- The Washington Times - Tuesday, December 11, 2001

Argentina's economy has developed the tell-tale signs of imminent meltdown. On Thursday, the Argentine government said it would seize $2.3 billion of retirement savings to which every worker has been required to contribute since 1994, giving pension funds an IOU in return. This move follows the government's recent decision to restrict to $250 a week the amount of funds Argentines can withdraw from their own bank accounts. If history is a guide, this is the death rattle of the Argentine economy.

Once a government forcefully "borrows" funds and restricts withdrawals, uncontrollable capital flight has taken hold and confidence in the economy has collapsed. Also, these measures cause doomsday rumors to proliferate and sow greater panic. Already, the opposition has said the government may be planning to confiscate individuals' accounts to pay its bills.

But public perceptions regarding the economy's prospects could hardly be more pessimistic than economic reality suggests. The country's overvalued currency, the peso, which is pegged to the U.S. dollar, has caused its exports to be prohibitively expensive abroad, particularly in Brazil, which was Argentina's largest export market before that country devalued its own currency in 1999. Sadly, Argentina's dollar-strong peso once provided the economy enviable stability. Over time, the dollar-peg has become unsustainable and has created a policy trap for Argentina, since straying from that peg would generate investor panic and wipe out the value of Argentines' savings overnight.

Now, the government seems certain to default on its $132 billion public-sector debt, which would give Argentina the unfortunate legacy of causing the most severe sovereign debt default in history. Already, the government has cut interest payments on $45 billion in bonds and some key payments are due on Dec. 19.

The more than $20 billion that the International Monetary Fund (IMF) has pumped into Argentina has not buoyed the economy. The fund said last week that it won't make this month's scheduled $1.3 billion loan payment until the government revises its budget for next year. Apparently, the IMF has finally given in to pressure to force countries to renegotiate their debts with creditors, rather than indefinitely pumping billion-dollar loans into ailing economies.

Economy Minister Domingo Cavallo has raised hopes for such negotiation with creditors, but the government needs a deep restructuring and plenty of luck to meet its debt obligations in the near future. If South America's second-largest economy is forced to devalue its currency and defaults on its loans in the near future, investor skittishness could become infectious, and other emerging economies could come under increased pressure.

The government should resist the temptation to dollarize the economy, a policy option it appears to be toying with. Such a measure would only put Argentina more deeply into its monetary policy trap. Instead, the government must demonstrate a stiffened resolve to cut costs and continue attempts to renegotiate its debt. And bond holders shouldn't play chicken with fate. It has become painfully clear that Argentina is tottering over a deep precipice. If it falls, bond holders might end up receiving nothing at all.

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