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Argentina's Woes Spur Fears of New Crises

Debt Problems Shake Emerging Markets

By Paul Blustein

Washington Post Staff Writer

Thursday, July 12, 2001; Page E01

A bout of turmoil in emerging markets worsened yesterday amid growing worries that Argentina will be forced to default on its massive foreign debt, raising the specter of another round of crises similar to the ones that buffeted Asia, Russia and Latin America in the late 1990s.

Latin American markets were hit the hardest yesterday as the Brazilian currency, the real, and the Chilean peso fell at one point to record lows, and Argentina's main stock index dropped 2.2 percent to a new 2001 low, after the Argentine government encountered severe difficulty inducing investors to buy its treasury bills Tuesday.

Currencies and stock markets in countries as disparate as South Africa and Taiwan were also off sharply, as was Turkey's, where stocks lost 7.8 percent and the Turkish lira fell to its lowest rate ever, even though the International Monetary Fund indicated it will soon disburse the next installment of the nation's $19 billion loan package.

The selling wave began intensifying last week, and analysts and officials agreed that it doesn't yet pose nearly the threat to the global economy that arose after a near-default by South Korea in late 1997 or the default by Russia in August 1998.

But the fallout from Argentina's economic woes provided ominous evidence of the continued danger from "contagion," in which financial turbulence spreads across national borders and even oceans. Although Argentina's economy is smaller than those of such previous crisis victims as Korea, Russia and Mexico, the bonds that have been issued by its government account for roughly one-fifth of the bonds in emerging-market portfolios held by overseas investors. So markets have become deeply unsettled by signs that Buenos Aires is losing its struggle to pay interest and principal on those bonds.

"Contagion is not an insignificant phenomenon, and we're seeing some of it at work right now," said Mark Siegel, managing director for emerging bond markets at David L. Babson & Co.

If the market downdraft persists, it could present the Bush administration with an awkward challenge. Treasury Secretary Paul H. O'Neill has tacitly criticized his Clinton administration predecessors for being too quick to assume that giant, IMF-led rescue efforts are needed to quell crises because of fears of contagion. And John Taylor, the Treasury undersecretary for international affairs, said earlier this week that he believes the troubles in emerging markets are attributable mainly to factors unique to the countries involved.

But some analysts said that if anything, contagion has become more problematic now because it stems partly from weakness in the world's biggest economies, particularly the United States. The currencies and stock markets of countries such as Taiwan and Singapore -- which this week said it has entered a recession -- have slipped sharply in recent weeks along with the fall in their exports to the once-booming U.S. market. The Singapore dollar is hovering near an 11-year low.

"One of the reasons I'm more concerned now than I was with some of the things that happened in '97 and '98 is that in '97 and '98, the U.S. was this big robust economy," said David Rothkopf, chief executive of Intellibridge Corp., a firm that provides information and advice to multinational companies and investors.

In the past, contagion spread primarily from one emerging market to another, for two main reasons. The first involves trade: When one currency weakened, it made other countries' exports relatively less competitive on world markets, so their currencies came under pressure, too. Second, investors whose holdings fell in one country's market often felt forced to sell securities from other markets to raise cash or offset their losses.

Both forms of contagion may be at work as a result of the problems in Argentina. The country is suffering from a three-year recession, and analysts have become increasingly skeptical that the government can pay the high interest on its $130 billion debt without imposing politically unpalatable economic austerity policies on the population.

Argentina has already received a substantial package of IMF assistance, and the government recently swapped about $20 billion of its short-term debt for longer-term bonds, thereby lifting some of the immediate threat of a default. But that move, in the opinion of many analysts, only postponed the day when the government will have to tell investors that they must simply accept reduced payments on their claims.

The latest sign of the financial vise closing in on Argentina came Tuesday when the government had to offer investors an interest rate of more than 14 percent to sell 91-day treasury notes, so that it could raise the funds needed to pay $850 million in dollar-denominated debt coming due.

Even local Argentine banks refused to buy more government notes this week, said Mohamed El-Arian, managing director of Pacific Investment Management Co., "which is the same dynamic which took place in Russia in August '98."

In Argentina, President Fernando de la Rua and his economy minister, Domingo Cavallo, last night unveiled details of a plan aimed at eliminating the $1.5 billion federal deficit by year's end.

The measures included cutting the salaries of government workers and contractors and reducing pensions and social security checks. And, in an effort to reduce tax evasion, government salaries and pensions will be paid into special bank accounts. Recipients will be given debit cards so that officials can monitor activity in the accounts to ensure the payment of sales taxes.

The plan faced immediate criticism from within de la Rua's center-left ruling coalition and did not include a key agreement in which Argentine governors pledged to take similar steps to reduce provincial budget deficits.

The prospect of a severe shock to the Argentine economy poses an obvious threat to Brazil, which does a substantial amount of its trade with its neighbor. And investors have grown increasingly reluctant to buy Brazilian securities, which has driven up the Brazilian government's interest costs, dampening market sentiment further in a classic vicious circle.

