ECONOMY-ARGENTINA: Market Ahead of Public in Decrying Gov’t Cuts

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jul 13 2001 (IPS) - The Argentine government decided to place higher priority on paying the foreign debt than on paying wages and other domestic expenses, triggering a paradoxical condemnation from the financial markets Thursday, which are apparently more concerned with the political panorama than with the management of the nation’s economy.

The Buenos Aires stock exchange fell nearly 14 percent Thursday – followed by a lukewarm recovery -, bonds plummeted and scepticism spread throughout the markets of Latin America, Spain and the United States, leaving many convinced that Argentina should overcome its reticence and stop paying its foreign debt and devaluate its currency.

The markets seem to doubt there is political support behind the adjustments President Fernando de la Rúa announced Wednesday, said Walter Molano, an analyst for BCP Securities, a brokerage firm. Other experts interpreted Thursday’s market reaction as a preference for a restructuring of the state and not a cut in salaries, due to the recessive nature of this measure.

Standard & Poor’s announced Thursday that it had lowered Argentina’s financial risk rating on long-term foreign debt titles from a “B” to a “B minus”, reflecting fear that the announced cutbacks would cause greater “strain on the cohesion of the governing coalition” that would ultimately block their implementation.

Argentina finds itself at the epicentre of an emerging market financial crisis. Nerves intensified instead of abruptly dissipating as the government had hoped they would when it decided on the “draconian” cuts intended to balance the federal budget. The money to pay the country’s foreign debt – reaching 128 billion dollars – is to remain untouched.

In a new attempt to avoid a cessation of payments, Economy minister Domingo Cavallo promised Wednesday to push the fiscal deficit down to zero, and to do so the government would only spend what it collects in tax revenues, he said.

However, Cavallo said “of course we will pay all debt punctually as it comes due.”

Public sector wages, pensions of more than 200 dollars a month, payments to government suppliers and even subsidies for the poor and the unemployed will suffer cuts on a month-to-month basis, in increments to be determined by how much money reaches the state coffers via taxes. The reductions, to begin immediately, are predicted to be eight to 10 percent for July.

The adjustment, which experts say is the most drastic and severe of the seven De la Rúa has imposed since he took office 19 months ago, had the contradictory effect of triggering a strong negative response in the financial markets and a more cautious reaction among political and labour sectors.

The governing centre-left ‘Alianza’ coalition, made up of the Radical Civic Union and the Frepaso parties, called Thursday for a “quick and prudent” resolution of the country’s “harsh reality,” and only seemed to disagree with the adjustment measures in demanding that they should target the wealthier sectors, not the poor.

“We must seek consensus among all parties so that we may immediately draft a set of proposals to confront this political, economic and social crisis, proposals based on equity so that the effort falls to those with greater economic means,” says the Alianza communiqué.

Leaders of Frepaso, a group whose loyalty to the government is hanging by a thread, had warned that this adjustment would mean the end of their participation in the coalition, but so far there have been no desertions, or even resignations, as there were just three months ago in reaction to a smaller cutback.

The opposition ‘Justicialista’ (Peronist) Party, meanwhile, remained tight-lipped. But the government of Buenos Aires province – the most populous in Argentina and led by Peronist Carlos Ruckauf – launched a plan to pay its employees’ wages with bonds.

Financial experts predicted that the province’s public employees – from administration, to teachers, doctors, nurses and police – will not be able to exchange those bonds at their nominal value, and will receive much less.

Labour unions, for their part, have already expressed opposition to the federal government’s spending cuts, but have yet to announce any protest measures.

The Central Bank of neighbouring Brazil was forced to intervene in the market Wednesday to prevent the further downslide of the ‘real’. The Sao Paulo stock exchange fell 2.23 percent, though began to a slow recovery at the start of trade Thursday.

In Chile, the peso saw a decline with respect to the dollar, hovering at the same level Thursday, while in Uruguay the Central Bank had to sell off some of its cash reserves.

But the lack of investor confidence triggered by events in Argentina spread beyond Latin America’s Southern Cone. On Spain’s stock exchange, where trade includes the major companies that bought Argentina’s public services when they were privatised in the 1990s, Wednesday saw a 2.35-percent decline.

Mexico’s stock market index dropped 2.2 percent Wednesday, and the New York exchange proved unable to correct itself until the end of the trade day.

In the context of a crisis that accelerated over the last two weeks as a result of rising credit costs, De la Rúa had insisted Monday and Wednesday that it is impossible to obtain foreign financing in Argentina. As such, he said, the country must learn to live within its means – a policy Cavallo promised to apply with the announced fiscal adjustments.

De la Rúa’s position became evident when the Argentine Treasury had to pay interests Tuesday of 14 to 16 percent in order to place bills worth 850 million dollars in a bid to obtain the financing necessary to cancel debt titles coming due Friday for a slightly higher sum.

The banks had at first demanded rates closer to 20 percent, prompting Cavallo to admit that the government could no long accept such rates. He then announced the De la Rúa administration’s determination to spend only what is collected and to auction off bills only in cases of urgent need.

“There is just one route to solving our problems: spend only what we have,” De la Rúa said as he announced the measures, which he defined as the sole way to prevent the devaluation of the Argentine peso or the cessation of debt payments.

The tense circumstances seemed to lay the groundwork for an immediate popular, union and political reaction, as occurred three months ago when a lesser adjustment caused the downfall of Cavallo’s predecessor, Ricardo López Murphy. But this time the markets were ahead of the public in expressing rejection of the fiscal cuts.

Argentina has been in severe recession for the last three years and unemployment hovers around 15 percent. The “convertibility” law, which pegs the peso to the US dollar and led to the stabilisation of prices in the 1990s, restricts the possibilities of a currency devaluation and feeds a high demand here for foreign capital.

Since the second half of 1998, investment began to slide as a result of the financial crisis in Russia and the devaluation of the Brazilian real, and the Argentine economy started to retract, creating a vicious cycle in which credit costs rise, economic growth stagnates, government revenues drop and the fiscal deficit expands.