By Marcela Valente
BUENOS AIRES/SANTIAGO, Jan 16 1999 (IPS)

Economic analysts in Argentina were pessimistic Wednesday over the devaluation in Brazil, while stock markets in Chile immediately felt the impact, with a fall of more than six percent and a considerable rise in the value of the dollar.

Brazil’s crisis took a sharp turn for the worse Wednesday with the resignation of Central Bank President Gustavo Franco and the widening of the band in which the local currency, the real, traded against the dollar.

The measure, taken by the Bank’s new president Francisco Lopes, led to an immediate nine percent devaluation of the real against the dollar.

Argentine economist Guillermo Calvo, who gained international reknown when he predicted the late 1994 Mexican peso debacle, said “Brazil has been on the tightrope for quite some time, but now is closer to the edge.”

Nevertheless, he and other analysts were confident that Argentina and Chile would be able to differentiate themselves from their biggest Southern Cone Common Market (Mercosur) partner, in the eyes of foreign investors. (Mercosur is comprised of Brazil, Argentina, Uruguay and Paraguay, while Chile and Bolivia have associate status).

According to Calvo, a professor at the University of Maryland in the United States, a small devaluation in Brazil could be enough to trigger an attack on the real in stock and foreign exchange markets – which would force the government of President Fernando Henrique Cardoso to deepen the devaluation.

But he agreed with other analysts in Argentina that even despite foreseeable losses on the stock market in Buenos Aires and a rise in interest rates, Argentina “has no reason to fall with Brazil.”

The losses were already felt Wednesday on the Santiago stock exchange, which registered a more than six percent drop in the early hours of the afternoon. The value of the Chilean peso fell, meanwhile, to 475 against the dollar, three pesos up from the evening before.

Traders in Chile’s financial and exchange markets said they were worried that what had been dubbed the “samba effect” would have an even greater than expected impact on the country, due to social and political factors such as a predicted rise in unemployment, the polarisation created by the arrest of former Chilean dictator Augusto Pinochet in London, and the campaign for the Dec. 11 presidential elections.

The Confederation of Production and Commerce, Chile’s umbrella business association, urged the government of President Eduardo Frei to immediately lower interest rates to cushion the fallout from the devaluation in Brazil.

But in a declaration issued after an emergency meeting, Finance Minister Eduardo Aninat and the president of Chile’s Central Bank, Carlos Massad, called on economic and financial agents to “avoid unnecessary overreactions.”

They did not announce any concrete measures, and insisted that the Chilean economy had sound foundations and would continue to withstand the international meltdown and ward off its expansion to Chile.

Brazil, the world’s eighth largest economy, is in a touchy situation, said Calvo. He added that all the options were traumatic, but that “for Argentina, it is preferable for Brazil to fall now than for this uncertainty to continue.

“If Brazil deepens its adjustment, it will have a terminal political crisis on its hands; if it fails to do so, its economic plan will fall flat; and in the middle is an unmanageable short- term debt” of around 170 billion dollars, he warned.

But Calvo believes Argentina and Chile will be able to differentiate themselves from Brazil if predictions of a collapse by their giant partner come true.

“A higher interest rate will be paid and foreign credit will shrink, but even the worst situation will be better than what happened in 1995,” he said, referring to the impact of Mexico’s December 1994 devaluation on Argentina.

Argentine economists were initially disturbed by the news of Franco’s resignation and Brazil’s decision to widen the mini-band in which the local currency traded. Argentina sends 30 percent of its exports to its biggest Mercosur partner. The Andean Foundation said the first impact of a collapse in Brazil would be felt by exporters.

With respect to market performance, there is no doubt among analysts that the crisis in Brazil will lead to a rise in interest rates in Argentina – a trend that already began Tuesday evening, when the government of Carlos Menem placed treasury bills at a higher rate than last week.

Daniel Novak, with ‘Consultores Economicos de Empresas Industriales’ (Economic Consultants of Industrial Companies), said Brazil’s risk “of not making it through the (southern hemisphere) summer and having to abandon the Plan Real,” which would lead to a drop in Argentina’s economic growth rate, was heightened Wednesday.

The Plan Real is the economic stabilisation plan implemented by Brazil since mid-1994.

Calvo said that instead of a devaluation, President Cardoso should opt for a moratorium on payments – which he described as “a reconversion of debt, a drastic measure that cannot be put off, like a doctor’s decision to amputate.”

The analyst maintained that such a move would allow the Brazilian government to reschedule its short-term debt and gain time. “For Argentina, that option would not be a catastrophe,” he said, while admitting that it would affect exports of cars and dairy products to Brazil.

Argentina’s Capital Foundation, meanwhile, proposed a variant on Calvo’s suggestion: a “dollarisation” of Brazil’s debt, which would allow a rescheduling of payments and a reduction in debt service costs. But the analysts said recent events tended to lead to a major devaluation of the real, forced by the markets.

Economist Roberto Lavagna, with the Ecolatina consultancy firm in Buenos Aires, said the key in Brazil was for the Cardoso administration to renegotiate the debts owed by the states, in order to isolate Itamar Franco, a former president and current governor of the powerful state of Minas Gerais, who recently declared a unilateral moratorium on debt payments to the central government.

Calvo said that in Argentina, which has a high level of foreign currency reserves and a manageable short-term debt, the snowballing of the crisis in Brazil could even mean “good news,” because it may force South America’s giant to resolve its long- standing problems once and for all.

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