14 - 20 February 2002
Issue No.573
|
Al-Ahram Weekly Online 14 - 20 February 2002 Issue No.573 |
||
| Published in Cairo by AL-AHRAM established in 1875 | Current issue | Previous issue | Site map | ||
Life after default
Tempers are flaring as the Argentine government looks for a way out of the financial crisis. Hisham El-Naggar writes from Buenos Aires
Five weeks have passed since Eduardo Duhalde was voted -- not by the people but by parliament -- Argentina's president for the next two years. The country -- and the world -- recognised him as the legal head of state, with a mandate to prove that there is life after default.
The fact that Argentina had announced a unilateral suspension of payments on its debt in the midst of street violence which cost ex-President Fernando de la Rua his job, is hardly irrelevant.
Argentina's default has been called "the greatest default in history," and has the financial community, in Buenos Aires and also in New York, London, Madrid and not a few other places, in an advanced state of agitation. Their concern: will Argentina pay up, in full or in part, at some point in the future?
The country's economic recovery is, in the nature of things, a far lesser concern. But there is a problem for globalisation's financial dons: without recovery, there is no chance that Argentina will make a convincing deal with its impatient creditors.
Hence the need to worry about the country's economic, as well as socio-political, state. The International Monetary Fund (IMF) and company would have preferred that President Duhalde implement its world-famous, and so far strikingly unsuccessful austerity recipe, and consumers, borrowers and bank depositors be damned. Fat chance, what with the population ever vigilant, banging its pots and pans periodically to remind the government that it will no longer consent to being systematically dispossessed.
The heart of the problem is the mess the financial sector is in. Massive capital flight during the months when Economics Minister Domingo Cavallo ran the show, with the support, however reluctant, of the IMF, made inevitable Cavallo's parting gift to the nation: a partial freeze on bank deposits. Such a step is enough to bring a vigorous economy to a an unceremonious halt, and Argentina's recession-bound economy was hardly vigorous.
Since then, the problem for Cavallo's successors has been to find a way of ending the freeze without the banks going under. The disastrous step taken by Cavallo was guaranteed to wreck what confidence was left in the banking system. Lift the freeze, conventional wisdom suggests, and watch the entire population withdraw its savings from the banking system.
So how can the government overcome at least some of the harmful effects of the baneful deposit freeze? The freeze has so starved the economy of liquid funds that the words of the popular tango Where's a peso to be found? are on everybody's lips these days. Duhalde took the courageous -- and, in the opinion of most experts, unpostponable -- step of devaluing the peso in the hope of achieving two things: making the economy more competitive, and being able to expand the money supply with the backing of the Central Bank's anaemic reserves.
Duhalde's strategy can be summarised as follows: devalue, jump-start the economy and hope excessive inflationary expectations do not wreck everything, negotiate a package with the IMF based on a measure of fiscal austerity, negotiate an arrangement with creditors, and hope for confidence to return gradually so that slowly ending the deposit freeze does not leave the country without any viable banks. As a nod to the IMF, the government consented to allow the peso to float freely as of 11 February. The government's strategy is not unreasonable, but it implies at least one enormous risk: in a country where memories of the hyper-inflation of the 1980s are still present, a falling peso could cause the population to fear inflation so much that no one would hold on to a single peso if he could possibly help it.
The demand for dollars would then be so voracious that the free-floating peso would float permanently downward vis-a-vis the dollar, making accelerating inflation a self-fulfilling prophecy. If the government declines to issue additional pesos, the liquidity shortage would then be catastrophic. If it does issue them, thus "validating" the inflationary process, a new hyper-inflation would not be far off.
The local press -- and the foreign one too, when it deigns to remember Argentina -- is full of foreboding. Unlike the 1980s when there was virtually no unemployment and the economy was operating almost at full capacity, unemployment is now believed to have passed the 20 per cent mark and the economy is operating at two-thirds capacity, if that. In such circumstances, it seems unrealistic for producers to keep raising prices and for unions to clamour for higher wages.
What appears inevitable -- and is not undesirable -- is a realignment of relative prices. Initially, tradable goods -- imports, import substitutes and exportables -- are likely to become dearer in local currency terms, while non-tradable goods, particularly services, can be expected to remain subject to the deflation which has plagued the economy in the past three years.
This would, alas, imply a loss of purchasing power for the bulk of the population. But it would not impede an export-led recovery and a stimulation of the local economy through import-substitution.
This best-case scenario depends on two conditions being met: that the public's expectations do not get too irrational, anticipating what would really be an unjustifiably persistent upward pressure on prices, and that the banking sector, currently paralysed, play a role in financing at least the working capital needed to get a recovery going.
Neither condition can be taken for granted, although the first is proving less problematic than the pessimists have forecast: consumers are fiercely resisting speculative price increases, sometimes by denouncing speculators and more often by declining to buy. It remains to be seen who will win the waiting game: speculators or consumers.
The second condition will require a more sustained effort on the part of all concerned before it is fulfilled. The government has responded to the public's wrath by decreeing that dollar-denominated bank loans -- and most bank loans were in the hard currency -- are to be converted to pesos at the old exchange rate of one peso to one dollar.
Dollar-denominated deposits -- and most deposits were in the US currency -- are to be converted to pesos at the more favourable rate of 1.40 pesos to one dollar: a modest compensation for the fact that it will be some time before people can have full access to their deposits.
Banks, many of them foreign-owned, have been screaming that such inconsistent treatment will cause their ruin. They have powerful allies in the international financial community, not to mention the international financial press. But they can count on zero support from a population which reproaches them for reaping dizzying profits in the 1990s, facilitating capital flight in the past few months and refusing to recapitalise so as to guarantee the safety of the public's savings.
Bank windows are the protesting public's favourite target in street demonstrations. And the word most often used by Argentines these days to describe the banks is the colourful slang term "chorros." Rough translation: "friggin" thieves.
A sensible view of the problem suggests that, sooner or latter, a deal will be struck to accommodate everybody's interests. The banks would receive some -- certainly not full -- compensation in return for a promise to recapitalise. This would be accompanied by an IMF deal, not so much to help Argentina -- heaven forbid -- but to ensure the viability of the mostly foreign-owned banks and the feasibility of some deal enabling foreign creditors to get something back.
Meanwhile, IMF officials visiting Argentina must learn to tolerate the sight of the banks' broken windows and the public calling the banks "chorros." What the IMF itself is likely to be called is another matter; at any rate, it is better left unprinted.
© Copyright Al-Ahram Weekly. All rights reserved
 |
|
|||||||||||||||||
| ARCHIVES Letter from the Editor Editorial Board Subscription Advertise! |
WEEKLY ONLINE: www.ahram.org.eg/weekly Updated every Saturday at 11.00 GMT, 2pm local time weeklyweb@ahram.org.eg |
 Al-Ahram Organisation |
Recommend this page