ECONOMY-ARGENTINA: Crisis Swallows Up Every Possible Solution

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Dec 10 2001 (IPS) - Argentina’s economic crisis has turned into a monster, devouring all potential remedies as they arise. The government’s new measures, announced on weekly basis, only seem to deepen the recession, while options for avoiding a debt default are disappearing and even last-ditch plans are being ruled out ahead of time.

For the second consecutive week, Sunday ended with a message from Economy Minister Domingo Cavallo, and, like the last time, the measures announced only exacerbated the scepticism and frustration being expressed by society, the business community and investors.

Few believe the measures will bring positive results and many expect Cavallo will resign soon.

“This is a very bad sign,” said the president of the Argentine Industrial Union, Ignacio de Mendiguren, Monday, referring to the announced scrapping of the plans the minister had implemented earlier this year to stimulate economic growth.

The president of the Argentine Rural Confederations, Manuel Cabanellas, also rejected the new measures, which have led him, he said, to “believe less and less in the authorities governing this country.”

Former economy minister Aldo Ferrer, an expert on globalisation, commented that the neoliberal model that has been in force in Argentina since the 1976 military coup is no longer capable of even respecting its own rules and is “headed towards collapse,” with no political way out of the disaster on the horizon.

There has never been such widespread agreement among analysts that Argentina’s crisis has reached the terminal phase.

But what underscores the complex nature of the current moment is that neither the governing coalition nor the political opposition have come up with policy alternatives that would mitigate the high social costs of the economic crisis.

The dissatisfaction of the Argentine people will become even more evident beginning Wednesday, with street protests organised by shopowners and a workers’ march on Congress, as well as a general strike slated for Thursday.

Also in the works is a “popular consultation”, a referendum convened by labour unions and other civil society groups, on the creation of an unemployment insurance system aimed at reactivating the internal market.

Thrashed by nearly four years of recession and by financial crisis, Cavallo said Sunday he was shelving his proposal intended to benefit the business sector through tax breaks, measures announced nine months ago to boost competition and jump-start the economy.

The plans covered 30,000 companies and had a price tag of 1.9 billion dollars annually in terms of lost tax revenues. The minister had considered the package an important benefit, but that the business community had not known how to take advantage of it. The reality is that demand is paralysed and the government desperately needs the tax income.

The rescinding of those measures came after the previous week’s announcement of strict banking limitations, which tightened the grip on private accounts in order to prevent the system from breaking. Argentines may withdraw only 1,000 dollars in cash each month. All other transactions must be carried out through cheques, credit cards or debit cards.

Cavallo announced the elimination of the corporate tax breaks upon his return from Washington, where he met with the board of the International Monetary Fund (IMF). He sought to win the early release of a sorely needed 3.1 billion-dollar loan that would allow Argentina to make good on the debt that comes due this week.

The IMF urged action towards a sustainable economic programme as a precondition for speeding up the payout of the funds. According to the board members, sustainability would be achieved through cutting public expenditures, but that approach is as difficult for Argentina in the economic arena as it is in the political sphere.

There are some at the IMF who recommended a devaluation of the Argentine currency, but given Cavallo’s refusal, they suggested following – to the letter – the existing balanced budget policy for the next year, sharply restricting spending and finding more efficient means for collecting taxes.

The Economy Ministry is also studying the possibility of further tax hikes and reducing public employee salaries and pensions, cheques that have been slashed twice in the last two years – without prompting any signs of life in the economy.

President Fernando de la Rúa himself acknowledged Monday that since he took office Dec 10, 1999, he has spent his presidency “putting out fires and confronting a crisis that is structural” and which began during the previous administration.

His optimism was relative, as he said that while this crisis is not the first, it is also not the last.

But this crisis is extremely complex: Argentina’s foreign debt of more than 130 billion dollars is equivalent to half its annual gross domestic product, the economy is mired in a deep recession, unemployment now reaches 18 percent, millions of Argentines have been pushed into poverty, the fiscal deficit rises as tax revenues plummet, and investor confidence is practically nonexistent.

Amid this uncertainty, Cavallo insists on maintaining the “convertibility” regimen, his brainchild that has pegged the peso to the dollar at one-to-one parity since 1991. The system, maintained by law, requires one dollar in the government coffers for every peso in circulation.

Nervous savers have been converting their money to dollars on a massive scale, such that there are no longer enough dollars to support the increased demand. The devaluation of the peso seems unavoidable.

This situation, barely controlled by the tight restrictions on bank accounts, has virtually ruled out the “dollarisation” of the Argentine economy as an eleventh-hour alternative for the convertibility regimen.

Former president Carlos Menem (1989-1999), who had proposed that Argentina should adopt the U.S. currency, said Saturday that “it is too late” to do so without devaluating the peso first, because the true value of the dollar is now probably 1.2 to 1.3 pesos.

The 34 billion dollars in reserves that existed when De la Rúa took office have shrunk to 14 billion. Even if Cavallo were considering adopting the dollar for the Argentine economy within the existing currency parity regimen, it would be extremely difficult to execute.

On another front, the local phase of the debt swap aimed at cutting interest payments in 2002, was a success to the extent that most of the title holders participated, but it did not maintain its positive impacts in the view of economists or even of the multilateral lending agencies.

In the political arena, tensions are growing within the ruling coalition and the opposition alike. Angel Rozas, president of the Radical Civic Union, De la Rúa’ centre-left party, stated Monday that “politically, there is not much margin left for following the economic adjustment route, and socially there is even less.”

Louder criticisms are coming from the lawmakers of the Justicialista (Peronist) Party, which as of Monday is the leading minority bloc in both houses of Congress. The Peronists have made it clear that they will resist any new adjustment measures.

The reality is that Argentina is caught in a terminal crisis, and the alternatives that emerge for resolving the situation – even partially – are immediately swallowed up in the economy’s vertiginous downward spiral.