ARGENTINA-BRAZIL: Cavallo’s Exit Wobbles Confidence

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Jul 29 1996 (IPS) - The fall of Argentina’s former minister of economy, Domingo Cavallo, caused no alarm in Brazil, but set the business community on tenterhooks awaiting the first steps of the replacement, Roque Fernandez.

Brazilian president Fernando Cardoso and his advisers rushed to confirm that in bilateral relations would remain unchanged, along with the Southern Cone Common Market (Mercosur) and the economic policy of both nations .

These relations and policies “do not depend on indivuduals,” said Brazil’s finance minister, Pedro Malan, adding that Fernandez, who has been director of the Argentine Central Bank for the past five year, “is a guarantee of continuity” in national liberalisation and economic stabilisation programme.

However, independent economists said the destitution of Cavallo, decided by President Carlos Menem Friday, had happened at a difficult time for Argentina and the world situation, generating uncertainty for the future.

Carlos Thadeu de Freitas, former director of the Brazilian Central Bank said the deciding factor was whether the Argentine government could maintain its credibility in the eyes of investors.

Argentina now has accumulated reserves of 20 billion dollars which allow it to put up with some foreign capital flight, but not for an extended period of time.

Capital could leave the country if the new minister does not show the political strength to cut spending and alleviate the public deficit – a difficult job in a nation with 17 percent unemployment and high levels of social tension, said Freitas.

Fernandez, an orthodox economist closely linked to the convertibility plan of the Argentine peso, represents continuity, though he has neither the weight nor the political vocation of Cavallo.

The Argentine plan is based in the straitjacket of one to one parity between the peso and the dollar, under a law which only allows money to be issued if hard currency comes in, said Freitas.

The continued flight of foreign capital, if the new minister does not inspire the confidence of investors, could weaken the Argentine government to the point of finally obliging them to devalue the peso. In this case, Brazil would be harshly affected, said the economist.

Brazil is trying to balance its foreign trade, which registered a deficit of 327 million dollars in June and appears to be following the same trend this month – hence the concern over a devaluation in Argentina, Brazil’s second largest export market.

The upward tendency in interest rates in the United States has also increased the risk at present, feeding the withdrawal of capital from Latin America, said Paulo Nogueira Batista, international finance and foreign debt expert from the Getulio Vargas Foundation.

Argentina and Brazil depend on foreign income to fund their public deficit and their current account with other countries. Uncertainty in either of the countries will make capital flee from all of Latin America, as was the case in the Mexican crisis of 1994, said Nogueira Batista.

But all the commentators are aware of the differences between the Argentina of today and the Mexico of December 1994, though there is the common factor of a high level of dependence on foreign capital. As well as increasing international reserves, Argentina also registered a trade surplus, while Mexico showed a deficit.

The problems are linked to the rigidity of the Argentine model, the high levels of unemployment and the political crisis in the Menem administration, which has lost three ministers this month, said Mario Humberg, co-ordinator of a business movement.

Cavallo’s rapid exit followed on the heels of the resignation of Justice Minister Rodolfo Barra, accused of past connections with an anti-semite organisation, and Defence Minister Oscar Camilion for a scandal over arms sales to Ecuador.

Under the ‘convertability law,’ the exit of foreign capital means a forced reduction in the circulation of national money, which deepens the recession and unemployment, and therefore, political tension.

Similar consequences result from measures which aim to avoid the disappearance of investors, like the raising of interest rates.

Ths complex equation, allowing little room for manoeuvre, also worries the Brazilian authorities. Hours before Cavallo’s replacement was named, Malan recognised the total “interdependence” of the two economies in an interview with Buenos Aires newspaper ‘Clarin.’