More on Argentina - The Real World of Dollarization

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

This IMF package is not designed to save the Argentine economy.
It is design to save the lender banks from a haircut at the
expense of further auterity domestic policies.  Agentines will
pay for it with higher unemployment, lower salaries, less social
security health care and education, as well as daily
consumption.

Note the key IMF phrase: money committed to Argentina reflected
the IMF's concern that a debt default by the nation could
trigger a crisis in other emerging markets.

Note also what international banks want: the government still
needs to cut public spending related to its union-dominated
health care program and its social security program. These
continuing reforms, as well as the government's ability to stick
to existing spending cuts and other measures, will be key to
maintaining confidence over the long term.

Note also: And the country remains hard hit by last year's
currency devaluation in Brazil; the devaluation prompted many
Argentine manufacturers to shift production to its neighbor.
Further, through Argentina's convertibility system, the
country's currency is fixed to the U.S. dollar, and most of
Argentina's exports have become less competitive because of the
dollar's strength.

December 19, 2000
Argentine Bailout Package Brings Investors Relief, but Leaves
Doubts

By PAMELA DRUCKERMAN
Staff Reporter of THE WALL STREET JOURNAL

BUENOS AIRES -- Argentina unveiled a $39.7 billion package of
emergency credits from the International Monetary Fund and other
lenders that should help it avoid a short-term-debt crisis, but
it isn't clear whether the bailout will help revive Argentina's
stagnant economy.

The size of the package, frantically assembled to help the
government meet a flood of coming debt payments, substantially
exceeded market expectations. Analysts said the amount of money
committed to Argentina reflected the IMF's concern that a debt
default by the nation could trigger a crisis in other emerging
markets.

President Fernando de la Rua, his popularity flagging with the
nation's fortunes, tried to whip up enthusiasm for the package.
"This eliminates any doubts about the Argentine economy," he
said at a ceremony to announce the deal. "Argentina is not
condemned to economic stagnation." The government said the
amalgam of loans and debt swaps will cover most government debt
payments through 2003.

Though pleased by the jumbo package, foreign investors were
quick to note that Argentina's problems extend beyond its total
debt of some $120 billion. They say the country's foremost need
is to get the economy growing again after two years of
recession. Reflecting this ambivalence, Argentina's battered
stock and bond markets barely budged in the wake of the
announcement.

Argentina has faced a raft of economic problems, including
concern about a slowing U.S. economy, which analysts say makes
U.S. investors warier of sending their money abroad.  And the
country remains hard hit by last year's currency devaluation in
Brazil; the devaluation prompted many Argentine manufacturers to
shift production to its neighbor. Further, through Argentina's
convertibility system, the country's currency is fixed to the
U.S. dollar, and most of Argentina's exports have become less
competitive because of the dollar's strength.

Government officials envision a scenario in which the aid
package allows Argentina to lower domestic interest rates, now
about 15%, triggering a surge of new investment to fire up the
economy. That prediction is backed up by some local economists,
who predict rates could fall to 10% within a month. "To the
extent that this [package] makes us less vulnerable, investors
will feel more inclined to make their own investments," said
Argentine Finance Secretary Daniel Marx.

The IMF said it will boost Argentina's existing standby loan to
$11 billion from $7.2 billion and provide the government with an
additional $2.7 billion under the so-called Supplemental Reserve
Facility. The IMF portion of the package requires approval by
the fund's board, expected next month.

The package also includes $2.5 billion each from the
Inter-American Development Bank and the World Bank, $1 billion
from the government of Spain and $3 billion from Argentine
institutional investors. Private investors are making a
significant contribution to the package, with $7 billion in debt
swaps and $10 billion in new loans from "local market makers."

Gustavo Canonero, head of Argentine research at Deutsche Bank,
says the government still needs to cut public spending related
to its union-dominated health care program and its social
security program. These continuing reforms, as well as the
government's ability to stick to existing spending cuts and
other measures, will be key to maintaining confidence over the
long term.

In Washington, Treasury Secretary Lawrence Summers underscored
the importance of these domestic policies to Argentina's
recovery. "We encourage the government of Argentina to fully
implement its enhanced commitments under  the new program, which
will help position Argentina for a restoration of confidence and
renewed growth."


Los Angeles Times, December 19, 2000, Tuesday, Home Edition

IMF ANNOUNCES $39.7-BILLION RESCUE PACKAGE FOR ARGENTINA;
LATIN AMERICA: THE BAILOUT TO AVERT A DEFAULT STOKES FEARS IN
BUENOS AIRES
OF WEAKENING LIVING STANDARD.

SEBASTIAN ROTELLA and CHRIS KRAUL, TIMES STAFF WRITERS

BUENOS AIRES -- The International Monetary Fund announced Monday
a
$39.7-billion bailout package for Argentina aimed at heading off
a massive
default here and the shock waves that could result throughout
Latin America
and beyond.

The financial rescue, echoing bailouts of Mexico and Brazil in
the 1990s,
was seen as a concrete confirmation of the fears among
Argentines that a
living standard that was once the envy of the continent is
deteriorating
fast.

President Fernando de la Rua declared that the announcement
marks the start
of an economic turnaround in a nation that was until recently a
model of
free-market reform for the region. But other Argentines worry
that the IMF
loan package--despite its hefty price tag--is only one step
toward untying
the knots of their national malaise: stubborn unemployment, a
yawning
budget deficit and disillusionment with the government.

