Asia Times: Argentine crisis threatens to cross borders


	July 17, 2001	atimes.com

Asian Crisis

Argentine crisis threatens to cross borders

Analysis by Gustavo Gonzalez

SANTIAGO - The countries of Mercosur (Southern Common Market) are beginning to react, perhaps with a bit of a delay, to the impact of the Argentine economic crisis. The crisis in Argentina is defying international borders on the wings of globalization and the market fundamentalism imposed by Economy Minister Domingo Cavallo.

Bankers, government officials and economic analysts in Chile and Brazil made as many optimistic predictions on Friday as pessimistic forecasts about what effects their countries will feel as a result of the draconian spending cuts announced Wednesday by Argentina's President Fernando de la Rua.

Mercosur ministers of Finance and the Economy are expected to meet in Montevideo this week, convened by Uruguay's President Jorge Batlle, who conferred with De la Rua in Buenos Aires last Wednesday and, since the announced adjustments, has maintained telephone contact with his Chilean counterpart, President Ricardo Lagos. The discussions would involve the officials entrusted with public finance and economic policy for Argentina, Brazil, Paraguay and Uruguay - full members of Mercosur - and for Chile and Bolivia, the bloc's two associate members.

According to Lagos, the intent of the meeting would be to offer the bloc's support to the De la Rua adjustment plan. But if the conference does actually take place, it would most likely be an opportunity for the five countries to test Cavallo, Argentina's economy minister. The measures with which the reinstated minister and father of the now-adulterated system of peso-dollar parity seeks to resolve Argentina's fiscal deficit have had repercussions on the neighboring countries in the form of sharp increases in exchange rates on the dollar and stock market turbulence.

At home, the Argentine government's cutbacks in spending will affect public sector wages, pensions of more than US$200 a month, payments to government suppliers and the subsidies for the poor and the unemployed. For Lagos, the shift of the Argentine crisis onto the financial markets of Brazil and Chile is a prototypical phenomenon of globalization.

The latest hikes in the price of the US currency in Chile led the local peso to accumulate a devaluation so far this year of 7 percent, while the Brazilian real has suffered a 30 percent decline in its relation to the dollar.

"It is a very difficult situation in Argentina and, as a result, to the extent that the markets are global, those that have an important level of exposure in Latin America are moving their papers and their currencies from Argentina to Brazil and, to diversify, from Brazil to Chile," the Chilean president said last week.

Chile's Treasury minister, Nicolas Eyzaguirre, said on Wednesday that these movements have partly speculative origins, via agents who purchase dollars on the Chilean and Brazilian markets in order to profit later in Argentina from what many believe is the imminent devaluation of that country's peso.

Both Lagos and Eyzaguirre gave assurances that the Chilean economy can successfully weather the impact of the Argentine crisis, but the president said everyone must be prepared in case the problems in the neighboring country "do not have the solutions we all hope for".

Heraldo Munoz, Vice Minister of Foreign Relations, stressed on Friday that the Chilean economy is strong, reflected in a "country risk" factor (a measure of the potential for international loan default as perceived by investors) that remains at 160 points, while that of Argentina reached 1,500 points by Wednesday.

The president of the Chilean Association of Banks, Hernan Somerville, called upon the authorities to take "all necessary measures" to protect Chile's currency, which has suffered greater deterioration than expected. "Make no mistake. The Argentine crisis could have a heavy impact on the Chilean economy," stated the banking leader.

Felipe Morande, head of the research division at the Central Bank of Chile, acknowledged in an interview with the online economic daily Valor Futuro that if the exchange rate on the dollar keeps rising while demand remains low, the country runs the risk of stagnation accompanied by inflation.

Brazil faces a similar challenge in controlling the devaluation of the real because of the inflationary risks it entails. And while the Chilean Central Bank maintains interest rates at 3.5 percent, the Brazilians predict that there will be new hikes next week on the already-high rate of 18.25 percent.

Brazilian analysts rule out the risk that their country could fall into a moratorium on its foreign debt payments, something that is a real danger for Argentina. But there is fear "that a long period of contagion and an prolonged contraction of the capital markets could cause so much damage that we would eventually have to be concerned about Brazil's ability to comply with its debts", said Christian Stracke, an expert from Commerzbank Securities.

The deceleration of the US economy and the added effects of the crisis in Argentina have prompted Brazil to scale back its gross domestic product projections for this year from 4.5 percent growth to 2.5 percent. Chile began the year with economic forecasts of 5.5 percent growth, which have now been adjusted down to 3 to 3.5 percent.

Somerville suggested that the Central Bank of Chile should dip into its international reserves to control sharp fluctuations and to counter speculation on the exchange market.

Economist Marcelo Mesquita, for his part, recommended that the Brazilian government extend a 1998 credit package of US$41.5 million signed with the International Monetary Fund (IMF) in order to facilitate international liquidity and mitigate the risks of crisis. But the IMF does not seem willing intervene in Argentina, which has now become the focal point for the outbreak of a new crisis centered in the Southern Cone of the Americas, and which could easily spread, following the routes laid out by globalization.

Thomas Dawson, director of Foreign Affairs at the IMF, said Friday in Washington that there are no plans to increase the "credit shield" funds the multilateral entity approved for Argentina in December 2000. The IMF drew up a support plan for Argentina for $40 billion with international funding and granted the country a standby loan worth $13.4 billion, of which Buenos Aires utilized $8.4 million in May.

Dawson said that there are currently no signs of global contagion resulting from the Argentine crisis, and he maintained that if Cavallo is successful in his plan to drastically cut government spending, there will be no need for intervention by the IMF or the international community. The perspective of the IMF stands in stark contrast to that of Argentina's public employees, who are preparing a national strike, while fear intensifies that financial breakdown could expand throughout Mercosur.

Holding fast to neo-liberal ideas, Cavallo launched the adjustment plan to eliminate the fiscal deficit asserting that the state would spend only what it earns in tax revenues, except when it comes to the Argentine foreign debt, which will be paid punctually. The minister thus intended to send positive signals to the financial markets and international investors, paying the price of fueling political and social tensions for the De la Rua government.

But his fundamentalist approach to the market did not work, and it was the stock market and financial agents that were the first to cast their vote of no-confidence for an economic adjustment plan that propagates its threats of turbulence throughout Mercosur and could hold the seed of a new international financial crisis.

(Inter Press Service)

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