THURSDAY SEPTEMBER 06 2001 Argentina stares at economic abyss FROM JAMES DORAN IN BUENOS AIRES IN A coffee bar in central Buenos Aires, Alejandro Schulenquer, a once-prosperous car salesman, stared blankly at the headlines in three different newspapers, each proclaiming a new means of salvation from national financial ruin. He grimaced at a picture of Domingo Cavallo, the Finance Minister, who claims that he will steer Argentina away from economic meltdown.

“He cannot save the economy from collapse,” Señor Schulenquer said. “It has already collapsed. Now they try to change the figures every day to give us hope. But there is none.”

Such hopelessness hangs over everyone in Buenos Aires. The holiday guide books tell of shops filled with luxury goods, flamboyant tango dancers in San Telmo and colourful bohemians in La Boca and Palermo Viejo. But the streets, shops and restaurants are mostly empty.

The financial crisis that is gripping Argentina has bled dry the Porteños, the people of Buenos Aires. Jobs have been cut by the thousand; unemployment is now at a record 17 per cent. Wages have been slashed and pensioners and the unemployed find their state handouts shrivelled to worthless levels.

The source of Argentina’s economic woe is its crippling $128 billion (£88 billion) debt. Last month the International Monetary Fund awarded the country $8 billion, which followed another award of $40 billion in December. Yet even after such huge injections of money, Argentina’s prospects remain bleak. Worse, time is running out. The country has less than 90 days to prove that its promises to the IMF can be kept.

Default would increase the risk of global recession. Neighbours, in particular Brazil would be hit first and hardest. But it would be disastrous for Argentina. Its financial infrastructure, dominated by foreign banks, would collapse. Unemployment would soar. Poverty, already at Third-World levels in most rural provinces, would become entrenched. Worst of all, it would very likely shut off foreign investment and trade, the only route back to health.

Michael Smith, chief executive of the Argentine arm of HSBC, the global banking group, said: “If Argentina does default, this will be a closed market for at least ten years. There will be no banks to speak of, no foreign investment, nothing. It would become a wasteland.”

Faced by this prospect and overshadowed by the corruption and debt in previous governments that has led them to it, President De La Rua and Señor Cavallo continue to smile, albeit grimly. Each day they unveil new reforms designed to stave off default.

Many blame Señor Cavallo for the present emergency, since he was Finance Minister under Carlos Menem, the former President, who privatised many state-owned industries and opened up financial markets, only for the billions of dollars raised to disappear instead of paying off the national debt or restructuring the economy.

Nevertheless, Señor Cavallo has acted swiftly since he was appointed in March. His big idea is the “zero-deficit” plan, under which Argentina must live within its means, spending no more than it receives in taxes. He is also trying to attack the plague of tax evasion, thought to be 40 per cent, while the President tries to stem the flow of cash to cumbersome, corrupt public services. Billions of dollars are lost each year in back- handers, pay-offs and fraud.

Martín Redrado, chairman of the Fundación Capital economic think-tank and a former head of the country’s Securities and Exchange Commission, calls the cuts “butchery”, but it is possible that Señor Cavallo will succeed. Señor Redrado noted that, from a $5.9 billion deficit in the first half of this year, Argentina is on track to overspend by only $151 million in the second half.

However, success relies upon Señor Cavallo’s measures performing as promised. The weakest of those may be wage cuts. Señor Redrado argues that the 13 per cent reduction in state wages and pensions needs to be “more like 24 per cent”, but “the people will not accept that”. As it is, there have been protests. Last week, more than 30,000 gathered in front of the government building, promising violence if wages were not restored. In Buenos Aires, employees are not being paid in money at all, but in “patacones”, bonds exchanged for goods and services in approved shops, because the province has no cash.

The prevailing view is that the only thing keeping Argentina from collapse today is, as Señor Redrado put it: “Fear. Fear of the abyss.”

http://www.thetimes.co.uk/article/0,,3-2001310377,00.html

-- Martin Thompson (mthom1927@aol.com), September 07, 2001