"The situation of the country is bad," said Susana Boite, 34, an
unemployed
mother of three. "I've never gone so much time without finding
even a
little part-time gig. Everyone's down in the dumps."

The low-key De la Rua took office a year ago promising
prosperity and
honesty. But unfavorable currents dragged down Latin America's
third-largest economy: Trade suffered because neighboring
Brazil's currency
devaluation last year made its products more competitive.
Argentina's
economy is expected to grow by only about 0.5% this year.
Joblessness, now
at 14.7%, has pushed tens of thousands of middle-class families
into poverty.

The IMF put together the loan package to ward off the specter of
a default
on Argentina's $ 21-billion foreign debt, which probably would
have been
necessary next year. That could wreak widespread havoc
reminiscent of the
"tequila effect" of Mexico's peso devaluation in 1994, a
phenomenon
repeated across Asia after Thailand devalued its currency in
1997.

The nearly $ 40-billion Argentine bailout, announced in
Washington and
Buenos Aires, is almost double initial estimates. The IMF will
contribute $
13.7 billion. The World Bank and Inter-American Development Bank
will add $
2.5 billion each. Argentine banks and pension funds will kick in
$ 13
billion, and Spain, a leading investor here in
telecommunications, banking
and oil, will open a billion-dollar credit line. A $ 7-billion
debt swap
rounds out the package.

The loans will "bulletproof" the economy, buying time and
investor
confidence, Argentine leaders say. Coming weeks will bring tax
cuts and
incentives to industrial production, according to Economy
Minister Jose
Luis Machinea, who started his tenure by raising taxes. Many of
the reforms
are a condition of the bailout.

"This operation will bring back to Argentina the dose of
optimism that is
necessary to engage the economic recovery," De la Rua said.

Nonetheless, analysts say the government must capitalize on the
opportunity
and jump-start both investment and reforms such as cuts in
bloated,
inefficient provincial governments. Without decisive action, the
crisis
will merely be postponed, critics say.

Agentines expect the worst. They are among Latin America's most
prosperous
and best-educated citizens, but they are also among its most
melancholy and
self-critical.

Their pessimism is fueled by the government, which has seemed
nearly
paralyzed after a multimillion-dollar bribery scandal in the
Senate in
September caused the resignation of reformist Vice President
Carlos
Alvarez, straining the center-left Alliance party to the
breaking point. De
la Rua has fought the image, accurate or not, that he is unable
to force
through austerity measures to balance the budget, improve tax
collection
and otherwise revive the economy.

Argentina's woes are on daily display at the small San Jose del
Talar
church in the middle-income Villa Devoto neighborhood, home of a
gated
shrine enclosing a 17th century painting of Our Lady That Unties
Knots. The
icon has drawn crowds since it was brought from Germany in 1996.
Pilgrims
arrive in busloads to ask the Madonna, which has reputedly
miraculous
powers and its own Web site, to help them find work or hang onto
the jobs
they have.

The nation is at the mercy of weak leaders and heartless world
finance
officials, said Raul Pissero, a baker. He came to implore the
Virgin, which
in the painting is depicted with an angel holding out a cord
full of knots,
to protect his business and his family.

"I voted for De la Rua," said Pissero, a muscular, gray-haired
man in his
40s. "A disaster. I regret it. We'll never get anywhere with
these
politicians. We should kill them all. The IMF has us by the
short hairs and
our debt keeps getting worse. That's our history: We will always
be
dominated. Before it was Spain, now it's the IMF."

Juan Luis Bour, an economist at the Foundation for Latin
American Economic
Research here, is somewhat less despairing: "What is needed is a
marking of
the course. . . . The government is going to have to make a
change to show
it has defined its course--to show that there will be no
default, no
devaluation, and that all necessary reforms will be undertaken
so we that
are not having the same conversation a year from now."

Argentine leaders are flirting with a dramatic but risky remedy:
recruiting
opposition Congressional Deputy Domingo Cavallo, the
hard-charging,
Harvard-educated technocrat who made Argentina a model of
free-market
transformation in the 1990s.

As economy minister for former President Carlos Menem, Cavallo
vanquished
hyperinflation by pegging the Argentine peso to the dollar and
enacted
aggressive privatization and modernization programs. Though a
threat to the
leadership, his return to the Cabinet would delight the
investment
community and, according to his admirers, deliver a "confidence
shock."

The Argentine bailout marks a change in IMF interventions, which
in the
past have come after a country has faced a run on its currency
or its
international reserves are nearing depletion. The IMF now aims
to intercede
before the contagion from a country's problems can spread.

"The perception among investors was that if we were to suffer
another big
crisis in emerging markets an already damaged asset class might
not ever
recover," said Michael Henry, Latin American economist at ABN
AMRO, a Dutch
investment bank with offices in New York.

Latin American stocks and bonds have recovered somewhat over the
last month
as it became known that the IMF was working on a rescue package,
Henry said.

"This is very good for Argentina. It gives them breathing room
and a
welcome time out to put in place the type of program they need
allowing it
to resume growth," said Sebastian Edwards, a former World Bank
economist
and now a professor at UCLA's Anderson School.

Outside the shrine of Our Lady Who Unties Knots, the pilgrims
talk of
survival.

"If I could, I would leave the country," said Valeria Torrens,
29, who came
to thank the Madonna after landing a job as a clerk at a pension
fund
company. "I don't know where we are headed. The answer is not in

politicians. Perhaps the answer is in faith."