Argentine Economy: Nowhere to Go but Down
By Brian Winter
BUENOS AIRES, Argentina (Reuters) - The resignation of Argentina's president will likely be followed by widespread bankruptcies, bank closures, the biggest sovereign debt default in history and an uncontrolled devaluation, economists said.
And that's just in the next 30 days.
Fernando de la Rua left Latin America's third-largest economy adrift on the brink of disaster when he quit the presidency late on Thursday amid deadly riots sparked by a harrowing recession in its fourth year.
Most analysts agreed De la Rua's long-term successor, almost certain to come from the opposition Peronist Party, would quickly default on Argentina's $132 billion public debt, a move expected by financial markets for months now.
What comes next, they say, depends on who emerges from the economic chaos that will likely result.
``Argentina's future is being decided in smoke-filled rooms right now. No one has a grip on the situation,'' said Christopher Ecclestone, an analyst for Buenos Aires Trust brokerage. ``Whatever happens is going to be very messy.''
The Peronists are deeply divided in their own ranks, and new provisional President Ramon Puerta, handed the reins of the country by Congress on Friday, is expected to last in the post for only a few days before possibly calling new elections.
But while the solutions are murky, Argentina's problems are clear.
Perhaps the biggest decision will be what to do with Argentina's currency peg, which makes one peso equal to one dollar. The peg ended 5,000 percent hyperinflation a decade ago but has in recent years been widely blamed for making the peso overvalued and the economy uncompetitive.
However, letting the peso float would result in an almost certain return to runaway inflation, ruining countless companies and individuals since more than 80 percent of Argentina's private debt is held in dollars.
``Ultimately it is unlikely that a maxi-devaluation can be avoided, potentially putting Argentina at the risk of further hyperinflation in the current context of maximum uncertainty,'' Credit Suisse First Boston said in a research note.
Other options -- such as ditching the peso and adopting the U.S. dollar or even issuing a third currency to stir depressed consumer spending -- would do little to address the fact that Argentina's currency is overvalued by somewhere between 35 and 60 percent, economists said.
To make a devaluation viable, some said bank deposits would have to be forcibly converted from dollars into pesos, while others argued the opposite was the correct course. Either option could fuel the collapse of some large banks already weakened by a recent run on deposits.
``Argentina can't make its industries competitive unless it abandons the currency peg,'' said Carlos Perez, an economist for Fundacion Capital consultancy. ``Devaluation is unavoidable evil. It's going to happen.''
DEFAULT SEEN AS A CERTAINTY
The protests that toppled De la Rua were seen by many as a demand by the third of Argentina living below the poverty line, as well as a decaying middle class, to stop using cash to pay the debt instead of collapsing social and health programs.
Almost no one doubts that the next leader will give into months of pressure and default on Argentina's public debt as tax revenues plummet and entire industries collapse.
The only question, it seems, is how ``messy'' the moratorium will be. In the inevitable restructuring, Argentina could eventually try to shave its debt load by anywhere from a third to half, economists said. Maybe even more.
``Debt restructurings have historically had a 'haircut' of around 35 percent,'' said one economist for a Wall Street bank. ''I don't see Argentina getting out of that tradition.
But another, who also asked to remain unnamed, disagreed: ''I think we're looking at a massive reduction in value here. Otherwise it just doesn't do them any good.''
A debt default of any kind would ruin many banks' balance sheets and shatter whatever confidence investors have in Argentina, leading companies to postpone investments and likely sending unemployment soaring beyond its current 18 percent.
And a return to growth looks like a distant dream.
In the third quarter, gross domestic product shrank by nearly 5 percent from a year earlier, according to figures released Friday, and some economists say GDP could fall between 15 and 20 percent in 2002.
Whatever happens, events will likely move quickly as the vacuum left by De la Rua's departure demands decisive action.
``The greatest power to make changes is always held on the first day,'' said Perez. ``The more time passes, the less ability there will be to make changes.''
(additional reporting by Juan Jose Lagorio)
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