Da: "Nello Margiotta" A: Oggetto: Fw: Argentina: Impasse With IMF Means More Crises Ahead Data: luned́ 18 marzo 2002 23.11 http://www.stratfor.com/standard/survey.php Argentina: Impasse With IMF Means More Crises Ahead Summary Argentina wants up to $20 billion immediately from the International Monetary Fund and other multilateral agencies in order to carry out deeper economic reforms. But the IMF wants the reforms completed before it will agree to provide any more financial aid to Argentina. The country's economic crisis is about to get much worse. Analysis Argentine President Eduardo Duhalde warned March 12 that the country's political institutions would begin to collapse in April if the International Monetary Fund does not provide billions of dollars immediately to prop up its battered economy. However, IMF Executive Director Horst Koehler said in Washington, D.C., the next day that although the organization wants to help, Argentina must "show more will" to help itself, Buenos Aires daily Clarin reported. The Duhalde government argues that it cannot make deeper economic reforms without first obtaining up to $20 billion in financial aid from the IMF and other multilateral entities. But the IMF, backed until now by the Bush administration, wants a more realistic budget, deep cuts in federal and provincial government spending and stronger guarantees for investor rights before it will agree to provide any more aid. Given the impasse, Argentina's problems will soon worsen, heightening the risk that violent protests and looting episodes could erupt and that Duhalde's government will fall. Even if Duhalde resigned and called new elections ahead of schedule, he likely could calm tensions only to a limited degree because Argentina's underlying economic problems would remain. Most likely, the military would take over and replace the current administration. Lt. Gen. Ricardo Brinzoni, the commander of Argentina's armed forces, recently said there is no possibility the military would take control of the government, calling instead for "more, not less, democracy" as the only solution to the country's problems, The Associated Press reported. But if Argentina collapses into anarchy in coming weeks, its reluctant, discredited and financially crippled military may be the only option for restoring order until new elections can be held. The IMF's tough conditions put Duhalde between a rock and a hard place. Compliance with the fund's demands is politically and socially explosive because it implies firing hundreds of thousands of government workers. Provincial governors battling for their individual political survival would resist deeper spending cuts, and dismissing up to a third of the government work force would spark potentially violent protests that could bring down Duhalde's unpopular government. However, without compliance, Argentina will not get any financial aid. And without an immediate cash infusion, its economic crisis likely will deepen in the coming weeks. Social tensions will flare again in potentially violent street demonstrations, Duhalde's fragile political support will crumble and he may be forced to resign and call new presidential and congressional elections well ahead of September 2003 as currently scheduled. In fact, the government's stability is increasingly doubtful, regardless of whether the IMF comes to Argentina's aid. Elsa Carrio, a populist socialist leader who heads all voter surveys of potential alternative leaders to the traditional Peronist and radical political establishment, told the Buenos Aires daily La Nacion on March 8 that with or without IMF assistance, Duhalde won't retain power to the end of 2002. Upon close inspection of Duhalde's economic plan, it is clear that -- even though the administration has complied with many IMF requests, including floating the peso and eliminating a two-tier exchange rate -- it lacks the political will to carry out more necessary reforms. After nearly three months in power, Duhalde has not unveiled any clear plans to reduce the size of the bloated federal and provincial governments. Also, despite a recent agreement with provincial governors to curb spending, more than $3 billion of fresh provincial debt has been issued in 14 different scrips since December, to offset a drop of more than 20 percent in tax revenues. Moreover, Duhalde's proposed economic plan does not include measures to liberalize the country's rigid labor markets, and some of his revenue-raising proposals will discourage exports and investment. Instead of pushing the Peronist-dominated Congress and provincial governors to enact reforms to slash public spending, Duhalde has launched an aggressive strategy to pressure the IMF and Bush administration to release more financial aid. For example, Economy Minister Jorge Remes Lenicov warned March 10 at the Inter-American Development Bank's annual conference that Duhalde was Argentina's "last chance" to avoid a political collapse, which could lead to the election of a socialist government opposed to free trade and open markets. In a lengthy appeal for immediate IMF aid, Remes Lenicov said the Argentine economy has contracted 15 percent since the 4-year-old recession began, private investment has dropped 40 percent, industrial output is down 20 percent, unemployment has reached 23 percent and more than 40 percent of Argentines now live below the poverty line -- compared with only 15 percent eight years ago, according to La Nacion. At the same time, Argentina's ambassador to the United States is leading a diplomatic offensive that emphasizes the country's longtime support for foreign policy goals seen as vital by Washington -- including support for Plan Colombia, backing the trade embargo against Cuba and offering Argentine troops to support the U.S. war against terrorism. Meanwhile, senior Argentine government officials are warning that their country would turn inward and disengage from the global economy if aid does not arrive quickly. However, Argentina's combined default and devaluation have already blocked its access to the global financial and trading systems. Since defaulting on $141 billion in sovereign debt in December, Argentina has stopped paying its debts and has lost all access to trade financing and other forms of international credit. The peso's devaluation, and a host of measures designed to cushion devaluation's impact on Argentine savers and debtors, nearly wiped out the private financial system and undermined international confidence in Argentina's commitment to property rights and contracts. As a result the country's only sources of hard currency are exports, which account for only 10 percent of GDP and have not increased despite the peso's devaluation. Moreover, Argentina now must pay cash for whatever it imports. This has already damaged trade and investment flows with neighboring countries such as Brazil and Chile. However, Duhalde has bigger immediate problems than damaged trade relations with neighbors. For instance, his for Goldman Sachs in New York City, estimates that the Argentine Central Bank's liquid foreign exchange reserves are now a negative $500 million and falling rapidly, Brazilian daily O Estado de Sao Paulo reported March 12. Leme also believes Argentina's economy will contract at least 10 percent in 2002, and inflation will top 100 percent as the government prints billions of new pesos to offset vanishing hard currency reserves. Meanwhile, unemployment is soaring. The February layoff total of 75,000 workers was 3,200 percent higher than the same month a year earlier and 134 percent higher than the number of layoffs reported in January 2002. Buenos Aires estimates that by May, unemployment could reach 30 percent and that more than 17 million Argentines -- nearly half the population -- will have dropped below the poverty line. With rapid aid unlikely, the government and Argentine businesses are bracing for a social explosion. Across the country thousands of banks, supermarkets, shopping centers and stores have installed metal grates and boarded up windows to protect their buildings and inventories from looting and destruction by angry protesters. This week, government workers also installed metal gates, barriers and other defenses to protect Congress and other government buildings from assault.