ECONOMY-ARGENTINA: A Quick End to Financial Storm, Promises Cavallo

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Apr 24 2001 (IPS) - Argentina’s Economy Minister, Domingo Cavallo, admitted Monday that there is anxiety in the financial markets, but he asserted that the government is not contemplating any renegotiation of the foreign debt, despite rumours to the contrary.

The panorama will be cleared up by Wednesday, Cavallo promised, amid the expectations, based on rumours that erupted over the weekend, about a debt restructuring, and which persist despite the government’s denial.

Argentina possesses a public external debt of 128 billion dollars, of which nearly 20 billion must be cancelled this year, with fiscal income and new loans.

But the nation’s recession, the decline in revenues and the rising costs of credit have fed fears of a real inability to meet the payment commitments.

This Monday, Argentina’s “country-risk” (an indicator of the safety of investments, measured by the surcharge Argentina pays for its credits in relation to US bonds), surpassed 1,200 points, putting it in a worse category than Russia, for example.

The evolution of country-risk shows a high and growing cost of financing, but “Argentina has no intent of failing to meet its obligations” or of renegotiating or restructuring the nation’s debt, Cavallo stated Monday.

“Unfortunate rumours” are circulating, the Economy chief said, and have hurt Argentina’s economic performance over the last 13 days in their references to a possible default on the foreign debt or a forced renegotiation.

The minister ruled out these alternatives and expressed his confidence saying “everything will be under control” by Wednesday.

Cavallo alluded to statements by columnist Charles Colomiris, of the US-based newspaper, The Wall Street Journal, who proposed a 30-percent reprogramming of the Argentine debt, and to economist Rudiger Dornbusch, who included a severe fiscal adjustment among his recommendations.

Cavallo promised to respond to their advice Tuesday in the same newspaper. He also had his work cut out by former Argentine president Carlos Menem (1989-1999), who proposed last week that the nation’s people should convert their savings in pesos to US dollars.

Cavallo’s appeals for calm were reversed Monday, as the markets opened and subsequently reacted with even greater uncertainty than last Friday, when the country-risk reached 1,046 points, the highest level since President Fernando de la Rúa named Cavallo to the ministerial post just over a month ago.

Last week was critical. Even the markets seemed to distrust the minister’s project of incorporating the euro as a currency to back the Argentine peso, which for the last decade has been supported solely by the dollar.

US President George W. Bush, in a joint press conference with De la Rúa, said his government would back the Argentine economy, and would do so not only through bilateral channels, but also by assisting this South American country’s efforts before multilateral credit institutions.

Cavallo said that, in addition to this important cooperation, Brazilian Finance Minister Pedro Malán and the president of Brazil’s Banco Central, Arminio Fraga, had voiced their trust that the Argentine crisis would be resolved in the short term.

But none of these statements was able to improve the stock market’s attitude. Financiers in general do not agree with the strategy of avoiding an orthodox fiscal adjustment in reactivating the economy, a route Cavallo has chosen for jump-starting production following nearly three years of decline.

Economist Claudio Lozano, of the Congress of Argentine Workers, commented that Cavallo is trying to gain time in order to put off cutting public spending until October, when the De la Rúa administration faces the first parliamentary elections of his term.

Given the deepening distrust, the minister decided over the weekend to postpone until May a 500-million-dollar bond auction in order to avoid contracting new commitments at exorbitant interest rates.

Cavallo explained that the delay is proof that Argentina does not need extraordinary financing, though he did ask for “comprehension” from multilateral credit bodies, such as the World Bank and the International Monetary Fund, in releasing the already-planned loans, which were conditioned upon compliance with fiscal commitments.

The country-risk rating climbs upwards to the extent that Argentine debt bondholders, fearful of the country’s potential inability to pay debt service, impulsively dump the notes, which depresses their market prices.

Of the 128 billion dollars in public foreign debt, 90 billion are in bonds that expire within the next five years, and the rest is owed to the international credit institutions.

In other words, the country-risk indicator marks the extra rate Argentina must pay for taking on additional debt, above the interest rate of financing of the US government. If the credit today costs four percent annually in the United States, Argentina would have to pay nearly 13 percent more for the same loan.