Fw: Don't cry for me, Argentina.

["Nello Margiotta" <animarg at tin.it>]

 

Save the tears for yourself......this from Stratfor:
 
Argentina: Deflating Washington's Free Trade Hopes

Summary

While in Quebec City, U.S. President George W. Bush said he will
make the creation of a Free Trade Area of the Americas (FTAA) his
top foreign policy priority in Latin America. But hard on the
heels of the summit, Argentina's mushrooming financial crisis
will bump hemispheric trade expansion off the top of the
administration's agenda. Instead of expanding trade, Washington
soon will face a potential debt crisis. And Argentina
increasingly looks like ground zero for faltering Latin American
economies.

Analysis

Argentina's main financial problem is not the peso's
convertibility to the U.S. dollar but rather the country's
inability to pay off its debt. Argentina simply is not earning
enough hard currency to pay down its public and private sector
foreign debt.

Argentina has a consolidated public sector debt of $143 billion,
which includes $128 billion in federal government debt and $24
billion in provincial government debt. Almost 70 percent of the
debt is denominated in U.S. dollars. Private sector debt totals
about $61 billion. Public and private sector foreign debt
together total about $204 billion. The public sector alone needs
to come up with about $20 billion a year to meet its debt service
commitments.

Economy Minister Domingo Cavallo insists he can lift Argentina
out of its 33-month recession without devaluing the peso or
defaulting. Argentina's man of the moment has floated a bold plan
to rescue the economy by increasing competitiveness and pegging
the peso to a dollar/euro basket, which will be implemented when
the euro reaches parity with the dollar.

Cavallo claims his proposals already are stimulating growth, but
global financial markets are skeptical. His peso proposal only
caused increased uncertainty in international markets, which had
already assigned Argentina the staggeringly high-risk premium of
938 basis points April 20. Apparently aware of the looming abyss,
on April 23 the Argentine government abruptly suspended the
following day's planned auction of $350 million in Treasury bills
and between $200 million and $400 million in Treasury bonds amid
fears the markets would charge exorbitant interest rates.

Cavallo clearly does not have all the answers. He recently
admitted the peso was overvalued by about 20 percent - but
insists devaluation will not occur on his watch. Critics of the
convertibility system Cavallo created a decade ago as economy
minister under President Carlos Menem claim the peso's rigidly
fixed one-to-one exchange rate with the U.S. dollar has
perpetuated high domestic prices and wages, undercutting the
competitiveness of Argentine commodities and industrial exports
as the dollar has strengthened against other currencies. Yet,
Cavallo also has rejected adopting the U.S. dollar as Argentina's
national currency.

Instead, he claims the adoption of a dollar/euro currency basket
sometime in the future, when the euro achieves parity with the
dollar, will make the peso more stable and competitive against
the dollar. However, many financial analysts see the proposal as
a disguised devaluation, noting that the euro was at 89 cents to
the dollar last week and may not reach parity for months or even
years. Other analysts puzzle over how tying the peso to both the
dollar and the euro would solve Argentina's financial dilemma:
how to earn enough hard currency to pay its foreign debts.

Cavallo will go to the International Monetary Fund again before
defaulting or devaluing. The IMF desperately wants to prevent
both a default and a devaluation of the peso, fearing the
regional and global consequences of a financial meltdown.
However, even another IMF bailout like the $40 billion aid
package assembled only last December will not solve the country's
fast-approaching debt payment crisis. At most, a bailout will
only postpone the inevitable moment when Buenos Aires finally
declares a default and seeks new restructuring talks with
international creditors.

There are regional implications, too. Brazil also is getting
hammered. As Argentina's financial crisis has ballooned this
year, Brazil's currency - the real - has come under increasing
pressure.  The real has depreciated more than 15 percent since
January. On April 20 it dropped to R$2.24 per U.S. dollar, its
lowest level since the currency was launched in 1994.

Last week the Bovespa, Brazil's leading stock market index, fell
8.52 percent - plunging almost 5.09 percent immediately after
Cavallo declared he favored loosening Argentina's ties to the
South American Common Market (Mercosur) in favor of a stronger
bilateral relationship with the United States.

Furthermore, when Argentina finally does default, U.S. President
George W. Bush will have little choice except to push trade
expansion aside and focus on debt restructuring negotiations in
which Argentina's creditors may have no choice but to write off
between 25 percent and 30 percent of what they are owed. If Bush
fails to engage the U.S. government quickly in solving
Argentina's financial meltdown, the crisis will spread regionally
and almost certainly will wreck plans to expand hemispheric trade
in Latin America.