I agree with Carmen's point that the problem is not only economic, but also institutional. The immediate problem is meeting dept payments to buy time for debt restructuring. However, the government is in a terrible spot. It would seem that to meet current payments, it will have to cut wages and raid people's savings even more than it already has, thereby risking further public alienation. Yet it has to do something to restore the confidence of foreign investors and persuade the IMF to free up the $2.7 billion tranche it is currently witholding.
The institutional problem has to with how the bill for this, and future debt payments, will be distributed among the various social classes. From what I've read, it would seem that the burden has fallen most heavily on those most dependent on government expenditures and on those who are building up savings for their future well being. These would, disproportionatly, be the poor and the lower middle classes. These people, not the wealthier classes, were the ones who were banging on pots and pans, smashing windows and looting stores in the recent video clips. Further cuts in government spending and incursions into personal savings to, in effect, transfer money from the Argentinian poor to the foreign rich will likely lead to further bangings, smashings and lootings. Tying the value of the peso to the US dollar illustrates the falacy of trying to maintain a fixed exchange rate without undertaking fundamental economic reforms. The most important question is not whether the government has the courage to free the peso and let it devalue itself. There is probably no alternative. The larger question is whether the government will have the courage and ability to undertake the kind of fundamental restructuring of the economy that will ensure that the current mess does not repeat itself. From what I've read, this could involve ensuring an effective and equitable tax system and a program to raise productivity over a relatively short period. But to do these things, Argentina will need foreign investment. The government will therefore have to everything possible to make sure it meets its debt payments, even at considerable political risk. Ed Weick > Glad to have a participant from Argentina. > > If there was a simple answer to this complex problem I am sure someone would > have come up with it by now. > > The only plausible solution seems to be to offer the same sort of outcome > that is typically offered to corporations who are close to defaulting on > their debt. > > Set up a plan for restructuring the debt (changing terms and condtions of > payment so that creditors get something rather than nothing). This would > give the govt some "breathing room" and some time to impose fiscal > discipline. > > Arthur Cordell > > -----Original Message----- > From: Carmen Lopez [mailto:[EMAIL PROTECTED]] > Sent: Saturday, December 22, 2001 6:48 AM > To: Ed Weick; Keith Hudson > Cc: [EMAIL PROTECTED] > Subject: Re: Argentina down and out > > > Hello, I am Carmen from Argentina. This tuesday and wednesday have been a > nightmare. I am a just graduated economist and I think that the problem of > my country is not only economic but institutional. Politicians have no > credibility at all. My country is a very "special" one. We have had 40 years > of inflation until convertibility arrived. Convertibility succeded in > restraining inflation but the cost was seen in the market for labor were > unemployment raised. I am very interested in hearing your opinions. > Sincerely, > Carmen > ----- Original Message ----- > From: "Keith Hudson" <[EMAIL PROTECTED]> > To: "Ed Weick" <[EMAIL PROTECTED]> > Cc: <[EMAIL PROTECTED]> > Sent: Saturday, December 22, 2001 4:16 AM > Subject: Re: Argentina down and out > > > > Hi Ed, > > > > Yes, the situation in Argentina certainly is complex. For a decade the IMF > > has been helping Argentina on reasonable conditions of reform but the > > country has still allowed its public debt to rise from 30% in 1993 to > > approaching 60% now. The Financial Times talks of "weak financial systems" > > and "poor fiscal discipline" as being the cause. More latterly, Argentina > > thought it could escape all normal sorts of budgetary disciplines by > simply > > tying its currency to the dollar. > > > > So the IMF is in a dilemma. It either carries on being captured by its > > borrowers -- much like a bank with a big customer -- and lending more > money > > with the probability that no reforms will follow, or it refuses to lend > > more money. Either way it will be bitterly criticised. > > > > It seems to me that Argentina is in the grip of two problems which are > > intertwining but have two different causes and can only be solved > > separately. One is, simply, bad housekeeping over the years -- too much > > government expenditure than the growth of the economy ought to allow. > > > > The other is how it values its currency. And this is where I come back to > > the bee in my bonnet. At present, the world is full of different sorts of > > currency policy ranging from total control (e.g. North Korea), total > > control with a shadow unofficial free currency (e.g. Russia and others, > > with the dollar serving their grey economy),currency board (Hong Kong > only, > > now that Argentina's has collapsed), pegged exchange rates (SE Asia), > quasi > > free-floating (USA), and (almost) total free floating (UK). > > > > All of this mess really means to me that no present-day government and no > > group of economists (except the Austrian school) have the faintest idea of > > what a currency is supposed to mean. None are prepared to accept the > notion > > that a currency ought to have intrinsic value which should exercise the > > same discipline on nations that it has on businesses and households. > > Otherwise it's just a token of varying degrees of arbitrariness. > > > > Sorry to harp on again about this! > > > > Keith > > > > > > At 09:31 21/12/01 -0500, you wrote: > > >The situation of Argentina is complex. There are no easy solutions and > > >there is no doubt that some fundmental change will be required before the > > >country can begin to limp its way out of caos. What has happened appears > to > > >be a case of the road to Hell being paved with good (and perhaps bad) > > >intentions and the right thing (at least in the short run) going rather > > >horribly wrong. It's a case of corruption, inaction, and the danger of > > >pegging the value of a domestic currency to something that is beyond > > >national control unless a country is willing to undertake the kind of > > >restructuring that EU membership requires. > > > > > >The reason for pegging the Argentine peso to the US dollar was runaway > > >inflation, but it soon became obvious that the peso was greatly > overvalued. > > >It was too easy a solution. How else might it have been done? Perhaps a > > >price and wage control board with strictly enforceable powers? Perhaps a > > >restructuring of the tax system that required people to pay up or face > > >extreme penalties, thus reducing the government's dependence on deficit > > >financing based on foreign loans? And in the longer term, perhaps a > > >concerted drive to move the country away from corned-beef exports to more > > >value added manufacturing? And also in the longer term, making Mercosur > > >into a viable economic union instead something that sounds nice in > > >politicians' speeches. > > > > > >It is probable that what we have seen this past week is only the > beginning. > > >Somewhere in the wings, the ghost of Jaun Peron is waiting. > > > > > >Ed Weick > > > > > > > > > > > > > > > > > __________________________________________________________ > > "Writers used to write because they had something to say; now they write > in > > order to discover if they have something to say." John D. Barrow > > _________________________________________________ > > Keith Hudson, Bath, England; e-mail: [EMAIL PROTECTED] > > _________________________________________________ > > > > >
