- The Washington Times - Thursday, August 16, 2001

The ice is cracking beneath Argentina. Once the poster child for the market reforms of the "Washington consensus," when it registered some of the highest growth rates in the world in the early 1990s, Argentina now has been mauled by three years of recession and a seemingly perpetual debt crisis. In early June, Buenos Aires swallowed the largest debt swap in history which, like a shot of local gin, temporarily took the edge off investors' fears over the country's faltering economy. But a massive hangover has set in as investors face the reality that a default on Argentina's $130 billion debt, about half of its gross domestic product (GDP), is inevitable. With social discontent already close to fever pitch, an economic meltdown could severely threaten Argentina's fledgling democracy.
The prospects for growth are slim to none, given the widespread slowdown among developed nations and in Brazil, Argentina's largest trading partner, an energy crisis and a deflated real have proven devastating to Buenos Aires.
Meanwhile, the government's only hope for boosting economic growth has relied on strengthening investor confidence, thereby increasing the flow of foreign direct investment into the country. Following Argentina's debt swap, many analysts were quite optimistic. Arturo Porzecanski, chief economist at ABN securities, observed June 13 in the New York Times, "What the market is telling you is that market nervousness has abated and the perception of country risk has been reduced. I honestly believe the worst is over." Then, just two days later, Argentine Economic Minister Domingo Cavallo, faced with the task of resurrecting a lifeless economy, announced a proactive, yet controversial economic package that reformulated the 10-year-old exchange rate policy of "convertibility." The peso is now pegged to the average value of the dollar and the euro, instead of solely to the dollar. This provided immediate relief to Argentine exporters, who were grievously suffering from ebbing sales due to the peso's inflated value.
But investors hit the panic button when they learned of the new devaluation scheme, effectively undermining the reforms. Mr. Cavallo has effectively been placed in a strait jacket by the tremendous debt and the tantrums of foreign investors. He is unable to engage in common Keynesian counter-recession strategies, because deficit spending or a devaluation would only further alienate investors, rendering debt servicing all but impossible.
The major problem is that economists, despite all their economic models for risk analysis, cannot predict the political future. Unexpected scandals, violence or a leadership crisis can easily create panic among investors. Currently, swelling poverty and a 16 percent unemployment rate since the mid-1990s have spawned strikes, protests and violence. However, Buenos Aires, hearing the cries of economists and investors to reduce spending, is now attempting to push through draconian budget cuts. Any additional slash in services would only intensify the ferocity of opposition, as the vast majority of unemployed are between the volatile ages of 18 and 25.
The public's faith in the government is also severely waning. In Transparency International's "Corruption Perceptions Index," Argentina was tied for 52nd in the rankings, reflecting the public's deep-seated belief that corruption is ineradicable. Another blow to public trust came with the indictment of former President Carlos Menem (who still controls a wing of the ill-reputed Peronists party) for selling weapons for personal gain. His successor, President Fernando De La Rua has also given reform a bad name by proving to be an inept leader who lacks both character and vision. Mr. De La Rua's approval ratings are barely in double digits and many doubt whether he can survive the rest of his term.
In a nation where the government has almost no legitimacy, unemployment and poverty ravish society, and with an economic crisis on the horizon, it is safe to say stability is anything but assured. Average Argentines may soon turn to Washington neo-liberals and ask them what have you done for us lately. The lack of a response may be enough to push Argentina's democracy through the ice along with its economy. With congressional elections in October, the stage has been set for political upheaval.
Who is going to clean up the mess? The Bush administration's proposal for debt grants is long awaited, but does little to ease the current crisis. Despite the recent financial rescue of Turkey, Treasury Secretary Paul O'Neil has attacked the Clinton administration for its frequent bailouts and warned investors and developing countries that aid would be less forthcoming. If this is not an idle threat and the United States neglects its traditional role as lender of last resort, the international economic system could be in deep trouble.

Max Bergmann is a research associate with the Washington-based Council on Hemispheric Affairs.

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