consumption.

Menem said Friday that whoever wished to take out a credit could do so “with complete tranquillity.” But his words do not reflect the current situation in local banks.

Over the past two years, increasing numbers of people took out mortgages in Argentina. According to Central Bank statistics, families account for 22 percent of the total credits offered by the system, or around 15 billion dollars.

The lion’s share of that debt is in dollars, which led consumers to jam informational telephone lines this week, and those on the verge of signing loan agreements to decide to wait for the storm to pass.

Eight percent economic growth had been projected for this year in Argentina, which would have allowed the 17 percent unemployment rate to be reduced by two percent. Argentina’s Gross Domestic Product shrunk nearly five percent in 1995, in the wake of the Mexican peso crisis.

But the pace of economic activity could slow down, pushing unemployment up. “The first thing companies do in these cases is reduce overtime, and put off decisions on new jobs,” said analyst Marcelo Bonelli.

The Argentine economy, which lost eight billion dollars in deposits at the height of the Mexican crisis, has a healthy banking system today, 30 percent smaller, with major investments from large foreign banks that took over local institutions.

No massive withdrawal of deposits has occurred here since last week when the southeast Asian crisis hit the Hong Kong stock exchange and sent ripples through markets in the rest of the world. But deposits for a fixed period in Argentine pesos were converted into accounts in dollars, which provide lower – but safer – returns.

Nor has there been a bloodletting in Argentina’s 22 billion dollars in foreign exchange reserves. According to a source with the Central Bank, that institution has sold 200 million dollars, less than one percent of the reserves.

The Ministry of the Economy has preferred not to touch a six billion dollar emergency aid fund, created in 1996 to respond to eventual financial crises with fast support to be provided by banks to bail-out institutions in trouble.

Economy Minister Roque Fernandez, who was Central Bank president during the Mexican crisis, has also decided against emergency measures in order to avoid giving off signs of nervousness. Fernandez said he believed the current crisis would last no longer than a week, and added that he was prepared to lower wages if necessary.

But the crisis has weakened the deposits managed by private pension funds, on which the future of millions of Argentinians depends. The losses have already reached 800 million dollars, 10 percent of the total amount.