Fw: Argentina: Impasse With IMF Means More Crises Ahead

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

 http://www.stratfor.com/standard/survey.php
 
 Argentina: Impasse With IMF Means More Crises Ahead
 
 Summary
 
 Argentina wants up to $20 billion immediately from the
 International Monetary Fund and other multilateral agencies in
 order to carry out deeper economic reforms. But the IMF wants the
 reforms completed before it will agree to provide any more
 financial aid to Argentina. The country's economic crisis is
 about to get much worse.
 
 Analysis
 
 Argentine President Eduardo Duhalde warned March 12 that the
 country's political institutions would begin to collapse in April
 if the International Monetary Fund does not provide billions of
 dollars immediately to prop up its battered economy. However, IMF
 Executive Director Horst Koehler said in Washington, D.C., the
 next day that although the organization wants to help, Argentina
 must "show more will" to help itself, Buenos Aires daily Clarin
 reported.
 
 The Duhalde government argues that it cannot make deeper economic
 reforms without first obtaining up to $20 billion in financial
 aid from the IMF and other multilateral entities. But the IMF,
 backed until now by the Bush administration, wants a more
 realistic budget, deep cuts in federal and provincial government
 spending and stronger guarantees for investor rights before it
 will agree to provide any more aid. Given the impasse,
 Argentina's problems will soon worsen, heightening the risk that
 violent protests and looting episodes could erupt and that
 Duhalde's government will fall.
 
 Even if Duhalde resigned and called new elections ahead of
 schedule, he likely could calm tensions only to a limited degree
 because Argentina's underlying economic problems would remain.
 Most likely, the military would take over and replace the current
 administration.
 
 Lt. Gen. Ricardo Brinzoni, the commander of Argentina's armed
 forces, recently said there is no possibility the military would
 take control of the government, calling instead for "more, not
 less, democracy" as the only solution to the country's problems,
 The Associated Press reported. But if Argentina collapses into
 anarchy in coming weeks, its reluctant, discredited and
 financially crippled military may be the only option for
 restoring order until new elections can be held.
 
 The IMF's tough conditions put Duhalde between a rock and a hard
 place. Compliance with the fund's demands is politically and
 socially explosive because it implies firing hundreds of
 thousands of government workers. Provincial governors battling
 for their individual political survival would resist deeper
 spending cuts, and dismissing up to a third of the government
 work force would spark potentially violent protests that could
 bring down Duhalde's unpopular government.
 
 However, without compliance, Argentina will not get any financial
 aid. And without an immediate cash infusion, its economic crisis
 likely will deepen in the coming weeks. Social tensions will
 flare again in potentially violent street demonstrations,
 Duhalde's fragile political support will crumble and he may be
 forced to resign and call new presidential and congressional
 elections well ahead of September 2003 as currently scheduled.
 
 In fact, the government's stability is increasingly doubtful,
 regardless of whether the IMF comes to Argentina's aid. Elsa
 Carrio, a populist socialist leader who heads all voter surveys
 of potential alternative leaders to the traditional Peronist and
 radical political establishment, told the Buenos Aires daily La
 Nacion on March 8 that with or without IMF assistance, Duhalde
 won't retain power to the end of 2002.
 
 Upon close inspection of Duhalde's economic plan, it is clear
 that -- even though the administration has complied with many IMF
 requests, including floating the peso and eliminating a two-tier
 exchange rate -- it lacks the political will to carry out more
 necessary reforms.
 
 After nearly three months in power, Duhalde has not unveiled any
 clear plans to reduce the size of the bloated federal and
 provincial governments. Also, despite a recent agreement with
 provincial governors to curb spending, more than $3 billion of
 fresh provincial debt has been issued in 14 different scrips
 since December, to offset a drop of more than 20 percent in tax
 revenues. Moreover, Duhalde's proposed economic plan does not
 include measures to liberalize the country's rigid labor markets,
 and some of his revenue-raising proposals will discourage exports
 and investment.
 
 Instead of pushing the Peronist-dominated Congress and provincial
 governors to enact reforms to slash public spending, Duhalde has
 launched an aggressive strategy to pressure the IMF and Bush
 administration to release more financial aid.
 
 For example, Economy Minister Jorge Remes Lenicov warned March 10
 at the Inter-American Development Bank's annual conference that
 Duhalde was Argentina's "last chance" to avoid a political
 collapse, which could lead to the election of a socialist
 government opposed to free trade and open markets.
 
 In a lengthy appeal for immediate IMF aid, Remes Lenicov said the
 Argentine economy has contracted 15 percent since the 4-year-old
 recession began, private investment has dropped 40 percent,
 industrial output is down 20 percent, unemployment has reached 23
 percent and more than 40 percent of Argentines now live below the
 poverty line -- compared with only 15 percent eight years ago,
 according to La Nacion.
 
 At the same time, Argentina's ambassador to the United States is
 leading a diplomatic offensive that emphasizes the country's
 longtime support for foreign policy goals seen as vital by
 Washington -- including support for Plan Colombia, backing the
 trade embargo against Cuba and offering Argentine troops to
 support the U.S. war against terrorism.
 
 Meanwhile, senior Argentine government officials are warning that
 their country would turn inward and disengage from the global
 economy if aid does not arrive quickly. However, Argentina's
 combined default and devaluation have already blocked its access
 to the global financial and trading systems.
 
 Since defaulting on $141 billion in sovereign debt in December,
 Argentina has stopped paying its debts and has lost all access to
 trade financing and other forms of international credit. The
 peso's devaluation, and a host of measures designed to cushion
 devaluation's impact on Argentine savers and debtors, nearly
 wiped out the private financial system and undermined
 international confidence in Argentina's commitment to property
 rights and contracts.
 
 As a result the country's only sources of hard currency are
 exports, which account for only 10 percent of GDP and have not
 increased despite the peso's devaluation. Moreover, Argentina now
 must pay cash for whatever it imports. This has already damaged
 trade and investment flows with neighboring countries such as
 Brazil and Chile.
 
 However, Duhalde has bigger immediate problems than damaged trade
 relations with neighbors. For instance, his for Goldman Sachs in
 New York City, estimates that the Argentine Central Bank's liquid
 foreign exchange reserves are now a negative $500 million and
 falling rapidly, Brazilian daily O Estado de Sao Paulo reported
 March 12. Leme also believes Argentina's economy will contract at
 least 10 percent in 2002, and inflation will top 100 percent as
 the government prints billions of new pesos to offset vanishing
 hard currency reserves.
 
 Meanwhile, unemployment is soaring. The February layoff total of
 75,000 workers was 3,200 percent higher than the same month a
 year earlier and 134 percent higher than the number of layoffs
 reported in January 2002. Buenos Aires estimates that by May,
 unemployment could reach 30 percent and that more than 17 million
 Argentines -- nearly half the population -- will have dropped
 below the poverty line.
 
 With rapid aid unlikely, the government and Argentine businesses
 are bracing for a social explosion. Across the country thousands
 of banks, supermarkets, shopping centers and stores have
 installed metal grates and boarded up windows to protect their
 buildings and inventories from looting and destruction by angry
 protesters. This week, government workers also installed metal
 gates, barriers and other defenses to protect Congress and other
 government buildings from assault.