Argentina: The Epidemic Spreads in Latin America
by Marcelo Izquerdo
Proceso, Mexico City, Mexico, June 30, 2002
[World Press Review, September 2002]
After its marked failure in the Asian crisis of 1998, the
International Monetary Fund (IMF) is under scrutiny by the world
financial community for not heeding the warnings about the possibility
that the Argentine crisis would infect the economies of the region.
The severe crisis in Argentina, the worst in the country's
history-which has doubled the poverty index in less than a year
to around 50 percent of the population-has crossed the borders
despite predictions to the contrary by the IMF. The feared "tango
effect" already has struck the weakened economy of Uruguay,
which is extremely dependent on all that occurs in economic and
financial affairs other side of the Rio de la Plata.
At the same time, it threatens Brazil with an explosive cocktail
of economic instability and political turbulence caused by the
impending triumph of leftist Luiz Inacio Lula da Silva in the
approaching presidential elections in October.
The ripples from the crisis have also been strongly felt in
Paraguay-the other partner in the Common Market of the South (Mercosur)-and
even in Chile and Mexico, where Bank of Mexico governor Guillermo
Ortiz has forecast that financial turbulence will continue in
coming weeks. [On July 15, Paraguay's president declared a state
of emergency after protesters angry over economic policies clashed
"It is difficult to determine if the IMF got it wrong
or not. There is a host of decisions that go beyond our credit
analyses. We cannot know if in reality it is a question of a defined
strategy," Cristian Krossler, Standard & Poor's analyst
in Argentina, told Proceso.
For Krossler, this much is clear: "Uruguay is, without
doubt, the country that is suffering most from the disasters in
Argentina. In Brazil, obviously there is some contagion, which
has become mixed with the electoral theme, and there are people
who are scared. And Chile suffers in an indirect manner through
the impact on investments." Many Argentine officials privately
grin with satisfaction when the word "contagion" is
mentioned in the markets. While no one dares to show his smile
in public and they prefer to put on a sober expression more in
tune with the crisis, the government of Eduardo Duhalde is convinced
that a generalized crisis would serve Argentine interests by sealing
an elusive accord with the IMF. Should that crisis explode, it
would drag everyone down into the same predicament.
The need to sign an agreement is urgent. Beginning July 15,
the country will have to disburse US$1.7 billion to pay obligations
on loans from the Inter-American Development Bank, the World Bank,
and the IMF If it fails to do so, Argentina will move into "total
default," and no one dares to contemplate the future of a
country in crisis that faces such a bleak scenario.
To avert a definitive break, Economy Minister Roberto Lavagna
spent last week in Washington trying to move negotiations forward.
But there he met a wall that proved difficult to scale. "The
Argentines obviously are in no hurry to discuss the restructuring
of the banking system. That surprised and disappointed me,"
declared IMF managing director Horst Kohler in an interview with
a German daily. Kohler referred to the report from the IMF representative
in Buenos Aires, the Englishman John Thornton, who observed that
the Duhalde government had not made the progress necessary to
warrant dispatch of a negotiating mission to the Argentine capital.
Thus, the Argentine government sought to forge a type of "continental
alliance" to press demands as a bloc for urgent IMF aid and
support from Washington to avert a greater "contagion"
from the crisis.
But Buenos Aires' appeal for help from its Latin American
partners fell on deaf ears. No government in the region wanted
to remain hitched to the rapidly unfolding crisis that Argentina
is suffering. And they kept their distance, like someone who avoids
contact with a smallpox victim." I never spoke about that
matter....The problems of Brazil are different. The economic situation
is very solid. We do not have the same problem that other countries
are experiencing," Brazilian President Fernando Henrique
Cardoso hastened to clarify.
A little while later, it was Uruguay's turn. Its foreign affairs
minister, Didier Opertti, said that he was not familiar with the
Argentine plan: "We have not been able to check out (that
version) in all its details. It has been discussed and has been
in the press, but officially the government has taken no position."
Most diplomatic of all was Mexican President Vicente Fox,
who told the daily Clarin of Buenos Aires-where he will arrive
July 4 for the expanded Mercosur summit-that he is inclined to
speak with George W. Bush, but without involving his country in
the crisis. "We want to be at Argentina's side during these
difficult times. For our part, we continue to desire to see what
Mexico can do for Argentina and Brazil. And if they ask us to
speak with President Bush, we will do so."
Argentina seems to be more alone than ever in its attempt
to close an agreement with the IMF, all the more so after the
concerns expressed at the G-8 summit in Canada over the crisis
and particularly its effects on Brazil.
Jose Maria Aznar, Spain's prime minister and the current representative
of the European Union, appealed to G-8 leaders to express their
"confidence" in Brazil's economic policy and, according
to European spokesmen, the meeting dealt with the "urgency"
of taking measures to avoid a wider contagion.
That same day, June 26, in a disturbance in Buenos Aires,
a protest by unemployed Argentines demanding urgent social assistance
was suppressed. The result was two dead, 17 injured, and 16()
arrested in a show of the country's volatile atmosphere.
