Argentine woes hit loonie
Falls below US65¢: Bush refuses to consider bailout for Argentina
Peter Morton
Financial Post, with files from wires services
WASHINGTON - The Canadian dollar was badly side swiped yesterday by the escalating Argentine economic crisis as panicked investors rushed to buy U.S. dollars and bonds.
The loonie fell below US65¢, as other secondary currencies were battered by fears the Argentine government may default on as much as US$130-billion it owes. It rallied toward the end of the day, closing at US65.07¢, a six-week low.
"As a side effect of the stampede into U.S. assets, the Canadian dollar was thrashed," said Sherry Cooper, chief economist at BMO Nesbitt Burns Inc. in Toronto.
George W. Bush, the U.S. President, finally waded into the Argentine crisis, calling on the beleaguered government to get its house in order but refusing to consider a U.S. financial bailout.
As secondary currencies such as the Canadian dollar continued to get battered in the fallout, top U.S. Administration officials said they were in contact this week with the government of Fernando de la Rua, the Argentine President.
"The best course of action right now is for Argentina to be able to take the steps it needs to take at home," said Condoleezza Rice, the White House's national security advisor.
Mr. Bush also sent a note to Mr. de la Rua expressing his hopes and concerns that the Argentine government would be able to implement a financial package to allow it to continue to pay interest on its debt.
For most of the week, there has been a flight to safe currencies such as the U.S. dollar and U.S. bonds after a sale of US$850-million in short-term debt on Tuesday that had interest rates so high -- more than 14% -- the government said it was effectively cut off from new loans.
That prompted major bond rating services such as Moody's Investors Service Inc. to downgrade Argentina's foreign currency country ceiling rating to B3 from B2, saying spending cuts would further weaken the economy.
So far, neither the United States nor the International Monetary Fund, which led a group of lenders that advanced Argentina US$4-billion last December, were willing to extend further credit to South America's third largest economy.
However, there appeared to be more support domestically for Mr. de la Rua's "zero deficit" plan that would cut US$1.5-billion from the government's budget this year, including cutting government salaries and pensions by 10%. That would reduce the government's deficit to US$5-billion.
After meeting with Mr. De la Rua into the early hours, Raul Alfonsin, a former president and now leader of the main party in the ruling Alliance coalition, said he would back a budget cut in the second half of the year.
As well, the opposition Peronists, who control the Senate, also said they would support a new financial package.
"We are going to defend the currency and the financial system to the end," said Domingo Cavallo, Argentina's Economic Minister.
That optimism finally started to work its way through Argentina's blue-chip MerVa stock index, which had fallen 28% over the past seven sessions. It ended the day up more than 5%.
Still, the Argentine government has a long way to go. Peronist governors, who control 13 of Argentina's 23 provinces, were also due to meet to discuss the plan. Trade unions oppose the cutbacks and state workers, who would be the hardest hit because they have traditionally enjoyed higher pay and privileged job conditions, threatened to strike.
As well, members of the government's left-leaning partner, Frepaso, have yet to come out in favour of the zero deficit plan, which comes ahead of October mid-term elections for Congress in which the Peronists, who ruled from 1989 to 1999, hope to make gains before the 2003 presidential vote.
Argentina has been in an economic slump for three years, leading to questions over whether it can pay the interest on its external debts.
"We are not confident that the De la Rua government will have the political authority to enforce the proposed spending cuts," said Theirry Wizman, managing director of Bear Stearns in New York.
Geoffrey Dennis, director of Latin American equity research at Salomon Smith Barney in New York, said while the risk of a default appears to be on the rise, "I don't think necessarily there will be a default."
At the same time, he said, the government does not seem to have the ability to make spending cuts stick. "Every time they do it, it doesn't seem to work," Mr. Dennis said.
Ms. Cooper also said it may be too late for Mr. Cavallo to do too much to restore global confidence.
"Mr. Cavallo has already short-circuited the fragile connection to global financial markets," she said, adding that it will take intervention from the International Monetary Fund to bring investors back to the country. |
