(Fwd) pol-cien : Will Argentina Trigger the Next Financial Cri

Les Schaffer schaffer at optonline.net
Thu Apr 19 06:20:49 MDT 2001

[ from Nestor ]

>From The Washington Post to Alejandro Méndez, from him to pol-cien (a
list on scientific policies in Argentina), then to me, now to the
whole planet: more or less the way the next crisis will unfold!

------- Forwarded message follows -------
From:           	"amendez" <amendez at fibertel.com.ar>
To:             	"pol-cien" <pol-cien at ccc.uba.ar>
Subject:        	pol-cien : Will Argentina Trigger the Next Financial Crisis?
Date sent:      	Wed, 18 Apr 2001 13:16:21 -0300

Will Argentina Trigger the Next Financial Crisis?

By Robert J. Samuelson

Wednesday, April 18, 2001; Page A21
The great danger of any economic slowdown is that it feeds on
itself. We already see signs of this in the United States. Weaker
consumer spending and business investment hurt corporate profits,
depressing stock prices and confidence, which then harm consumer
spending and business investment. The same thing can happen on a
global scale. When things go bad, countries that were muddling along,
despite huge problems, discover that they can no longer cope.  Their
budget, debt or trade troubles worsen, and the fallout spreads to
other countries through lower imports or loan defaults. The potential
for a chain reaction is why Argentina matters. It could trigger the
next global financial crisis. Since late 1998 it has endured a
stubborn recession. Unemployment is up from 13 percent to 15 percent,
according to the International Monetary Fund (IMF). The government of
President Fernando de la Rua is wildly unpopular.  Economist Charles
Calomiris of Columbia University predicts the government will
inevitably default on its debt of about $140 billion, much of it owed
to foreigners in dollars. In a forgiving economic climate, a default
might remain only a problem between Argentina and its many creditors
(pension funds, insurance companies, investment banks, mutual funds
and wealthy individuals).  People would see it as an isolated
breakdown. But that luxury no longer exists.  The U.S. economy is
flirting with recession; Japan is mired in stagnation. The upshot is
that an Argentine default, by damaging trade and investment throughout
Latin America, could worsen the global slump. Economic instability
might also feed political instability. In Argentina, strikes and
street protests could "drive the economy down further and chase
foreign investment," warns Mark Falcoff of the American Enterprise
Institute. Among "emerging market" countries -- nations that are
neither desperately poor nor fabulously wealthy -- Argentina has been
a big borrower on international money markets. It accounts for about
20 percent of "emerging market" government bonds, says J. P. Morgan
Securities.  This equals Brazil's share and is ahead of Mexico's (15
percent) and Russia's (10 percent). An Argentine default would inflict
widespread losses that might discourage creditors from making new
loans or raise interest rates from their already stratospheric
levels. Because they are risky, "emerging market" bonds carry interest
rates much higher than U.S. Treasury bonds. This extra "spread" is now
about 7 to 8 percentage points. The major threat is an abrupt slowdown
of foreign capital to Latin America. Every major Latin economy is now
running a sizable current-account deficit. Broadly speaking, this
means that their foreign earnings from exports, tourism and investment
do not cover their payments for imports and debt service. In 2000 the
deficits totaled 4.2 percent of gross domestic product for Brazil, 3.3
percent of GDP for Argentina and 3.1 percent of GDP for Mexico, says
Merrill Lynch. The gaps are typically covered by foreign investment in
the forms of loans, purchases of local stocks or direct investment
(building factories or buying local companies). Decreased capital
flows to Latin America would curtail world trade, whose growth in 2001
is already projected by the World Bank to drop by more than half from
last year. Latin countries need foreign investment (in dollars, euros
or yen) to pay for some of their imports.  Less investment would cause
them to cut their purchases from each other and from the United
States, Europe and Asia. In 1999, for example, Argentina sent 24
percent of its exports to Brazil. Meanwhile, Latin America absorbed
$142 billion of U.S. exports (including $86 billion to Mexico, $13
billion to Brazil and $5 billion to Argentina) and $54 billion from
the European Union. Even without a default, capital flows to Latin
America may drop, says economist Carmen Reinhart of the University of
Maryland. They have consisted heavily of direct investment -- mainly
to buy companies being privatized by Latin governments -- and lower
U.S. corporate profits will squeeze these. An Argentine default would
compound the damage. To Calomiris, it's not whether -- but when. The
country, he says, can't generate trade surpluses large enough to cover
the interest on its foreign debt, let alone repay maturing loans. In
2000 the interest payments totaled about $12 billion. Argentina has so
far avoided default by borrowing more. In late 2000 the IMF agreed to
provide a large new loan. But at best, this is a stopgap; at worst,
it's throwing good money after bad. (Indeed, because the United States
is the IMF's largest member, the loan struck some economists as the
Clinton administration's way of postponing any crisis until it had
left office.) Calomiris thinks lenders will need to write down their
debts by 25 percent to 30 percent. Of course, he could be wrong. In
late March, President de la Rua appointed Domingo Cavallo as economy
minister. In Argentina, Cavallo is a legendary figure, having
eliminated the country's chronic inflation by creating a "currency
board" in 1991. (This required that every peso of Argentine currency
be backed by one U.S. dollar, preventing the government from inflating
the money supply.) Ironically, the confidence inspired by Cavallo's
triumph, both within Argentina and without, helped justify the huge
foreign borrowings of the 1990s.  Since his appointment, Cavallo has
persuaded Argentina's Congress to pass a package of tax and tariff
measures that (he promises) will revive the economy by promoting
investment and exports. The plan is full of contradictions, but
perhaps it will work. Who knows? The larger point is that the next
financial crisis, wherever it happens, may be less manageable than the
last. With hindsight, the fundamental reason that Asia recovered so
quickly from the financial crisis of 1997-98 was the U.S. economic
boom. Asia could relieve its debt problems by exporting to the United
States, and Americans' boundless confidence prevented bad news from
feeding on itself. This time we may not be so lucky. © 2001 The
Washington Post Company

------- End of forwarded message -------

Néstor Miguel Gorojovsky
gorojovsky at arnet.com.ar

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