- The Washington Times - Monday, February 11, 2002

What began as an economic meltdown in Argentina is beginning to take on ominous political overtones. Argentina could now face a constitutional crisis that could deeply undermine the country's democratic integrity. And such an affront to democracy would cause the situation to become increasingly volatile.
Earlier this month, the Supreme Court correctly ruled the government's confiscatory freeze on banking deposits unconstitutional, thereby establishing quite dramatically its independence from the administration of President Eduardo Duhalde. Mr. Duhalde, who was appointed by Congress amid massive protests to serve until the end of 2003, was never democratically elected by the Argentine people. The major political parties in Congress, which clearly demonstrated their disdain for the democratic system by unilaterally appointing the current president, are now threatening to impeach Supreme Court judges based on their decision on the banking deposits on the flimsy pretext of "corruption." Such a move would discredit Argentina's standing as a member of the world's democratic community and should prompt the White House to categorically oppose any future International Monetary Fund (IMF) loans to that country.
The Duhalde government was wise in demonstrating concern with the health of the banking sector in view of the severe economic upheaval that has hit Argentina this year. But the administration has made no effort to balance this concern with citizens' rightful demand to be able to access their accounts. And the government has myopically ignored the other economic repercussions of the freeze on bank deposits.
As economists Allan Meltzer and Adam Lerrick pointed out in a Financial Times op-ed last month, the bank freeze, first instituted by former President Fernando de la Rua and continued by Mr. Duhalde, has prompted a liquidity crisis, particularly since cash payments account for half of the Argentine economy. Tax revenue has fallen 30 per cent in the past year and wages in the informal sector have dropped a precipitous 50 per cent in just one month as a result of the government's decision to limit citizen's access to their own bank accounts, Messrs. Meltzer and Lerrick wrote.
What these economists therefore propose is that banks issue bank checks for the full value of individuals' bank deposits, backed by the Argentine government. The government wouldn't be able to use these kinds of checks to pay for fiscal costs, and since the money already "exists" on the banks' books, the policy wouldn't cause inflation. This proposal on its face seems a quite reasonable solution. But it will prove impossible to implement, since the current Argentine government inspires so little confidence that the public won't give the bank checks the value assigned to them.
The Argentine government this week unveiled an economic plan which in some ways mirrors the Meltzer-Lerrick proposal. In order to comply with the Supreme Court's surprise ruling, the Argentine government will allow banks to issue customers negotiable bankers' drafts to be used instead of cash. More positively, the Duhalde administration also said it would free-float its currency, the peso, thereby breaking with the country's decade-old monetary link with the U.S. dollar, which had become unsustainable. The government also announced an austere budget with a modest deficit which, if adhered to, will help restore some of the lost confidence in the Argentine economy. But these economic proposals need the backing of a credible government. Should the Mr. Duhalde trample on the Supreme Court's independence, he will surely keep investors at bay.

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