Correspondent Anthony Faiola in Buenos Aires contributed to this report.

© 2001 The Washington Post Company

-- (M@rket.trends), July 12, 2001

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U.S., IMF signal no help coming for Argentina

Thursday July 12, 7:24 PM EDT

By Mark Egan

WASHINGTON, July 12 (Reuters) - Argentina suffered a double whammy on Thursday as both the IMF and its most powerful member, the United States, indicated no new money was being considered to help prop up the embattled economy.

Speaking during a routine visit to Brazil, the International Monetary Fund's point man on Latin America, Claudia Loser, said of the possibility of fresh cash for Argentina, "for now, this is not being considered."

Sources familiar with the Bush administration's position on Argentina echoed that sentiment. The sources told Reuters on condition of anonymity that while the administration was concerned about Argentina's rapidly degenerating situation, there is no support now for providing further funding.

Earlier on Thursday, White House National Security Adviser Condoleeza Rice said the Bush administration was closely following Argentina's financial crisis and that other countries besides the United States could be part of a solution.

"We're following the situation in Argentina quite closely," she told a National Press Club luncheon. "It is a matter of concern. It is not, however, a matter on which we do not have a partnership with others."

The comments, notable for their lack of any suggestion that help for Argentina was in the works, came as spreads on Argentine bonds topped 1500 basis points over U.S. Treasuries. That interest rate showed markets effectively bracing for a default the nation's $128 billion debt mountain.

IMPEDED BY INFIGHTING

The deterioration in the situation -- stemming from persistent fears on Wall Street of a default -- came despite cost-cutting measures unveiled by Economy Minister Domingo Cavallo late on Wednesday.

While markets welcomed those measures, they continued to fall heavily as investors viewed political infighting as likely to impede Cavallo's latest policy moves.

The IMF on Thursday called a briefing on the Argentine situation for board members, spokesman David Hawley said.

The snap "informal meeting" was called directly after the lender approved restarting a loan for Turkey, another country mired in financial difficulties. The meeting was more for the purpose of offering information to the board rather than "discussing alternatives," one source said. "The situation is being observed continuously. The whole situation in emerging markets is on everyone's minds."

"Argentina is facing a difficult situation and they have taken what looks like decisive action. We will just have to wait and see how it evolves from here," the source added.

Meanwhile Standard & Poor's -- a leading credit-rating agency -- further downgraded Argentina's rating.

The agency said the severity of the cost-cutting measures facing Argentina heightened the risk that the nation's government could collapse -- something it said would make a debt restructuring "hard to avoid."

The lack of will to bail out Argentina at both the IMF and United States should come as little surprise to those who follow developments in international economics. The IMF, under the guidance of Horst Koehler, and the U.S. Treasury, under Secretary Paul O'Neill, have signaled a tighter line on bailouts than has been the case in the past.

The IMF's treatment of Turkey in recent weeks -- cutting the country off temporarily for what could be called relatively minor deviations from pledges made for its $15.7 billion loan package -- has shown the lender taking a harder line on wayward nations than in the past.

Indeed, in an interview with Reuters on Wednesday, a well-placed international monetary source said the IMF believed Argentina had "fallen asleep at the wheel" in implementing the pledges behind a $40 billion IMF-led rescue package agreed to last December.

IMF WEARY OF ARGENTINA

The source indicated the IMF has grown weary of the lack of political resolve in Argentina in recent months and feels it can do little to help the country as a result.

And since taking office this year, O'Neill has signaled that he will not forgive countries that create their own mess by bailing them out with billions of taxpayers dollars.

"If we do not have to worry about contagion, it is going to be a lot easier to say, 'you brought this situation on yourself in spite of the best possible advice and we are not going to bail you out,'" O'Neill said in late June.

In case there was any room for misunderstanding, Treasury said on Tuesday they saw no contagion as a result of Argentina's problems, despite markets being roiled as far afield as Brazil, Poland, Turkey and South Korea.

Cavallo made no friends in Washington recently when he changed the country's currency peg regime giving exporters cheaper pesos and charging importers more. The minister made the change without discussing it with the IMF, raising tempers at the lender which was privately against the move.

Nevertheless, the United States is not ignoring the situation. Senior Bush administration officials are planning daily conference calls to keep an eye on developments in emerging markets in general. And if the situation deteriorates much further, the administration's policy on bailouts will be given its biggest test to date.

It still remains unclear what tack other industrialized nations would like the IMF to take on Argentina -- something that will heavily influence whether the country will get fresh funds.

But economists told Reuters that while the situation may seem dire now, there remains one simple solution that could keep the wolves from Argentina's door until the end of the year.

Should Argentina manage to convince the IMF, World Bank, the Inter- American Development Bank and others to allow it early access to money under its $40 billion loan package that otherwise wouldn't be available until next year, then Cavallo could thumb his nose at financial markets confident he has enough cash to meet all his obligations through the end of the year.

But to date, Argentina has not asked for that help and, so far, there is no indication anyone would be willing to give it to them.

©2001 Reuters Limited.

-- (M@rket.trends), July 13, 2001.