- The Washington Times - Friday, July 13, 2001

Concern that Argentina is on the verge of bankruptcy and will default on its debt is agitating global financial markets already wracked by a U.S.-led economic slowdown.

In echoes of the 1997 Asian financial crisis, markets from Buenos Aires to Istanbul tumbled yesterday despite a pledge by the Latin nation to drastically cut its budget deficits and head off a rapidly developing debt crisis.

A second consecutive day of ratings downgrades by major Wall Street firms added to the country's woes. Argentina's stock market lost another 10 percent in value, while Mexico's peso and stock market sagged and Brazil's currency touched a record low against the dollar.

The contagion effect hit markets as far away as Poland, Hungary, Indonesia and the Philippines. The main stock index in Spain, where banks have invested heavily in Argentina, fell to its lowest close in 2? years.

Sung Won Sohn, chief economist with Wells Fargo & Co., said a debt crisis appears inevitable in Argentina because the country for years has been living beyond its means, piling up a stunning $130 billion in foreign debt.

Years of profligate spending and borrowing came home to roost this week when Argentina found it was unable to roll over its debt unless it paid an exorbitant 14 percent in interest.

"I don't think Argentina can go on with business as usual. Something's got to break," said Mr. Sohn, predicting that the government will be forced to restructure its debt and devaluate by uncoupling the Argentine peso from the dollar.

Mr. Sohn said he doubts the Argentine crisis will spread much beyond Latin America, however, because most other developing countries have taken precautions since the Asian crisis that make them less vulnerable to contagion. Unlike Argentina, most Asian countries now have floating rather than fixed exchange rates, for example, and have built up sizable foreign-exchange reserves.

"It's not likely today's 'tango effect' will become a global financial crisis," Mr. Sohn said. But he acknowledged that the situation bears watching given the weakened state of the world economy in the wake of the major economic slowdown in the United States.

The prospects for most economies around the world hinge more on the health of the U.S. economy than on any downturn in Latin America, he said. Argentina has been in deep recession for three years. But the economies of Mexico and Japan started to contract more recently as exports to the United States fell off.

All eyes are on the U.S. economy in the hope that a rebound materializes later this year.

"To me, there's only one way to get out of this dilemma. U.S. economic growth has got to accelerate," Mr. Sohn said.

So far, U.S. financial markets have largely shrugged off the Argentine troubles, and American consumers have gone on spending in ignorant bliss, he said.

Yesterday, Wall Street stocks surged dramatically on the prospect of reviving profits and growth at technology bellwethers Microsoft and Motorola.

The U.S. economy actually benefits in the short term from Argentina's woes, Mr. Sohn noted, because many of the investors in Argentina and other emerging markets are pulling out and plowing their money into U.S. Treasury bonds, which are considered a safe haven for investments worldwide.

That lowers interest rates in the United States and strengthens the dollar, holding down inflation and spurring growth.

Over the long run, however, the U.S. economy will be hurt by a drop in exports to Argentina and other Latin nations engulfed by the crisis. And the willingness of investors everywhere to lend money could be hurt substantially if Argentina actually defaults on its debt, Mr. Sohn said.

A default or at least a formal debt restructuring appears inevitable to many investors, since Argentina has gotten to the point where it must borrow just to pay interest on its debt. Also, the nation's leaders and political parties have been largely unwilling to make deep budget cuts.

"The spending cuts necessary to balance the budget will severely test the government's resolve possibly to the breaking point," said Standard & Poor's Corp. in downgrading Argentina's credit rating yesterday.

"The government's program has faced growing internal challenges, highlighted most recently by funding disputes with the provinces," it said. "Argentina's ratings could be lowered again if political and social tensions frustrate the government's efforts."

White House national security adviser Condoleezza Rice, appearing yesterday before the National Press Club, said the Draconian budget measures announced by Argentine Economy Minister Domingo Cavallo "are admittedly very difficult economic steps."

But she voiced hope that Argentine President Fernando De la Rua "will be able to carry through on those steps."

An international consortium of lenders organized by the International Monetary Fund made $40 billion of loans available to Argentina earlier this year, contingent on the government reducing its budget deficits.

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