The Economist is pleased that the Argentine economy is doing better than expected. But it cannot maintain its optimism for even a full article. Toward the end, the tone changes:

Argentina's current policies do not grapple with its core problems--a bankrupt state and an insolvent financial system. The veranito rests on financial controls, autarchy and a very weak exchange rate. Argentina has no access to outside financing (not even trade finance). It ought to be poised for an export-led boom: it has a hugely competitive exchange rate, good infrastructure and has had a decade of high investment in plant and machinery. But strong growth in exports is impossible without credit. Banks will not lend again until their balance sheets are restructured and the legal uncertainties surrounding frozen deposits and loan repayments are reduced.

I agree--with the concluding pessimism, that is. While a 10 percent or 20 percent cut in real government spending in 2000 or before would have kept Argentina out of its crisis, we now have had a 50 percent cut in real government spending because of the crisis. Argentina is simply too small to sustain a modern division of labor at a prosperous level under autarky. I had thought that by now Argentina would have resolved on a future economic strategy and recovery would be beginning. Not so.

Economist.com: Argentina's economy

Storm abated, outlook still unsettled

Jan 9th 2003 | BUENOS AIRES
From The Economist print edition

AP

Can much swallowing of IMF pride make an Argentine economic summer?

IN BUENOS AIRES they call it the veranito, or Indian summer, meaning that it may not last. But a year after Argentina's dramatic default and devaluation, and long after most economists had expected the place to plummet into hyperinflation, there are ever more signs that the economy is over the worst. Output has stopped falling. According to official figures, industrial production rose in the year to November, for the first time in 27 months. The exchange rate, stable at 3.5 pesos to the dollar since July, recently strengthened. Unemployment has fallen (albeit from 22% to 18%) and consumer confidence is rising. And a much-delayed agreement with the IMF seems to be in the bag at last.

For much of the past year, President Eduardo Duhalde's government has held protracted talks with the Fund over a new loan programme. The IMF took a tough stance. It was sceptical about Mr Duhalde's ability to stabilise the economy, let alone reform it. Now, it seems, the Fund has been forced by its political masters—specifically the G7 group of rich countries—to cave in. France and Italy led the charge for leniency, and were recently joined by the United States.

The G7's plan is for a pared-down “transition” loan that would last for six months (until after a presidential election, currently scheduled for April 27th). There would be no new money; the Fund would merely lend enough to ensure that Argentina does not default on its debts to the IMF itself. But the plan involves no new meaningful reforms. From utility prices (where it was demanding a big hike) to the issue of amparos (court-ordered repayments of individuals' frozen savings, which it wanted stopped), the IMF looks about to back down. Barring last-minute changes, the Fund's board is due to approve an agreement in these terms on January 17th—precisely the day that Argentina is due to repay the IMF $1 billion, a payment that the government had threatened not to make.

Whatever its implications for the IMF, for Mr Duhalde a loan agreement would be a big coup. It would vindicate his strategy of putting pressure on the international institutions by threatening to default on Argentina's debts to them. (In November, the government defaulted on $800m of World Bank debt. Without an IMF agreement, further defaults are likely). More important, an agreement would provide a seal of approval for the government's economic strategy, and its view that the economy is on the mend. Roberto Lavagna, the economy minister, recently declared that the country's four-year recession is over. This was not just an Indian summer, he implied, but the dawn of serious recovery.

Unfortunately, such optimism may be misplaced. Yes, the economy has stopped collapsing—at least for now. The government has been more adept at creating stability than many had expected. Argentina has had many big devaluations in its turbulent history. They have generally been followed by hyperinflation. Not this time: although the peso fell by 70% last year, consumer prices rose by only 40%. That was mainly because devaluation took place in a deeply depressed economy with high unemployment. But the government's policies have also been better than many expected. It did not resort to the printing presses to satisfy populist spending pressures. In nominal terms, public spending stayed constant, meaning that it fell sharply in real terms.

After some disastrous early decisions, such as freezing deposits, and converting loans and deposits from dollars to pesos at different rates, monetary policy was also surprisingly skilful last year. The central bank steered a careful course between providing liquidity for banks whose deposits were fleeing, and keeping the exchange rate stable. Gradually, public confidence in the peso returned. As one economist quips: “Argentines are now more worried about burglars at home than about banks ripping them off.” At the same time, strict capital controls mean that firms, at least in the short term, have had little choice but to put their export earnings in banks. The result is that demand for pesos is rising, so much so that restrictions on frozen current accounts were lifted in December and those on time deposits were loosened.

How long might this fragile stability last? A relatively cheerful Wall Street banker sees the veranito stretching until the election. “The notion that there is something unsustainable in the Argentine policy framework is a bunch of rubbish,” he says. Some Argentine economists agree.

But many are worried. In passing the budget last month, Congress weakened the government's grip on spending, and pressure to spend will rise as the election approaches. In principle, an IMF agreement should help the government hold the line—but this one may not. An agreement might in turn embolden Mr Duhalde to postpone the election, or try to stand again himself. Such political uncertainties could result in a renewed loss of confidence in the peso. That could trigger a bank run, particularly when the remaining deposit controls are lifted.

Even more worryingly, Argentina's current policies do not grapple with its core problems—a bankrupt state and an insolvent financial system. The veranito rests on financial controls, autarchy and a very weak exchange rate. Argentina has no access to outside financing (not even trade finance). It ought to be poised for an export-led boom: it has a hugely competitive exchange rate, good infrastructure and has had a decade of high investment in plant and machinery. But strong growth in exports is impossible without credit. Banks will not lend again until their balance sheets are restructured and the legal uncertainties surrounding frozen deposits and loan repayments are reduced.

An IMF agreement would be a small step towards ending Argentina's financial isolation, but the government still has to renegotiate its debt (of about $100 billion) to private creditors. Even if they accept a huge write-down on their loans, servicing these will require a budget surplus (before interest payments) far bigger than this year's target of 2.5%. Given this to-do list, it is a little too soon to declare that the worst is over for Argentina.