To: John Pitera who wrote (4269 ) 7/12/2001 4:27:39 PM From: John Pitera Respond to The Problem with Argentina defaulting is that it will create a "blueprint" showing other countries such as Brazil, thatone-year non-deliverable forwards priced in a 35% devaluation in the Argentine peso. The yen seemed to be the biggest beneficiary of such concerns, as an unwinding of emerging market carry trades helped to boost the Japanese currency. The yen also outperformed on the back of comments from the MoF's Kuroda, who reportedly said on Japanese television that structural reform did not necessarily have to bring about further weakness in the yen. While the euro and the euro-bloc currencies garnered a flight to quality bid yesterday, the market seemed to be a bit more concerned today about the heavy exposure of Spanish banks to Argentina. The euro also saw better selling pressure as the euro/yen cross failed to break through significant trendline resistance, while euro/dollar failed to take out its late-June highs. The Brazilian real not surprisingly took another major hit today. The real suffered early on with the carnage in Argentine fixed-income, while selling pressure was exacerbated as S&P downgraded the long-term sovereign credit rating on the Republic of Argentina to single B- from single B, and affirmed its single C short-term sovereign credit rating. The outlook on the ratings remained negative. "The downgrade reflects growing strain on the cohesion of the governing coalition and the risk that it may impede efforts by Economy Minister Domingo Cavallo to implement draconian measures to balance the federal budget. Until now, support for the De la Rua Administration has been based largely upon the expectation that Minister Cavallo's policies would succeed in triggering economic recovery by the end of 2001. Against a background of stagnant output and waning market confidence, the government's program has faced growing internal challenges, highlighted most recently by funding disputes with the provinces. Minister Cavallo's strategy is now shifting toward a belated recognition that much-stronger budgetary adjustments are required to safeguard Argentina's currency board regime. However, with the economy unlikely to pick up before next year at the earliest, the spending cuts necessary to balance the budget will severely test the government's resolve-possibly to the breaking point. An unraveling of the ruling coalition in these circumstances would make debt restructuring hard to avoid."
