- The Washington Times - Saturday, January 19, 2002

BUENOS AIRES (AP) Argentine President Eduardo Duhalde finds himself caught between the “suits” and the “shirtless” as he struggles to rebuild his country’s collapsed economy.

As Washington, Wall Street and the Europeans press him not to resort to protectionism and other market-unfriendly policies, the poor and the struggling middle class are defiantly refusing to tighten their belts as the financial crisis deepens.

One wrong step and Mr. Duhalde like his two predecessors could be ousted by street protests, plunging the country into what he himself fears would be a “bloodbath.”

So far, Mr. Duhalde’s balancing act has managed to dig Argentina into an even deeper hole than it was in two weeks ago, when he took charge. Analysts say time is running out for him to win back international confidence.

“It’s a very messy tightrope act,” said Ben Laidler, analyst for UBS Warburg in Santiago, Chile. “And below the tightrope there’s an unknown void.”

“What’s foremost in Duhalde’s mind is averting a social explosion,” Mr. Laidler said.

The core of Mr. Duhalde’s dilemma is Argentina’s currency, the peso, which his government has unchained from its decade-old peg to the U.S. dollar by adopting a complex dual exchange rate mechanism spurned by the International Monetary Fund.

Most analysts agree that the peg, which initially gave Argentina financial stability in 1991, ended up as a straitjacket that hindered efforts to end a crippling four-year recession.

The slump has sent unemployment spiraling to near record levels of more than 18 percent and forced the country to halt payments on its staggering $141 billion public debt the world’s biggest sovereign default.

But where economists disagree with Mr. Duhalde is how to spread the costs of the devaluation.

Traditionally a populist, Mr. Duhalde has promised to pay back Argentines’ dollar savings currently frozen in the crumbling banking system in dollars, and to convert some of their dollar-based loans into pesos.

That might keep enraged savers and small-scale debtors off the streets. But because earnings are in pesos while most debts are still in dollars, the move could spell mass bankruptcy for banks and the corporate sector.

“The banks want the government to de-dollarize everything, but if Duhalde does that, the man on the street will bear the full brunt of the devaluation,” said Mr. Laidler.

“At the moment they’re postponing that decision and just hoping everyone will just about survive,” he said.

International investors led by the United States and Spain, which have sunk tens of billions of dollars in Argentina have urged Mr. Duhalde to steer a more market-friendly course.

“Argentina, and nations throughout our hemisphere, need to strengthen commitment to market-based reform, not weaken it,” President Bush told the Organization of American States on Wednesday. “Half-measures will not halve the pain, only prolong it.”

Anne Krueger, the IMF’s No. 2 official and Mr. Bush’s representative at the lending body, said yesterday in Chile that “the Argentines need to formulate a new monetary policy framework, restore their banking system. They need a budget, a fiscal policy.”

There are signs that the message is getting through.

The government has promised a tight 2002 budget and wants to let the peso float freely within months, as the IMF would prefer. It also has named Mario Blejer, a respected former IMF official, as the new chief of the country’s central bank.

“People have a very high opinion of him,” said Chip Brown, chief economist for Banco Santander Central Hispano, attending a Latin American investors’ conference in Cancun, Mexico.

“But investors are extremely cautious, quite negative,” he said. “People are holding their breath for they’re not too sure what. The situation is extremely fragile.”

Argentina has turned for help to its northern neighbor, Brazil, which itself went through and survived a major devaluation in 1999.

Brazilian President Fernando Henrique Cardoso has urged industrialized nations not to be too harsh too soon on Mr. Duhalde.

“We shouldn’t be demanding of Argentina more than it can give at this moment,” Mr. Cardoso said Wednesday. “Before anything else, it’s necessary to stabilize the political situation, so Argentina can present … a credible economic plan.”

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