An IMF bailout for Argentina?

Louis Proyect lnp3 at
Sun Nov 5 08:14:38 MST 2000

NY Times, November 5, 2000


Argentina, a Fiscal Angel That Fell From Grace


One of Argentina's top money men showed up in New York last week with a

Daniel Marx, the secretary of finance, told worried investors at the
Council of the Americas about the erratic performance of financial markets
lately. "We acknowledge that there is an Argentine component to this
uncertainty," Mr. Marx said flatly.

At that moment, he sounded less like a government official and more like
the investment banker he had been until December. Many in the audience
already knew him, and had come for reassurance that Argentina's problems
would not explode into the century's first economic prairie fire.

Their minds were not set at ease. Their foremost worry is the nearly $20
billion in debt that Argentina has to refinance next year. That won't be
easy, given the sorry state of investor confidence in the country. Two
years after a brutal recession ended, Argentina's economy is still
struggling — growth of just 1 percent is expected this year — and no one
knows when the besieged Argentine government will be able to put together a
budget. The dollar-pegged peso is hurting exports and may be too overvalued
to sustain. The country's $123.5 billion in federal debt is also a growing
headache, and last week, Standard & Poor's put Argentina on a credit watch,
with a negative outlook.

On top of all that, a political crisis is roiling Buenos Aires. Carlos
Alvarez, the vice president, resigned a few weeks ago over a bribery
scandal that is threatening to unravel the ruling alliance that Fernando de
la Rua cobbled together when he became president in December.

The turmoil in Argentina has set off rumors that the United States Treasury
Department and the International Monetary Fund are working on a financial
bailout to keep Argentina from defaulting on its loans. Both agencies deny
the rumors. The fund already has arranged a $7.4 billion line of credit, of
which $2 billion is available for use. But Tom Dawson, the fund's director
of external affairs, said there had not been any discussion of additional

As always, Lawrence Summers, the Treasury secretary who was the American
official most involved in the 1995 bailout of Mexico, is keeping his cards
close to the vest. He declined to comment on the rumors, but he
acknowledged that he was watching Argentina carefully.

"Argentina is a country that has a strong record of reform during the
1990's, and that should serve it well," Mr. Summers said after a recent
meeting in Montreal.

That record of economic reform is part of what makes Argentina's sudden
volatility so hard to ignore. For most of the last decade, Argentina was a
symbol for American- style, market-oriented economics. Under the guiding
hand of Domingo Cavallo, a former minister of the economy, Argentina
transformed itself into an exemplar of a developing nation.

But when things were going well, Argentina went off its fiscal diet. It
overspent, racking up serious deficits and borrowing heavily. The current
government inherited a seriously weakened economy, and efforts to restore
confidence have backfired.

Despite Mr. Marx's assurance that everything is under control, many
economists fear that Argentina's troubles could prompt a regional disaster,
or worse. Argentina represents anywhere from one-quarter to one-third of
benchmark emerging-markets indexes like the one put out by J. P. Morgan. If
Argentina has trouble refinancing its debt or goes into default, the entire
region could be hurt, as happened after the Mexican crisis in 1995 and
Brazil's currency devaluation in 1999. American investors and banks have a
big stake in Argentina, and a default could leave them holding billions of
dollars in bad loans.

Having suffered through those earlier debacles, investors are particularly
sensitive to Argentina's woes. "It's the old saying, `Once burned, twice
shy,' except here it's more like five times burned and really shy," said
Walter Molano, managing director of BCP Securities, a brokerage firm based
in Greenwich, Conn.

Leonardo Leiderman, head of Latin American research at Deutsche Bank, is
one of the few economists willing to predict that Argentina will pull
through. "Our call is that Argentina will not default on its obligations
next year," Mr. Leiderman said. "But it's going to take a strong stomach to
get through the weeks ahead."

During his recent visit to New York, Mr. Marx also acknowledged that
difficult times could increase the temptation to use economics for
political gain, which wary investors would probably rather not have heard.

"We have to turn back to basics," he said, and not give in to political
pressures "that might distract us so that we do not act like rational human

Louis Proyect
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