Last May the Argentinian government woke up after three years of recession that inflicted slow growth, lower wages and a loss of tax revenues while at the same time discouraging foreign investment and encouraging the flight of hard currency from the country.
In 1989 the Argentina peso was pegged to the US dollar, one for one, so as to provide confidence for foreign investors. Subsequently, inflation in 1996 went down from 3,000 percent to 1.6 percent and national production increased for 230 percent.
The national growth at that time for Chile was about 114 percent and in Brazil it was 7.7 percent.
As of 1999, the euro lost 27 percent of its value against the US dollar, while the Brazilian dollar lost 53 percent of its value.
As more than half of Argentina’s exports are absorbed by Brazil and European nations, the Argentinian economy was on the verge of collapse.
The US used to accommodate the difficulties of trading with Argentina in the sense that it gave it funds whenever there was a crisis. Because of this historical support, Argentina remained confident that any delay in settling its debts would not lead to a catastrophe.
It wanted to reschedule loan repayments or otherwise obtain new loans to meet new obligations.
The US, however, is having none of it. From now on the weak peso will not be pegged to the US dollar — a disaster for the Argentinian economy.
So it will be left to the International Monetary Fund to push for a settlement of debts, a total of $130 million, and a halt to further loans to Argentina.
It is understood worldwide that the Argentinian government is well aware of the economic problems and difficulties and of the necessity to find a political solution. The government has nominated Domingo Cavallo as economy minister to bring about the miracle needed. He was previously responsible for the pegging of the peso to the US dollar.
Cavallo was quoted as saying that he is aware of the recession, the unemployment rate of 16 percent, the low national production, the incompetitiveness of exports and the highly priced imports. Moreover, he will neither devalue the currency nor decrease the peso’s value against the dollar because it would lead to bankruptcy for the country’s economy.
So far, his actions have not satisfied Uncle Sam. The Financial Times had the following to say: “The Argentinian difficulties have been discussed by President Bush, British Premier Tony Blair and the Spain Prime Minister Jose Maria Aznar, and the White House has emphasized the application of the IMF program related to this matter.
Moreover, the US Treasury undersecretary has met with the president of Argentina, and informed him that the US administration supports the application of the payments program as set out by the IMF. There will be no more loans whatsoever.”
In brief, this Argentinian episode with the IMF will persist unless America allows for a solution.
