- The Washington Times - Monday, July 23, 2001

Argentina's fiscal mismanagement and outdated market framework have created a financial vortex which has finally, after three years of persistent pressure, pulled the country into full-blown crisis. Given the contagious effect of economic turmoil in the emerging world in recent years, world leaders and many investors are nervously watching the situation in Argentina, particularly in light of the similar problems affecting Turkey.

Many economists have noted that although Argentina's budget imbalance is certainly a cause of concern, it doesn't seem to warrant the type of exodus of capital which has punished the country in recent years and more markedly in the past few weeks. Argentina's public sector debt, which totals $128 billion, represents 45 percent of its gross domestic product - not such a daunting figure. And the government has only about $9 billion in debt to roll over in the second half of this year. All the same, Argentina's stocks have gotten pummeled and the average interest rate on its foreign bonds are almost 16 percentage points over U.S. Treasuries.

The crisis has many causes. Investors are concerned over some of the country's regulations which are a lag on economic growth, such as inflexible labor laws, high taxes and the high tariffs levied on imports coming from countries outside of the Mercosur customs union, of which Argentina is part. And while investors seem willing to bear these regulatory inefficiencies in the developed world, after all French workers are confined to a 35-hour work week, they are much more demanding of the emerging markets. The $40 billion bailout package that lenders, led by the International Monetary Fund (IMF), lent Argentina has been unsuccessful in generating stability.

Also contributing to Argentina's woes currently is its monetary policy, which directly pegs the value of the Argentine peso to that of the U.S. dollar. This policy has helped prevent inflation since the central bank must have dollar reserves to match the pesos it prints, but it is becoming unsustainable given the lack of investor confidence in the country. Argentina's dollar-strong currency has made the country's exports prohibitively expensive in its main market, Brazil, which devalued its own currency in 1999.

To Argentina's credit, Economy Minister Domingo Cavallo is trying to execute a zero-deficit plan. The measure is nothing short of drastic for Argentina's socialist-styled government, and may be politically unsustainable. Investors certainly are demonstrating they remain skeptical of its staying power. And the decision of several labor federations Thursday to call a 24-hour strike in opposition to the government's plan highlights the policy's unpopularity among powerful factions.

If Argentina is able to meet its debt obligations and liberalize its economy, it may be able to recover from the ongoing economic maelstrom. And although economic crises are a brutal and Draconian instigator of reform, countries often emerge with sounder economic policies, banking sectors and overall regulatory framework in wake of speculative attack. If Argentina weathers this storm, its highly educated labor force and diverse natural resources, could beckon investors back. But if conditions fail to improve, emerging markets may be in for a rough ride.

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