http://www.nytimes.com/2001/07/13/international/americas/13ARGE.html?todaysh eadlines July 13, 2001 Markets Disapprove of Argentina's Plan to Rescue Economy By CLIFFORD KRAUSS Argentine Debt Creates Fallout That Is Wide (July 12, 2001) BUENOS AIRES, July 12 — Political leaders and investors turned a disapproving cold shoulder today to a new round of austerity measures offered by the government, sending local financial markets plummeting and a chill through some markets abroad. It was the second jolt in the markets this week for Argentina, which has been struggling to contain an economic and banking crisis for several months. On Tuesday, interest rates spurted as the government auctioned more than $800 million in short-term bonds. Treasury bill yields soared to 14 percent, the highest rate in five years. Today, overnight bank rates were quoted as high as 150 percent, as investors signaled that they considered Argentina's finances increasingly risky. Late Wednesday, Economy Minister Domingo Cavallo, who engineered the country out of a economic morass a decade ago, announced major cuts in public salaries and pensions and an increase in taxes intended to eliminate a projected $1.5 billion budget deficit in the second half of the year. Although the measures would surely be painful, they were proposed to respond to growing fears internationally that Argentina was heading toward bankruptcy and a devaluation of its currency. But the announcement sparked angry threats from labor leaders and chafing within the already fractious government. Instead of firming the weakening values of Argentine bonds and stocks, the move only gave economists and investors more evidence that the government is careering without clear direction month to month from one divergent economic approach to another. The Merval stock index here closed down 8.2 percent after having rebounded from a 13 percent decline. It has fallen 24 percent in two weeks. The fallout from Argentina has been felt the most in neighboring Brazil, South America's largest economy and Argentina's largest trading partner. Its currency fell to a low today against the dollar. The currencies of Mexico and Chile also fell, as did the leading index on the Mexican stock market. The effects of Argentina's troubles have not been as severe as past emerging market crises like those in 1997 and 1998. But in recent days, stock markets as far away as South Africa, Taiwan and Turkey have been shaken by Argentina's debt troubles. Today, though some emerging-market currencies strengthened. In the United States, stock prices rose, owing mostly to a broad rally after a bullish forecast by Microsoft. Treasury prices also rose, and some analysts attributed that to investors' leaving emerging market debt like Argentine treasury bonds for the safety of United States securities. The mounting political opposition to the Argentine program appeared intended to forestall greater austerity measures like cuts in health care, education and Social Security spending. But it is exactly such cuts that many economists say will be needed for the government to continue to pay interest payments on the debt. The uncertainty of whether the government is strong enough to take such measures has had the effect of raising interest rates, making debt payments more expensive. In recent weeks, a consensus has emerged among Wall Street analysts that a default or a debt restructuring was probably likely. An outright currency devaluation, considered less likely, would hurt living standards significantly. Neither the United States nor the International Monetary Fund foresee intervening to help Argentina. Argentina has suffered through a three-year recession, with unemployment exceeding 16 percent and a growing number of businesses entering bankruptcy. In recent weeks, the crisis has been compounded by rapidly rising interest rates rooted in investor doubts that the central government and provinces can fulfill their payment obligations on a combined debt of $150 billion. Those doubts have been stoked by the growing perception that President Fernando de la Rúa is unable to inspire public confidence or unite his diverse ruling coalition around a program to manage government finances or growing social unrest. Mr. Cavallo announced on Wednesday cuts of 8 to 10 percent in wages for more than a quarter of a million federal employees and equivalent cuts in pension benefits for retired government workers. He also proposed an increase in a financial transactions tax and a new court system to crack down on major tax evaders. But he stopped short of announcing cuts in services or layoffs of government workers. "We have to spend only what we have," Mr. de la Rúa said. "The public sector will not borrow money at exorbitant rates," Mr. Cavallo said. "But we will pay the debt. We have money to do so." He also vowed to keep the value of the Argentine peso tied to the dollar. Mr. Cavallo's announcement on Wednesday represented a change of emphasis, if not of direction, from the wide array of approaches that he has tried since returning as economy minister four months ago. He had previously cast aspersions on austerity, preferring to increase manufacturing through instituting protectionist measures and multiple exchange rates to subsidize exporters. The problems have developed over several years. Although the economy grew by 43 percent in the 90's as President Carlos Saúl Menem privatized much of the government and cut regulations, government spending rose by a larger 90 percent. The economy began slowing after the Asian and Russian financial crises in 1998, as international investors began withdrawing from emerging markets. A drop in prices for agricultural exports further slowed growth, lowering tax receipts. Mr. de la Rúa raised taxes shortly after taking office in January 2000, a policy that slowed growth without closing a growing fiscal deficit. The policies did not satisfy international investors, who are seeking a stronger effort at cutting spending, nor several pivotal leaders in the center-left government coalition or opposition who say the new austerity policies will only contract the economy even more. For cuts in spending to stick, the government will look to its shaky support in Congress. Mr. De la Rúa and Mr. Cavallo had to delay announcing their program by two hours, as competing sectors of the cabinet argued heatedly behind closed doors. Then, many senior officials in the governing coalition refused to attend the announcement. The leader of the governing Radical Party in Buenos Aires Province, Federico Storani, was one of the leaders in Mr. De la Rúa's party who were caustic. "This is the kind of policy that has been proven to fail," he said. "With this adjustment, Cavallo has confessed his failure." Leaders of the opposition Justicialist Party, who control most governors' offices and the Senate, were also critical. "It's the last card they have to play," said Senator Eduardo Menem, brother of the former president, whose recent indictment has complicated relations between the government and the opposition. "It's only going to generate more problems," he added.
