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July 15, 2001

A LATIN TRAGEDY
By Paul Krugman - New York Times

In the 1990's Argentina staged a dramatic recovery from decades of economic mismanagement, and in the process became an icon of the new world order. But last week the Argentine government found that it could roll over short-term debt only by offering a 14 percent interest rate, five points higher than a month earlier. And the buzz on Wall Street is that the question about an eventual Argentine debt default is no longer whether, but when.

Both the markets and the Argentine government are treating the issue as mainly one of deficit spending. Indeed, in a desperate effort to regain market confidence, President Fernando de la Rúa has called for draconian spending cuts.

But Argentina's fundamental problem isn't fiscal; it's monetary. Ten years ago Economy Minister Domingo Cavallo, the nation's economic hero, introduced a much- acclaimed monetary system, the nation's "currency board." Now he finds his handiwork threatened by that system's tragic flaw.

First, a word about the dire budget numbers you may have heard. Argentina, we are told, has a public debt equal to 45 percent of its G.D.P.; it has a budget deficit of more than 2 percent of G.D.P. Gee — the budget numbers are almost as bad as they were in the United States when the elder George Bush was president!

Why does a level of debt and deficits that caused only tut-tutting here create panic in Argentina? To some extent it's a vicious circle: because investors believe default is likely, they demand usurious interest rates that may well push the country into default. But the main answer is that behind a mildly troubled budget lies a deeply troubled economy.

Argentina's economy surged between 1990 and 1998, but it has been steadily contracting ever since. Unemployment, which stayed high even during the good years, has risen above 16 percent. This dismal performance contributes to the budget problem in at least three ways. A depressed economy means low tax receipts; it's hard to slash spending or raise taxes when the populace is already feeling a lot of economic pain; and it's hard to convince lenders that you will grow out of your problems when your economy is, in fact, shrinking. It's easy to criticize Argentina's political leadership for its inability to eliminate the budget deficit. But when did you last see our own leaders raise taxes and cut spending in the face of a nasty recession? ...

Domingo Cavallo needed to drop the currency peg, but was continually urged to keep the peg as the economy first slowed, then entered a recession phase, and finally a depression. The peg had to be dropped, for Argentina currency was pricing its exports out of its neighbor countries and southern Europe. Drop the peg, but the peg was not dropped.

http://www.nytimes.com/2004/12/26/international/americas/26argent.html?ei=1&en=bb0e8837128cd3f8&ex=1111418099&pagewanted=all&position=

Argentina's Economic Rally Defies Forecasts
By LARRY ROHTER

BUENOS AIRES - When the Argentine economy collapsed in December 2001, doomsday predictions abounded. Unless it adopted orthodox economic policies and quickly cut a deal with its foreign creditors, hyperinflation would surely follow, the peso would become worthless, investment and foreign reserves would vanish and any prospect of growth would be strangled.

But three years after Argentina declared a record debt default of more than $100 billion, the largest in history, the apocalypse has not arrived. Instead, the economy has grown by 8 percent for two consecutive years, exports have zoomed, the currency is stable, investors are gradually returning and unemployment has eased from record highs - all without a debt settlement or the standard measures required by the International Monetary Fund for its approval.

Argentina's recovery has been undeniable, and it has been achieved at least in part by ignoring and even defying economic and political orthodoxy. Rather than moving to immediately satisfy bondholders, private banks and the I.M.F., as other developing countries have done in less severe crises, the Peronist-led government chose to stimulate internal consumption first and told creditors to get in line with everyone else.

"This is a remarkable historical event, one that challenges 25 years of failed policies," said Mark Weisbrot, an economist at the Center for Economic and Policy Research, a liberal research group in Washington. "While other countries are just limping along, Argentina is experiencing very healthy growth with no sign that it is unsustainable, and they've done it without having to make any concessions to get foreign capital inflows."

The consequences of that decision can be seen in government statistics and in stores, where consumers once again were spending robustly before Christmas. More than two million jobs have been created since the depths of the crisis early in 2002, and according to official figures, inflation-adjusted income has also bounced back, returning almost to the level of the late 1990's. That is when the crisis emerged, as Argentina sought to tighten its belt according to I.M.F. prescriptions, only to collapse into the worst depression in its history, which also set off a political crisis....