Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Options Box -- Ignore unavailable to you. Want to Upgrade?

To: hobo who wrote (10532)	4/20/2001 3:04:38 PM
From: Poet	Read Replies (1) \| Respond to of 10876

Tosc, You've been studying up on your currencies, I see. Heck, it's better than watching this market jiggle into expiry. I'm going back out to the garden.

To: hobo who wrote (10532)	4/20/2001 4:16:09 PM
From: John Pitera	Read Replies (2) \| Respond to of 10876

speaking of Cavallo here is a briefing article on the situation from last month....and they were right we would be hearing about Argentina again. BONUS BRIEF: Can Domingo Cavallo Save Argentina? 21-Mar-01 00:10 ET Hate to beat a dead horse here (aren't you glad we did not make any mad cow or foot and mouth reference), but recent developments in Argentina definitely warrant a closer look. Only 10-days into the job, Economy Minister Ricardo Lopez Murphy has resigned, frustrated by President De la Rua's lack of credibility, as well as his inability to put the economy back on track. While the markets loudly applauded Lopez-Murphy's replacement, former Economy Minister and father of the peso peg, Domingo Cavallo, it is important to remember that Lopez-Murphy was afforded the same courtesy when he took over for Jose Luis Machinea. Enough Is Enough Lopez-Murphy's demise began on Friday when he announced an eagerly anticipated $7.9 bln fiscal austerity package to cut government spending over the next three years. Without the spending cuts, the government would face an $8.0 bln fiscal deficit this year, $1.5 bln above the IMF target stipulated in the $40 bln aid package Argentina received at the beginning of the year. While the plan was fairly well-received by a business community desperate to bring international confidence back to Argentina, it did NOT go over well with the politicians. Opposition Peronist Governor Carlos Ruckauf called Lopez Murphy's plan "a slap in the face" and promised to fight it. Such negative rumblings from the opposition were largely expected, but when members of De la Rua's own Union Civica Radical party decided to resign, the president may have decided enough was enough. See Ya Interior Minister Federico Storani and Education Minister Hugo Juri resigned in protest to Lopez-Murphy's decision to cut funds for universities by $361 mln this year, leaving education as the biggest loser in the federal spending cuts. Not to be outdone, the $770 mln hit to the teacher incentive fund expense account also formed the bulk of the decrease in provincial transfers. This left De la Rua facing massive student protests, a 48-hour strike on the part of the country's largest teachers' union and perhaps most importantly, the loss of his ruling coalition. While there was some talk that funds could be diverted back into education via a removal subsidies for fuel in southern Patagonia region and a fund for tobacco producers, such a move would not only have unleashed another wave of social tension, but would also have required congressional approval. Hoping For Deja Vu All Over Again This is where former (and now current) Economy Minister Domingo Cavallo comes in. Cavallo (known best for his role as the "father of convertibility" when he helped to combat skyrocketing inflation by pegging the Argentine peso at a one-to-one rate to the dollar) has already promised that he will send an austerity package to Congress this week that will reduce Argentina's fiscal deficit without cutting education funding or reducing fuel subsidies to Patagonia or tobacco funds to northern provinces. While the markets absolutely love Cavallo, his plan to reduce government spending by a whopping $3 bln this year did not get us particularly excited. From what we hear, Cavallo's plan will largely be based on asking Congress to implement laws to fight corruption and tax evasion, while also eliminating government bureaucracy. Still A Political Story First of all, we have serious doubts about Congress being able to do anything at this point, particularly with both Cavallo and De la Rua already meeting strong opposition to their request for "special powers" that would allow austerity measures to be implemented immediately, and without the approval of Congress. We also have some concerns about the fact that the reform package will put so much faith in improved tax collection. Such concerns were shared by Claudio Loser, the International Monetary Fund's (IMF) Western Hemisphere Department Director, who noted that "Argentina doesn't have a very good record on tax compliance." For our part, we would note that plans to improve tax collection seem incredibly misguided as all of the focus is on the files of the largest 100K taxpayers rather than a crackdown on evasion. As far as we are concerned, political tension seems destined to keep Argentina at defcon 1 on the global radar screen. Cavallo and De la Rua are certain to butt heads over reform, while the decision to include former Vice President and FreSoPa leader Carlos Alvarez in a new cabinet is extremely counterproductive. While the Cavallo return helped to calm the markets a bit on Tuesday, we would note that the Argentine sub-component of the J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) was still trading around 900 bp above US Treasuries, with most of Tuesday's gains related to dealer mark-ups rather than any significant real money interest. Default Concerns In addition, default concerns continue to loom large as De la Rua himself said that "the government asks foreigners for more than $11 billion each year in order to function. Neither the national government nor the provinces are in condition to cope with this situation any longer." Such concerns were particularly evident in the losses surrounding Spanish banking stocks. Banco Santander Central Hispano S.A., Spain's largest banking group and the third largest stock on the Spanish market, fell 1.7%, while Banco Bilbao Vizcaya Argentaria S.A. lost 1.2%. From what we have learned, both banks have fairly large lending and bank branch operations in Latin America. Last But Certainly Not Least Finally, what would a look at Argentina be without talk of the peso peg? Remember, Cavallo had expressed support for a shift away from the exclusive one-to-one peg with the dollar, favoring a basket of currencies including the euro and the Brazilian real. This may explain why the one-year non-deliverable peso forwards were quick to price in a 20% devaluation following the announcement that he would replace Lopez-Murphy. Of interest, even with Cavallo pledging support for the peg on Tuesday, one-year forwards continue to price in a 10% devaluation. In other words, something tells us it won't be long before we are writing on Argentina once again.