Argentina teeters near crisis

Trouble for biggest borrower in emerging world could trip up global economies

By Scott Bernard Nelson, Globe Staff, 7/26/2001

The news coming out of Italy during the Group of Eight economic summit last week focused on antiglobalization protests, international squabbling over global warming, and the possibility of missile-killing satellites. But behind closed doors, the presidents, premiers, and finance ministers spent just as much time debating the economic future of a country that hadn't been invited to the party.

Argentina, the world's 17th-biggest economy, is teetering on the edge of financial crisis. Heads of state, economists, and money managers alike are watching and wondering: Could the next global financial crisis be brewing in Latin America?

''The financial world is and ought to be scared,'' said David Wyss, chief economist at Standard & Poor's in New York. ''If Argentina goes, maybe Turkey topples, too, and there will be added pressure on countries like Brazil and Indonesia.''

With global economies tied more closely than ever, a meltdown by the emerging world's biggest borrower could have a ripple effect on markets from New York to New Delhi. Memories of the 1997-'98 ''Asian Flu,'' which eventually spread to Russia and Brazil, don't help. That crisis virtually killed off the global bond business for a while and forced the US Federal Reserve Bank to intercede.

Questions on what to do about the Argentine situation were featured prominently in the final report issued by the Group of Eight over the weekend. Afterward, French President Jacques Chirac said that ''if Argentina collapses, it will not collapse by itself.'' He predicted that the world's economic powers will be forced to step in to avert a full-fledged crisis, despite White House comments to the contrary.

''It's a very fragile situation for the other governments,'' said Tulio Vera, chief debt strategist at Merrill Lynch. ''The economy is not good anywhere, and there are a tree of possibilities.''

It's also a fragile situation for plenty of people in Boston.

The Hub is home to a larger concentration of money managers than just about anywhere else, and many of them are scanning their portfolios these days for investments that could suffer if emerging markets take a turn for the worse. And FleetBoston Financial Corp., operating under the name BankBoston in Latin America, is Argentina's second-biggest bank.

''The interest in this has to be disproportionately high in Boston,'' said Wyss, S&P's former top economist in New England.

The anxiety on all fronts stems from fears that Argentina could be headed for a default on roughly $130 billion in government bonds. Overseas banks such as Fleet hold almost $69 billion worth of the bonds, according to the Bank of International Settlement, with the rest owed to trading partners and to groups like the International Monetary Fund and the World Bank.

Argentina is one of the most leveraged nations on the planet, and the most leveraged emerging market economy.

More than one dollar in five lent to emerging markets goes to Argentina, according to the most recent statistics compiled by J.P. Morgan Chase & Co.

That wasn't a problem as long as the country's economy was humming along nicely. Exports of agricultural products, fuel and energy, cars, and other goods to Brazil, the European Union, and the United States rose quickly in the 1990s, which boosted tax revenue and allowed the government to make its debt payments.

But the Argentine economy has been in a recession for almost three years now. The resulting falloff in tax revenue and a bloated government payroll have combined to eat up any discretionary income the government had and to precipitate the current round of hand-wringing.

The country received a $40 million cash infusion from the IMF in December, but that hasn't stemmed the tide of trouble. The main stock index has fallen more than 20 percent year to date, bank customers are closing accounts at alarming rates to convert their money into US dollars, nationwide protests recently followed president Fernando de la Rua's ''zero deficit'' policy of reduced government spending, and interest rates have skyrocketed as investors see more risk in the situation.

And the worst may be to come, say analysts.

''The Argentina situation is probably a shock wave away from a resolution,'' said Jose Barrionuevo, director of global strategy at French bank BNP Paribas. ''It's far from over.''

Barrionuevo said the most likely scenario is that the Argentine economy will muddle along past a congressional election in October and into the fourth quarter, when the government will be forced to restructure its bond debt. Eventually, he said, the country is likely to default on some of the payments altogether - much as Russia did on $26 billion in Soviet-era bonds in late 1998 following a devaluation of the ruble.

Vera, of Merrill Lynch, said ''there is a reasonable chance'' that Argentina will be forced to restructure its bond debt late this year, but he doesn't foresee a default. Dave Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn., said only that ''the arithmetic of default still puts a fairly high risk on Argentina.''

