Living Dangerously

Pressures on the Argentine government to suspend foreign debt payments and devalue the peso have escalated as the global economic outlook has deteriorated in the aftermath of Sept. 11.

Cautious optimism that a debt default would be averted following the International Monetary Fund’s (IMF) agreement in August to a US$8-billion emergency credit package quickly evaporated. Domestic resistance has hardened to the deep cuts required to achieve a balanced budget in the second half of the year and in 2002.

The whirlwind of “persistent rumors about the departure of [Economy] Minister Domingo Cavallo and an abrupt change in the tone of economic policy” caused “tremendous torment” for President Fernando de la Rúa’s team as they struggled to calm fears of default, observed María Giselle Castro in the conservative La Nación of Buenos Aires (Oct. 5).

Despite official reassurances that the De la Rúa administration remained committed to preserving the convertibility regime anchoring the peso at a one-to-one parity with the U.S. dollar, Castro noted that many Argentine economists anticipated an eventual move to full dollarization. Still, Castro reported that most economists agreed “that adopting U.S. currency is no solution to the grave fiscal problem.” In the view of some domestic observers, Argentina’s narrow escape from debt default in August bought only a brief breathing space. A recession now well into its fourth year, further erosion in credit ratings, and simmering social discontent may again plunge the nation into crisis. “For the last year or so,” columnist James Neilson wrote in the liberal Buenos Aires Herald (Oct. 9), “Argentina has been edging nearer to the queue...outside the [salvage] yard where ‘failed states’ are broken up. Some suspect it will soon barge its way toward the front.” If the government’s daunting IMF commitment to a balanced budget forces further spending cuts that fuel social upheaval, he added, “all hopes of economic recovery would have to be put on hold...[and] Argentina would be on its own in the world.”