Headline: Argentina's trouble could affect us, too

Source: Terry Savage [columnist], Chicago Sun-Times, 30 August 2001

Source: http://www.suntimes.com/output/savage/cst-fin-terry30.html

'Let's all go shopping." It's the rallying cry of American consumers. And it's meant good news for the economy, keeping us out of recession as business investment collapses in tech and telecom.

But guess who else is shopping--and it's not a signal of good news. A hotel doorman pointed it out to me as he helped some visitors loaded down with Bloomie's and Nordstrom shopping bags. "Oh, they're from Argentina," he said, noticing my amazement. "We have a lot of tourists from there, and they spend like crazy."

It made instant sense. The Argentine peso is pegged one-to-one to the dollar--at least at this writing--and Argentinians want to get rid of those pesos while they still have some value. Argentina is expected to devalue imminently--making those pesos worth much less.

Consumers, businesses hurt in devaluation

It will be a problem not only for individuals--but for companies that have piled up about $25 billion in debt, which is dollar-denominated or dollar-pegged. After a devaluation, businesses would have to scrape together many more Argentine pesos to repay those bank loans--or default.

The banks are in as much trouble as the business economy in Argentina. It's not only travelers to the United States who are pulling deposits out of the banks and turning those pesos into something they hope will retain value. Even Argentine stay-at-homes are withdrawing cash before a feared government freeze on accounts. Bank deposits have fallen by $2.4 billion since early July.

Argentina has about $130 billion of sovereign debt--plus a huge and growing budget deficit that it finances by selling bonds, mostly to the banks! Now the Argentine government is making deep budget cuts in exchange for promises of new loans from the International Monetary Fund totaling $8 billion. But Argentine workers are protesting the austerity plan, which includes wage cuts even as the price of a basic commodity like bread is soaring.

OK, so why should American consumers, or investors, care about the financial woes of Argentina? I have two words: Remember Asia.

We live in a very small world, after all. Argentine debt represents about 20 percent of emerging-market bonds. A series of defaults could freeze world capital markets and world trade as scared money seeks a safe haven. Not only Argentina, but Brazil, Chile and even Mexico could be affected. And U.S. markets have already proved they're not immune to such a global crisis.

No wonder the IMF is readying loans. But the IMF also demanded austerity three years ago when it decided to bail out Asian countries. That combination--cash for a bailout in exchange for deep spending cuts--was enough to send the region into a tailspin. Obviously, the IMF has not learned the lesson.

Can U.S. shop enough to keep world afloat?

Right now, the dollar has fallen somewhat from its high level of earlier this summer, but it remains relatively strong against most currencies--in spite of lower interest rates here. But some countries around the world have been cutting their interest rates to weaken their own currencies. That gives them a trade advantage: a weak currency makes their exports more attractive to other countries whose stronger currencies can buy more of their products.

But what if the U.S. economy continues to weaken, and the dollar continues to fall? Some economists fear it could lead to a global recession. To counteract that possibility, the Fed has been lowering interest rates and increasing the U.S. money supply at a 20 percent annual rate. Those low rates and plentiful credit are what's kept American consumers spending on houses, cars and clothing.

But can we shop enough to keep the rest of the world afloat? Global economic growth bailed the world out of the last currency crisis. But now Europe, and particularly Germany, are heading toward their own recessions. And the American economy isn't exactly booming. So it pays to keep an eye south of the border.

Or else we might have a global reprise of the signature song from "Evita," "Don't Cry for Me Argentina."

And that's The Savage Truth.

-- Andre Weltman (aweltman@state.pa.us), August 30, 2001

Answers

Argentine spendthrifts, huh? Makes sense, but for an entirely different reason than sappy, irresponsibe American spendthrifts.

-- Wayward (wayward@webtv.net), August 30, 2001.

so why wouldn't individuals just draw out their money and convert to another currancy, ie US$?

-- Taz (Taz@outintheforest.com), August 30, 2001.