Bailout is hollow victory as faith in de la Rua continues to slump.

BUENOS AIRES -- The $39.7 billion international bailout of Argentina puts an end to fears of an imminent financial crisis, but it has raised additional questions about whether President Fernando de la Rua is capable of governing the country.

Faced with a reluctance on the part of the Clinton administration to provide funds directly during a hard-fought campaign, multilateral lenders, commercial banks and institutional investors cobbled together a complex package.

Now that the crisis has abated for the time being - the package will allow the country to meet its obligations next year and the year after - the finger pointing has begun. De la Rua's standing at home, already tarnished by criticism over his poor handling of a corruption scandal, political turmoil within the ruling Alianza coalition and protests against his economic policies, has suffered a major blow.

A recent poll showed that just 8% of the population, only a few points above the poll's margin of error, approved of his handling of the government and economy. Economy Minister Jose Luis Machinea, often remembered for his perceived role in the hyperinflation of late 1980s that forced Radical President Raul Alfonsin to step down seven months early in 1989, has denied persistent rumors that he will step down or be fired. Analysts say the only reason he remains is that firing Machined would anger the Radical party, one of the two partners in the Alianza coalition. De la Rua already is having trouble with the other major partner, Frepaso, due to his handling of the corruption scandal.

After just 12 months in office, de la Rua is widely seen as a failure, having been unable to deliver on promises to revive the economy and crack down on corruption. The bailout, although greeted with widespread relief, also is seen as a sign of his weakness and ineptitude.

Argentine economists also have been quick to point out that the bailout does not address the problems that led to the crisis, such as high budget deficits, unemployment, lack of consumer demand and excessive labor and pension costs.

The consensus is that de la Rua will have a hard time pushing measures intended to bolster competitiveness, reduce public expenditures and renew investor confidence.

De la Rua may yet have to sacrifice Machinea, who many view as damaged goods. Pressure is building for him to replace Machinea with Defense Minister Ricardo Lopez Murphy, Foreign Minister Adalberto Rodriguez Giavarini and even former economic czar Domingo Cavallo. There appears to be widespread skepticism that even with the fresh funds, Machined is capable of putting together a viable economic program, especially since time is short if major economic changes are to make a difference by the end of 2002, when the money from the rescue package starts to run out.

Most business leaders believe the government will not drop the long-standing policy of keeping the peso on par with the US dollar. The business community will be watching to see whether de la Rua is successful in wringing trade concessions out of Brazil and other Mercosur partners. Other key tests will be whether the government can push tax and pension reforms through Congress.

Although there is no large scale flight of companies from the country yet, many large international Firms are cutting payrolls and appear to be bracing for protracted economic hard times. US firm Esso recently laid off workers at its refinery outside of Buenos Aires and company officials have said they may move headquarters operations to Brazil.

Trade and Industry Minister Javier Tizado and other government officials insist that 30 months of recession have created pent-up demand for consumer goods that could lead to industrial growth of 5% next year. Tizado said recently that ff the government can restore investor confidence, companies will resume capital investments, which would lead to job creation, rising domestic demand and increased exports. However, growth in industrial output through November was a paltry 0.2% and there were significant declines in output in October and November compared to the same period a year ago.

Who backed the bailout?

(All figures in billion US$)

IMF                                 $13.7
Private banks                       $10
Various debt swaps                   $7
Local pension funds                  $3
World Bank                           $2.5
Interamerican Development Bank       $2.5
Spain                                 $1