- The Washington Times - Sunday, January 6, 2002

From combined dispatches
BUENOS AIRES Argentina is in free fall.Its economy is shattered. It can't pay its huge debts at home or abroad. Its political leaders are befuddled and desperate. Military leaders are grumbling. There's looting, rioting and death in the streets.
And nobody sees the end of it yet.
The long-expected but swift financial collapse gained momentum late last night as the lower house of Congress overwhelmingly passed a law to give President Eduardo Duhalde emergency powers to devalue Argentina's currency, prop up its banking system, and regulate consumer prices. The upper house is expected to pass the bill today.
The government also wants to use citizens' hard-currency bank savings "temporarily" to bolster the federal government's accounts.
The Central Bank has ordered banks to close tomorrow and Tuesday, allowing clients to try to adjust to their reduced financial circumstances. After so many traumas, however, Argentines are dogged when it comes to their money. At noon Friday, some pensioners could be seen carrying umbrellas, settling into canvas chairs in the sun and applying sun block as they joined a queue that promises to last well into winter.
For years, successive Argentine governments have borrowed more than they could afford and then imposed short-term belt-tightening measures to try to recover. In November, President Fernando de la Rua tried to impose austerity measures, including limiting bank withdrawals. The move resulted in rioting and demonstrations that led to 27 deaths, hundreds of arrests and installation of five different presidents in less than three weeks.
Argentina on Thursday entered into the first of what is expected to be many defaults by missing a payment on $28 billion in bonds.
Analysts have been predicting Argentina's financial collapse for some time, but the financial world was shocked by the speed with which the country unraveled as the Argentine public began protesting after then-Economic Minister Domingo Cavallo's latest round of austerity measures last month.
The riots, looting, and deaths forced Mr. de la Rua's resignation and a succession of presidents, ending with Mr. Duhalde, who was sworn in Tuesday.

A long, hard fall
A century ago, German and other European publications called Argentina "the land of the future." In the early 1950s, it was the seventh-richest country in the world.
Today, South America's largest country owes a staggering debt load of $132 billion, much of it to foreign lenders. If its default continues, it will be the largest in history.
Argentina reached the brink of bankruptcy through decades of fighting among the country's powerful 24 provincial governors, allegations of corruption, and mismanagement of its economy.
Since the end of World War II, when Argentina's treasury had accumulated an unprecedented amount of gold from agricultural exports, the government has routinely used public money to obtain political support from various constituencies.
Immediately after the war, the late dictator Juan Domingo Peron laid the foundation of a long history of misusing government funds. By the time the military took over in 1976, the country was run on a pattern of spending and then asking the International Monetary Fund (IMF) and the World Bank for more cash.
In 1983, the military regime collapsed following the disastrous war against Britain over possession of the Falkland Islands. By 1988 Argentina had a semblance of democracy and hyperinflation.
The IMF had figured out by then that most of the government's revenues were being used to rescue inefficient national industries that could not compete in international markets because of high labor costs or were being channeled to the provinces ruled by governors from the party in power.
But more than half of Argentina's current foreign debt comes from a federal government decision in the mid-1980s to assume the foreign debt of inefficient private enterprises in response to pressure from an increasingly protectionist local business community in return for political support.
Moreover, Argentina also had acquired a reputation of failing to meet its obligations. Creditors grew impatient with the country's noncompliance. In addition, tax evasion became "just another national sport, like soccer," said one Argentine economist.
Argentina's financial and legal problems prompted U.S. economist Milton Friedman to say that, in the world, there were three economic systems: "the capitalist, the socialist and the Argentine."

Moving into the First World
The Peronists returned to power when Carlos Menem won the presidency in 1989.
He brought Domingo Cavallo, a Harvard-educated economist, into the government. Mr. Cavallo introduced a liberalization program and a wave of privatizations that split the Peronist Party. Some party stalwarts considered Mr. Cavallo's measures a betrayal of Mr. Peron's policy of a state-controlled economy.
Mr. Menem's government managed to stay in power for 10 years. Mr. Cavallo introduced in 1991 the one-to-one exchange rate with the dollar that Mr. Menem said was the solution to the country's economic problems.
The peg guaranteed the currency system by insisting every peso was backed by $1 in the country's reserves.
The peg wiped out hyperinflation, which peaked at 3,000 percent, and created economic stability.
Argentina also adopted tough free-market policies, tight budgetary controls and set out to attract international investment. As inflation fell, overseas money flooded in to take advantage of the economic boom.
Argentina, Mr. Menem said, was now "a First World country."
Though his tenure was plagued by scandals, he managed to stay in power by reforming the Constitution.
Argentines took on personal debt, which was in effect denominated in dollars. At the same time the country built up a large stock of overseas debt.
But by the end of the 1990s the peso move was starting to cause problems. As the American economic boom pushed the dollar's exchange rate higher, Argentina found it harder to export. That was compounded by Brazil's decision to devalue its currency, which improved its competitiveness.
Unemployment jumped, since the private sector could not absorb the work force that had been dismissed from state-owned, inefficient industries and companies. At the end of Mr. Menem's tenure in 1999, the jobless rate was at a record 16 percent. Today it is estimated at 21 percent.
"Argentina sold all of its grandmother's jewels. Now there is nothing else to sell, but the debt keeps growing," an observer in Buenos Aires said in 1999. "It's not going to go away on its own or by magic."
The Bush administration and the IMF, tired of Argentina's financial mismanagement, denied further credit this fall, practically guaranteeing a default on its debt.

Devaluing the peso
Although the peso-dollar peg worked at the time, economic analysts now see it as the main reason for Argentina's 43-month recession.
Mr. Duhalde's bill would convert private contracts to pesos in a country where even house purchases are made with dollars.
It would restructure small-dollar debts to protect peso-earning Argentines from the devaluation.
The man tapped to become treasury secretary, Sen. Oscar Lamberto, said the plan envisions a free-floating exchange- rate system alongside an official fixed exchange rate.
"The idea is that there would be two [currency] markets," Mr. Lamberto said Friday. "An official market, established by the monetary authority and a free market, for non-priority transactions in which the currency will fluctuate according to the market."
Converting dollar debts into pesos should help shield the average Argentine from the impact of the devaluation, but it shifts the burden to the banks.
Mr. Duhalde showed little sympathy for banks, talking of "ending the decades-old alliance between politics and the financial world, instead of the productive sector."
His bill in Congress does include a proposal to tax oil exports to compensate banks for what will prove a costly restructuring of dollar debts.
Some analysts expect the dual exchange-rate system to allow more of the endemic corruption that helped bankrupt Argentina in the first place.
"The ambiguity between the two exchange rates opens the way for corruption and abuse," said Walter Molano, an analyst for U.S.-based BCP Securities.

Treading carefully
The populist Mr. Duhalde will have to be careful dealing with Argentines who are impoverished and unemployed.
The president and Congress are seen as examples of "what Argentines don't want anymore," as a protester put it a few days ago.
Congress is dominated by Mr. Duhalde's Peronist Party, which ran the country from 1989 to 1999 and racked up much of the country's debt.
Economists are skeptical his measures will succeed because many Argentines have lost confidence in banks and the new system is seen as open to corruption and growth of a black market.
A return to military rule is one fear voiced by Argentines. But some observers in Buenos Aires, like political scientist Hector Marteau and journalist Jose C. Escribano, are skeptical about that.
"There is no chance of a military coup. The order people are asking for is not that of force, but of well-defined economic measures and social peace," Mr. Marteau said.

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