Analysts are all but unanimous, though, when it comes to the global impact even the worst Argentinian developments would have, regardless of whether other governments or agencies intervene. Emerging markets elsewhere would clearly take a hit, but nobody thinks a worldwide crisis is likely on the scale of the one caused by the Asian contagion of the late 1990s.

That's because people have been able to see this crisis coming for at least a year and because, some argue, investors learned their lessons after earlier emerging markets disasters.

''There just isn't the kind of leverage and exposure today that there was three years ago and certainly that there was five or six years ago,'' said Gilmore. ''Consequently, you're not going to see the same kind of contagion we once saw.''

FleetBoston chief economist Wayne Ayers agreed that ''this is not a repeat of 1998, when we saw the Russian default and markets worldwide seized up.''

He also said the overseas banks are not in as precarious of a situation as it might appear. Roughly 3 percent of Fleet's earnings are attributable to Argentina, and those are not likely to suffer much if the government ends up stretching out its bond payments or even if it defaults on a few.

New England's biggest bank tends to limit its loans in Argentina to big multinational companies and wealthy private-banking clients. The worse the situation gets there, Ayers said, the more cash people - especially high-net-worth customers - are likely to stash with the perceived safe haven provided by BankBoston.

''Argentina will move eight ways from Sunday to avoid defaulting on those bonds,'' Ayers predicted. ''But even if they do, one of the strong suits for us is the BankBoston name and reputation.''

Ironically, perhaps, the ultimate determinant of how painful the situation gets for all parties might be the strength of the American and European economies.

''If the US starts pulling out of this slowdown and Europe grows, Argentina will probably be all right,'' said Wyss, of S&P. ''If not, they won't be all right and we will just have to see how it shakes out for everybody.''

Scott Bernard Nelson can be reached by e-mail at nelson@

globe.com.

This story ran on page C1 of the Boston Globe on 7/26/2001.

http://www.boston.com/dailyglobe2/207/business/Argentina_teeters_near_crisisP.shtml

-- Martin Thompson (mthom1927@aol.com), July 26, 2001

Answers

The sleeper here--a danger that everybody seems to be overlooking--is that it is Brazil, not Argentina, that is closer to collapse. When their drought-imposed energy restrictions were implemented on June 1 it immediately resulted in a 15% drop in industrial production. Brazil is the industrial giant of the emerging nations, in fact, in total, it is the 8th biggest economy on the planet Earth. 15% is one HELLUVA drop. Brazil is also Argentina's number 1 trading partner, and its (Brazil's) currency, the Real, is in shatters, dropping like a rock against the dollar (which the Argentine economy is also pegged to).

The currency imbalance, alone, is becoming devastating. Yet, we read or hear practically nothing about this. Like this article, everybody seems to be saying, nothing to worry about--nothing like 1998 and the Rusian default.

I have a sick feeling that a thunderbolt is about to hit the world financial community. I just hope it is not the equivalent of 1929.

-- JackW (jpayne@webtv.net), July 26, 2001.

Can anyone tell me if Argentina is one of those countries that has switched to using the US dollar as its currency instead of whatever the national currency used to be (peso?). Also, if Brazil is the 8th or 9th largest economy in the world, why isn't it invited to these global eco-summits?

-- Cash (Cash@andcarry.com), July 27, 2001.

Cash, the Argentine curency is PEGGED to the dollar, hence, with the dollar so strong, their currency, too, is soaring. This puts them all the more out-of-wack with the Brazilian Real, which is tumbling, almost daily. And, as they are each other's major trading partner, this makes for dramatic dislocations.

It's said that Arentinans are now pulling their money out of banks, and converting them to ACTUAL U.S. dollars. That's capital flight, about the worst thing that can happen to any country. And, if the Argentine government does actually let loose of this peg, and devalue, this capital flight will become calamitous.

As to why Brazil is not invited to the G-7 meetings, I don't know. Maybe it's because they are 8th. Or, maybe it's because, while the south is highly industrialized, the nort of Brazil is still, for the most part, quite primitive, making it, yet, a developing nation.

-- JackW (jpayne@webtv.net), July 27, 2001.