FINANCE-ARGENTINA: A Trip to Washington Aims to Head Off Disaster

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Dec 7 2001 (IPS) - Argentina’s Economy Minister, Domingo Cavallo, made a last-minute decision Thursday to fly to Washington, where he will meet with International Monetary Fund’s board to seek a way out of the grave economic and financial crisis that is threatening to push Latin America’s third largest economy into a debt default.

Cavallo’s decision came after top government officials met to assess the impact of the IMF’s Wednesday night announcement that it would withhold payment of a 1.26-billion-dollar loan instalment scheduled for this month, funds that were earmarked for making payments on Argentina’s public debt.

The government now faces some hard choices, which analysts say include a devaluation of the Argentine peso, a negotiation of the foreign debt that includes a partial forgiveness of the principal, or the “dollarisation” of the economy, though this option becomes increasingly difficult as the treasury’s reserves dry up.

President Fernando de la Rúa, who took office two years ago, has watched as the recession – now in its fourth year – and fiscal deficit have slashed reserves from 34 billion to 19 billion dollars.

These funds serve as backing for the monetary “convertibility” system that since 1991 has maintained one-to- one parity with the dollar. By law, for every Argentine peso in circulation there should be one dollar in deposit.

But international financial analysts say there are no longer enough “real dollars” to make true compliance with the convertibility law possible.

In the course of 2001, the De la Rúa government has promoted a series of debt restructuring plans, such as debt swaps, and in the last few months has had a “zero deficit” policy, which stipulates that the state cannot spend more than the revenues it takes in – a sum that shrinks with each passing month.

De la Rúa and Cavallo admitted Thursday that they are deeply concerned about the difficult moment the country is experiencing. Politicians and legislators, from the ruling or opposition parties alike, have clamoured for changes in the national economic policies and a debt restructuring that goes farther than the once currently in force.

Cavallo, who left for Washington Thursday, is “no longer credible inside or outside the country,” charged Raúl Alfonsín, former president of Argentina and current senator for the centre- left Radical Civic Union (UCR), which is also De la Rúa’s party.

“This restructuring of the debt is not enough,” Alfonsín said, expressing his fear that the economic crisis would only get worse.

Fellow UCR senator Rodolfo Terragno stressed that “a new economic policy is indispensable,” one that does not continue to shut down consumption and sap the cash reserves. “We must negotiate a new debt restructuring,” he said.

Economist Jorge Remes Lenicov, a deputy of the opposition Justicialista (Peronist) Party, made the same demand. The IMF’s refusal to grant the bailout loan is worse news than the massive run on bank deposits, he said, and urged the government to take steps toward “a complete renegotiation of the debt.”

Withdrawals from Argentine banks since January have totalled some 15 billion dollars, the result of nervous savers and investors’ fears that the government would default on its debt.

The restrictive bank rules announced over the weekend came in response to the run on the banks last Friday, estimated to have depleted the system’s deposits by 500 million dollars, pushing several banks to the brink of closure.

IMF spokesman Thomas Dawson in Washington denied that the multilateral organisation had pressed Argentina to devaluate its currency, saying that what concerns the Fund most are fiscal issues, as the De la Rúa government has failed to meet its commitments related to taxes and public spending.

The IMF decision endangers the payments – worth 1.4 billion dollars – that come due Dec 14 and 19 on a total debt reaching 140 billion dollars, or nearly half of Argentina’s annual gross domestic product. Ninety percent of that debt is in dollars.

The postponement of the IMF’s disbursement also puts the brakes on credits from the World Bank, the Inter-American Development Bank, and the Spanish government.

“We are negotiating within a framework of a virtual convocation of creditors,” admitted Cavallo at a forum of business leaders organised by the European Union and Mercosur (Southern Common Market) Thursday in Buenos Aires.

The minister assured that Argentina would honour its public debt, though he said the government first would pay pensioners and retirees, public employees, and make other social-related domestic payments. He did not clarify the government’s approach as far as foreign creditors.

Cavallo stated that the country is operating as usual and that there is no reason for alarm because Argentina will rise above these “very complicated, very difficult” moments.

The IMF’s announcement that its assistance depends on Argentina’s implementation of an austerity programme and a balanced budget came just hours after Cavallo outlined a loosening of the newly implemented banking restrictions.

The massive withdrawals last week occurred just as the local phase of the Economy Ministry’s public debt swap came to a close. The operation was a relative success, with transactions involving titles worth some 50 billion dollars. The government will wait as long as 60 days before launching the foreign phase of the swap.

In a bid to prevent a collapse of the banking system, Argentine authorities imposed limits on cash withdrawals to 250 dollars a week, a measure they modified Wednesday to a one-time 1,000-dollar withdrawal per month. There are also tight restrictions on how much money can be taken or sent out of the country.

Beyond the 250-dollar cash limits, account holders may access their money only through electronic transactions, using credit or debit cards, or through cheques, which may not be cashed, only deposited.

The restrictions have prompted anger and frustration throughout the Argentine population and long lines at the banks.

The measures convinced the country’s two main trade unions to convene strikes and other protest measures for Dec 13, one day before the first payment deadline on the debt, the fate of which lies in Cavallo’s visit to Washington.