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Cavallo changes course, will focus on deficit reduction.

BUENOS AIRES -- A chastened Argentine government is vowing to eliminate the country's chronic deficits after investor confidence crumbled and the government was forced to pay extremely high interest rates at the most recent bond sale.

For months, investors have warned the government that the root of Argentina's economic problems was excessive spending. Publicly and privately, multilateral officials have been urging Economy Minister Domingo Cavallo to reduce expenditures, both by the federal and regional governments.

Instead, Cavallo has focused his efforts on a well-received tax reform plan, which has succeeded in stabilizing government revenues, and a very poorly timed reform of the country's exchange rate system, which has further undermined investor confidence.

It took a week in which the country's risk rating fell to unprecedented levels and a very expensive debt auction to convince Cavallo of the need to respond adequately to the concerns about the deficit. An appeal by Cavallo to the country's bankers to charge the government "patriotic" rates in Tuesday's $850 million Letes treasury bill auction was ignored. Cavallo had asked local investors to seek no more than 12% for 91-day notes, but the government was forced to pay 14%, an increase of more than 50% over rates at the last sale. A last-minute attempt to extend the sale for an hour in a bid to obtain lower interest rates only angered local financiers. At the same time, the country's risk rating continued to soar, topping 1,200, well above the psychologically important level of 1,000.

After the auction, which also saw weak demand, Cavallo conceded defeat and promised a new approach to dealing with the country's problems. He announced that the auction proved that Argentina no longer could access new credit and said he would begin work to eliminate Argentina's budget deficit, which is expected to be $6.5 billion this year, on top of the government's $128 billion public debt.

Cavallo said that while the federal government would ensure that it and provincial governments meet obligations, neither would incur additional debt.

Cavallo and President Fernando de la Rua held a cabinet meeting Tuesday at which ministers were ordered to submit spending reduction plans within 48 hours. Officials reportedly are under orders to cut at least $1 billion in spending, which would come on top of about $1.7 billion in previous reductions. The government also has reached agreements with provincial governments to cut expenditures by $650 million over the rest of the year.

Despite all of the cuts, it appears that Cavallo's plans to balance the budget this year are a fantasy. The drastic cuts in services, social spending or state personnel that would be required to end deficit spending would be hugely unpopular and would only contribute to the three-year old recession. Bringing the budget into balance would require across-the-board spending cuts of 5% to 10% at the federal and provincial level. It is unrealistic to think that such sweeping reductions can be identified within 48 hours. The only new proposals to surface are limits on retirement benefits and a new tax on salaries of top state officials.

Politically, de la Rua is weak. Rumors that he is in poor health and may resign helped send local markets lower and added to the perception of a government adrift. The opposition Justialista party, which controls a number of key provinces, is trying to extract concessions from the government in exchange for supporting spending cuts. The governors, while agreeing to some reductions, also are clamoring for new reforms, such as reductions in road tolls, cuts in public service rates and increasing unemployment benefits that actually would result in more spending. A deadlock with the governors would have consequences for the government because it would result in the regional governments not being able to pay suppliers, who currently are owed nearly $500 million.
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Title Annotation:Economy Minister of Argentina Domingo Cavallo
Publication:America's Insider
Article Type:Brief Article
Geographic Code:3ARGE
Date:Jul 12, 2001
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