ECONOMY-ARGENTINA: Currency Board Creator Offers Himself as ‘Saviour’

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Nov 4 2000 (IPS) - The chief architect of Argentina’s currency board, former economy minister Domingo Cavallo, offered Friday to occupy the vacant post of vice-president — a gesture that highlighted the enormous sense of uncertainty surrounding the economy of this Southern Cone nation and the social discontent with the government of Fernando de la Rúa.

“If this government is going to follow the policy put in place by Cavallo, then why don’t they just call him, because he knows how to do it better,” a disillusioned engineer working in telecommunications, who voted a year ago for the governing centre- left Alliance, attracted by its promises of “growth with equity,” remarked to IPS.

The miscalculations and mistakes of the government, which from the start has applied a tough fiscal adjustment policy without results, and which remains caught up in a grave internal crisis, has led many voters to believe that the longed-for changes that were to follow the departure of former president Carlos Menem (1989-99) have only been for the worse.

Cavallo’s “self-nomination” for the post of vice-president has come at a time when the government has admitted its fears that the year will end with an overall drop in Gross Domestic Product (GDP) and a rise in unemployment, and that things will not look much better for the first half of 2001, when bulky debt servicing payments fall due.

An executive at the Morgan Stanley investment bank told representatives of the De la Rúa administration this week that “orthodox methods” were not giving fruit in Argentina — in other words, that the fiscal adjustments, including wage cuts and tax hikes, have failed to translate into growth of either investment or employment.

Former president Raúl Alfonsín (1983-89) also caused a commotion this week when he pondered out loud about “how nice it would be” to suspend debt servicing payments “for a couple of years” in order to invest in the economy and improve conditions for growth.

In the first few months of 2001, Argentina will have to pay at least 20 billion dollars in interest as well as part of the capital of the foreign debt (which is generally financed by new loans).

Argentina’s foreign debt, which totals more than 200 billion dollars, accounts for the single biggest chunk of expenditure in next year’s budget.

In the past few days, rumours have continued growing about the risk of a cessation of payments if Argentina fails to earn the confidence of foreign investors, crucial to continued access to financing at reasonable rates.

In fact, the government is reportedly negotiating the creation of a several billion-dollar emergency fund with multilateral lending institutions and the United States treasury.

Due to the continued delicate state of the Argentine economy, Alfonsin’s remarks on a popular talk show caused quite an ado, and triggered a spate of loud denials.

Economy Minister José Luis Machinea said the idea of suspending debt servicing payments was unthinkable: “Argentina must pay, and it will pay, because I don’t know of any company or country that can grow without access to credit.”

Against that backdrop, Cavallo’s “offer” to fill the vacated vice-presidential seat was met with loud applause from his audience of business representatives, although several leaders of the ruling Alliance close to former vice-president Carlos Alvarez — who resigned last month — resoundly rejected the possibility of incorporating Menem’s ex-economy minister into the government.

In 1991, Cavallo implemented Argentina’s currency board, which ties the peso by law at parity with the dollar, and stipulates that there must be one dollar in foreign reserves for every peso in circulation — and which put an end to runaway inflation.

The former economy minister said “Alvarez’s return as vice- president in 2001 is perfectly possible,” since the cabinet changes that Alvarez was demanding in order to remain in the government ended up being implemented after his departure.

But, he said, “if he doesn’t return, I would present myself” as an option.

Thus, Cavallo added yet another element of chaos and doubt regarding the fate of the government of De la Rúa, who was voted into office at the head of an Alliance comprised of his party, the centrist Radical Civic Union (UCR), and the left-leaning Front for a Country with Solidarity (Frepaso), headed by Alvarez.

Cavallo, who has gained international renown giving seminars and conferences around the world, took 33 percent of the vote in the May elections for mayor of Buenos Aires, and won 10 percent of the ballots when he ran as presidential candidate in October 1999.

Buenos Aires Mayor Aníbal Ibarra, one of Frepaso’s most prominent leaders, said Cavallo’s proposal was legally impossible, and that if it were accepted anyway, the end result would be “a different alliance, not the one the people voted for.”

There have been rumours circulating since before Alvarez handed in his resignation that Cavallo had been tempted with the offer of a position in the government.

The rumours were denied by the ruling Alliance, and several cabinet members — including Interior Minister Federico Storani — threatened to resign if Cavallo was brought on board.

Ten days ago, Cavallo met with Machinea and expressed his support for the government’s handling of the economy.

Analysts say Machinea used the occasion of the meeting with his predecessor Cavallo — who enjoys prestige in international financial circles as the creator of Argentina’s currency board — to legitimate his performance which, although quite orthodox, has not thoroughly satisfied bankers, investors and creditors.

Cavallo also met with former president Alfonsín, who is the head of the UCR, the leading party in the Alliance.

That meeting took the country by surpise, because Cavallo is a long-time critic of Alfonsín’s government, which ended early amid four-digit inflation and rioting in several cities. The former president, meanwhile, is a critic of the currency board arrangement which, while it tamed the spiralling inflation, also limited the government’s freedom to determine monetary policy.

Shortly before his meeting with Cavallo, Alfonsín said the second big tragedy since the 1930 coup d’etat was the currency board designed by Cavallo, which — he said — has become a trap from which it is impossible to escape without paying high costs.

The Ministry of the Economy is attempting to hush such criticism, as well as complaints about the foreign debt — another taboo subject that Alfonsín frequently mentions.

On Thursday, the markets reacted to Alfonsín’s remark about “how nice it would be” if Argentina could have a couple of years free of debt servicing payments, in order to invest that money in the economy.

Minister Machinea also reacted, saying such a measure would only bring the people “more pain,” while Secretary of External Financing Daniel Marx said that “anything that undermines confidence is paid with recession and unemployment.”

Nor did the idea find an echo in the private sector. Economist Miguel Broda, an adviser to investment companies, agreed with Marx that “anything that hurts investor confidence only serves to further aggravate the recession, lack of investment and rise in poverty.”

But the problem, some analysts pointed out, is that the poverty already exists — affecting an estimated one-third of the population of 37 million — and is growing, even though external financial commitments continue to be respected.

And this week, various protests held by the unemployed and civil servants reminded the government, which turns a year old in December, that there was another debt still unpaid — months of back-pay they are owed — despite government promises.