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Joy over Argentine bailout obscures problems that remain.

BUENOS AIRES -- Argentine officials are hailing the $34 billion bailout by the international financial community as the first step toward a sustained recovery of the battered economy. While the rescue package was followed by a number of important measures aimed at reforming the economy their euphoria masks a number of serious problems that remain.

The initial reaction to the bailout was a national sigh of relief as interest rates and the country's risk rating dropped substantially. The papers are full of confident projections by government officials and private-industry analysts that 2001 will see a surge in consumer demand and rising exports.

Experts cite an expected strengthening of the Euro versus the dollar, which will make dollar-based Argentine exports more competitive, expectations of lower interest rates in the United States and hopes of stronger international commodity prices as grounds for optimism. In particular, there are hopes the weakening of the Euro and wariness of European beef supplies to concerns about mad cow disease will bolster Argentine meat exports significant. Exports already were showing strong performance at the end of last year.

In addition, economists say two years of recession have created pent up domestic demand for consumer goods, while local industries have allowed inventories to slip to near record low levels, both indications the local economy is due for a bounce. Domestic demand grew a strong 3.8% in November and an even more robust 4.4% in December.

However, there are a number of factors that could weaken a recovery and analysts worry that circumstances beyond the government's control could also cause problems.

Politically, President Fernando de la Rua remains weak due to a loss of confidence in his handling of the economy and fractures within the ruling Alianza coalition. Many members of Congress view the bailout as money from heaven and are pressuring the government to increase spending, despite the government's commitment to multilateral agencies to do just the opposite over the long run. De la Rua was forced to veto the budget after lawmakers inserted several budget-busting provisions, including reversing a 12% salary cut for government workers. However, even the government's proposal calls for a deficit of more than $7 billion, which will add to the mounting foreign debt, which was partially responsible for the recent crisis.

Problems getting his program through Congress prompted de la Rua to issues a series of decrees implementing most of the measures. However, a court quickly struck down one reforming the government's public works changes and opposition politicians were gathering their forces to oppose changes in the relationship between the federal government and the provinces, historically a touchy subject in Argentina. The government also got another slap in the face when former Economy Minister Domingo Cavallo refused to serve on a panel to propose tax reforms. The government had sought to bring the respected Cavallo into the government in almost any capacity to bolster its credibility.

In addition, a multi-billion dollar public works program is slated to start slowly this year and is expected to generate few jobs, a problem given that high unemployment is one of the main sources of de la Rua's unpopularity. Expenditures in northwestern Argentina, one of the hardest hit areas, are expected to be just $31 million and will create a paltry 1,000 jobs.

There also is concern about the state of the global economy as growth in the US slows. Most economists say they worry a recession in the United States could spread to Latin America and depress demand in Brazil and other key markets. The US rate cut last week sent markets higher and touched off near euphoria.

In the longer term, it is unclear that Congress has the discipline to keep spending at current levels for the next five years, one of the terms the government accepted as the price for the bailout. There is no legally binding mechanism to keep spending under control and with the government so weak, opposition parties already are using the issue of poverty and unemployment to press for more spending.
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Title Annotation:economic reform measures underway
Publication:America's Insider
Article Type:Brief Article
Geographic Code:3ARGE
Date:Jan 4, 2001
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