Argentina: "The IMF has us by the short hairs"

Louis Proyect lnp3 at
Tue Dec 19 09:29:30 MST 2000

Los Angeles Times, December 19, 2000, Tuesday, Home Edition



BUENOS AIRES -- The International Monetary Fund announced Monday a
$39.7-billion bailout package for Argentina aimed at heading off a massive
default here and the shock waves that could result throughout Latin America
and beyond.

The financial rescue, echoing bailouts of Mexico and Brazil in the 1990s,
was seen as a concrete confirmation of the fears among Argentines that a
living standard that was once the envy of the continent is deteriorating

President Fernando de la Rua declared that the announcement marks the start
of an economic turnaround in a nation that was until recently a model of
free-market reform for the region. But other Argentines worry that the IMF
loan package--despite its hefty price tag--is only one step toward untying
the knots of their national malaise: stubborn unemployment, a yawning
budget deficit and disillusionment with the government.

"The situation of the country is bad," said Susana Boite, 34, an unemployed
mother of three. "I've never gone so much time without finding even a
little part-time gig. Everyone's down in the dumps."

The low-key De la Rua took office a year ago promising prosperity and
honesty. But unfavorable currents dragged down Latin America's
third-largest economy: Trade suffered because neighboring Brazil's currency
devaluation last year made its products more competitive. Argentina's
economy is expected to grow by only about 0.5% this year. Joblessness, now
at 14.7%, has pushed tens of thousands of middle-class families into poverty.

The IMF put together the loan package to ward off the specter of a default
on Argentina's $ 21-billion foreign debt, which probably would have been
necessary next year. That could wreak widespread havoc reminiscent of the
"tequila effect" of Mexico's peso devaluation in 1994, a phenomenon
repeated across Asia after Thailand devalued its currency in 1997.

The nearly $ 40-billion Argentine bailout, announced in Washington and
Buenos Aires, is almost double initial estimates. The IMF will contribute $
13.7 billion. The World Bank and Inter-American Development Bank will add $
2.5 billion each. Argentine banks and pension funds will kick in $ 13
billion, and Spain, a leading investor here in telecommunications, banking
and oil, will open a billion-dollar credit line. A $ 7-billion debt swap
rounds out the package.

The loans will "bulletproof" the economy, buying time and investor
confidence, Argentine leaders say. Coming weeks will bring tax cuts and
incentives to industrial production, according to Economy Minister Jose
Luis Machinea, who started his tenure by raising taxes. Many of the reforms
are a condition of the bailout.

"This operation will bring back to Argentina the dose of optimism that is
necessary to engage the economic recovery," De la Rua said.

Nonetheless, analysts say the government must capitalize on the opportunity
and jump-start both investment and reforms such as cuts in bloated,
inefficient provincial governments. Without decisive action, the crisis
will merely be postponed, critics say.

Agentines expect the worst. They are among Latin America's most prosperous
and best-educated citizens, but they are also among its most melancholy and

Their pessimism is fueled by the government, which has seemed nearly
paralyzed after a multimillion-dollar bribery scandal in the Senate in
September caused the resignation of reformist Vice President Carlos
Alvarez, straining the center-left Alliance party to the breaking point. De
la Rua has fought the image, accurate or not, that he is unable to force
through austerity measures to balance the budget, improve tax collection
and otherwise revive the economy.

Argentina's woes are on daily display at the small San Jose del Talar
church in the middle-income Villa Devoto neighborhood, home of a gated
shrine enclosing a 17th century painting of Our Lady That Unties Knots. The
icon has drawn crowds since it was brought from Germany in 1996. Pilgrims
arrive in busloads to ask the Madonna, which has reputedly miraculous
powers and its own Web site, to help them find work or hang onto the jobs
they have.

The nation is at the mercy of weak leaders and heartless world finance
officials, said Raul Pissero, a baker. He came to implore the Virgin, which
in the painting is depicted with an angel holding out a cord full of knots,
to protect his business and his family.

"I voted for De la Rua," said Pissero, a muscular, gray-haired man in his
40s. "A disaster. I regret it. We'll never get anywhere with these
politicians. We should kill them all. The IMF has us by the short hairs and
our debt keeps getting worse. That's our history: We will always be
dominated. Before it was Spain, now it's the IMF."

Juan Luis Bour, an economist at the Foundation for Latin American Economic
Research here, is somewhat less despairing: "What is needed is a marking of
the course. . . . The government is going to have to make a change to show
it has defined its course--to show that there will be no default, no
devaluation, and that all necessary reforms will be undertaken so we that
are not having the same conversation a year from now."

Argentine leaders are flirting with a dramatic but risky remedy: recruiting
opposition Congressional Deputy Domingo Cavallo, the hard-charging,
Harvard-educated technocrat who made Argentina a model of free-market
transformation in the 1990s.

As economy minister for former President Carlos Menem, Cavallo vanquished
hyperinflation by pegging the Argentine peso to the dollar and enacted
aggressive privatization and modernization programs. Though a threat to the
leadership, his return to the Cabinet would delight the investment
community and, according to his admirers, deliver a "confidence shock."

The Argentine bailout marks a change in IMF interventions, which in the
past have come after a country has faced a run on its currency or its
international reserves are nearing depletion. The IMF now aims to intercede
before the contagion from a country's problems can spread.

"The perception among investors was that if we were to suffer another big
crisis in emerging markets an already damaged asset class might not ever
recover," said Michael Henry, Latin American economist at ABN AMRO, a Dutch
investment bank with offices in New York.

Latin American stocks and bonds have recovered somewhat over the last month
as it became known that the IMF was working on a rescue package, Henry said.

"This is very good for Argentina. It gives them breathing room and a
welcome time out to put in place the type of program they need allowing it
to resume growth," said Sebastian Edwards, a former World Bank economist
and now a professor at UCLA's Anderson School.

Outside the shrine of Our Lady Who Unties Knots, the pilgrims talk of

"If I could, I would leave the country," said Valeria Torrens, 29, who came
to thank the Madonna after landing a job as a clerk at a pension fund
company. "I don't know where we are headed. The answer is not in
politicians. Perhaps the answer is in faith."

Louis Proyect
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