Reviving economic growth in a deteriorating Argentina is not going to be easy
Argentina's latest effort to win fresh international loans to help stave off default is posing a test for the more stringent US policy on bailing out financially-troubled emerging market countries.
Faced with a deteriorating situation in Argentina, policymakers working for President Bush are struggling to avoid the kind of multibillion-dollar rescue packages that the previous administration employed. As things stand now, the odds against them are growing.
More importantly, neither the US nor anyone else has been able to put together a plan for reviving Argentina's economy in the face of that government's latest austerity programme. Unless the economy rebounds soon, domestic support for belt-tightening may collapse.
'The real challenge to the US strategy is not what's happened so far ” it's what they will do several months from now when it becomes evident that the strategy isn't working,'' says Alan Stoga, head of Zemi Communications, LLC, a consulting firm.
That may be fatal. Argentina's economy has been in recession since late 1998, and Argentines clearly are tired of the economic hardship. Whatever else its merits, the austerity programme isn't likely to spur new growth anytime soon.
To preserve its currency at one peso to the dollar, Argentina's central bank must squeeze credit. The government is preparing to cut spending sharply, step up tax collections and raise taxes on imports. Living standards are bound to fall. Argentines already are pulling their money out of the nation's banks in an effort to safeguard it in case of a default, sending the country's cash and gold reserves below the amount of pesos in circulation, and threatening the currency system.
In principle, the new, more tight-fisted US approach has its share of backers. To some, the administration of President Clinton was too free with US and IMF loans, assembling almost $300bn-worth between 1995 and 2000 for countries ranging from Mexico and Russia to South Korea and Indonesia.
Under President Bush, the US was to eschew big bilateral rescue packages and pressure the IMF to cut back its own bailout programmes. Instead, the IMF would concentrate on warning countries in advance that they were heading for trouble. In practice, however, it hasn't been that simple. When Turkey got into trouble again last April, the administration found itself forced to endorse a $10bn IMF-backed rescue. Turkey is a key Nato ally. The administration also endorsed a $40bn loan to Argentina, which the IMF approved in December, just before the new administration came to power. Last week, it helped engineer a $15bm IMF line-of-credit to Brazil as insurance in case Argentina defaults.
'We thought the era of big bailouts was over, but apparently not,' says Ian Vasquez, an international economics specialist with the Cato Institute, a free-market-oriented research group in Washington.
For all its opposition to such loans, the US had little choice, says Roger Kubarych, a former Federal Reserve strategist now at HVB Group. He says: 'These were ongoing programmes, they didn't have the luxury of starting from scratch.'
Even so, the administration went a bit further in the latest Argentine flap, passing the ball to the IMF and giving it free rein to come up with a new scheme, in the process relegating the US to a second-string player.
The administration also has been giving conflicting signals to the financial markets, both about the intentions of the US on providing additional loans to Argentina and about who is in charge of US international economic policy. The administration's silence over whether to okay a new loan package for Argentina, while endorsing a new $15bn line of credit to Brazil, gave investors the impression that the US might be abandoning Argentina entirely.
Over the past several weeks, there's been a lot of backing and filling on the question of a new Argentine loan. A month ago, Condoleezza Rice, Bush's national security adviser, poured cold water on the idea.
Since then, Bush himself has called Argentine President Fernando de la Rua to offer his backing and John Taylor, the Treasury's top international economic official, travelled to Buenos Aires to discuss the situation, also a show of support.
The stakes in the flap over Argentina are high. Although some analysts dismiss the threat of contagion, it's widely accepted that an Argentine default would raise interest rates for all emerging-market countries, heightening the global slowdown.
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