After several months of insisting that the Argentine crisis
was a strictly local phenomenon, the IMF was forced to retreat
at the beginning of June and recognize that Uruguay had fallen
into the snares of Argentina's misfortune.
"There was a strong contagion in Uruguay, which has a
close economic relationship with Argentina, above all in financial
areas. Some Uruguayan banks depend on Argentine banks, and much
of their deposits are from Argentines who, fearful of a repetition
of the corralito (the freeze on term deposits currently in force
in Argentina), began to withdraw their deposits," Argentine
economist Aldo Abram told Proceso.
On June 20, Uruguay abandoned its policy of exchange-rate
bands and permitted the free float of the dollar. The first reaction
was a devaluation of the Uruguayan peso, which fell from 16 to
25 pesos against the dollar before stabilizing in subsequent days
at 23 pesos.
The second reaction came from the Uruguayan population. That
night, the people took to the streets of Montevideo to bang their
pots, the standard battle cry of all protests in neighboring Buenos
Two days later, Uruguayans watched in astonishment the familiar
movie played out on the other side of the Rio de la Plata: The
appreciation of the dollar fueled increases of between 1() percent
and 30 percent in the prices of principal goods such as meats.
Sugar prices rose by 20 percent as the sector said that it must
pay in dollars for its raw materials, while bread prices increased
by 10 to 12 percent.
The new reality that has hit Uruguayans is a faithful reflection
of the crisis: In May alone, $1.387 billion left the country,
or 12.44 percent of total deposits in the banking system.
In the view of Standard & Poor's analyst Krossler, Uruguay
fully shares the suffering of the Argentine crisis "in various
respects, especially in terms of business links and a traditional
symbiosis between the two countries. Fifty percent of depositors
in Uruguay do not reside in that country, and the majority are
But the IMF is not prepared to allow Uruguay to fall into
the Argentine "black hole. "The international organization
approved an increase of $1.5 billion in the existing standby credit
line for Montevideo, including authorization for the government
of Jorge Batlle to draw down "immediately" up to $508
million. These funds will be targeted to meet obligations on maturing
foreign debts, replenish depressed international reserves, and
create a Financial System Assistance Fund.
The announcement was made one week after the IMF first recognized
that "the Argentine crisis that is affecting the region has
had a more adverse effect on the Uruguayan economy than previously
"The IMF is on top of the matter. It is working to prevent
the contagion from growing much greater. In Uruguay, it is attacking
the contagion in a positive manner, identifying the problems,
and bringing them to light- all of the things that did not take
place in Argentina," Krossler argued.
But the shocks of the "tango effect" were inevitable
for the Uruguayan economy. The government has revised economic
goals for this year, which now anticipate a fall in gross domestic
product of between 6 and 7 percent instead of the 2-percent decline
previously estimated following four years of recession. Inflation
is now placed at 12 percent, setting aside the previous projection
of 9.9 percent.
Demands for the resignation of Economy Minister Alberto Bension
have rained down on Uruguay's political establishment. "One
must take care with the demand for the minister's resignation
because one must take care of the political system," said
Sen. Luis Alberto Heber of the National Blanco Party, part of
the government coalition with Batlle's Colorado Party.
Meanwhile, Brazil suffers in two ways. On the one side, the
growing distrust in the face of an eventual triumph of leftist
Luiz Inacio Lula da Silva in the October presidential elections
has sown fears in the markets, ignited a surge in the dollar and
in country risk (second in the world after Argentina), and provoked
the fall of the I Sao Paulo stock exchange.
In the meantime, the "tango effect" has cut into
the line and stirred things up among foreign investors. Krossler
commented that "obviously there is some contagion, and that
is getting mixed in with the electoral theme, and there are people
who are scared."
But for American economist Raymond Collit, chief of the Financial
Times office in Sao Paulo, "The main problem is internal,
with a combination of growing foreign debt and fears that a Lula
government might stop paying its heavy international obligations.
Moreover, the international market, after Argentina, today is
more susceptible to this type of problem. Investors got burned
with Argentina and now they distrust Brazil. They think that,
although the risk may be small, it is better to get out. The Argentine
crisis created the conditions for Brazil to fall into this situation.
It is a type of contagion over the long term, a rejection of market
reforms affecting the confidence of investors.
"One can criticize not only the IMF, but also the U.S.
government. In Brazil, one perceives a great deal of resentment
at Washington's growing attitude of indifference in recent months,
evidenced in the measures against free trade in the steel industry
and in agriculture subsidies, among others."
Abram argued that investors think that Brazil "can repeat
Argentina's errors, and these people are fleeing in desperation
from Brazil. But if [Jose] Serra [a leading opponent of Lula in
the presidential race] were ahead in the polls, none of that would
be happening now."
The Brazilian financial market has become accustomed to a
dangerous word: collapse. The dollar on June 26 reached its highest
quotation since July 1994, when [then Finance Minister] Cardoso
launched the Real Plan [introducing the real as Brazil's currency
as part of an economic-stability program that reduced quadruple-digit
inflation to single digits in a few months]. It closed that day
at 2.87 reals, and a steadily growing number of analysts believe
that it will continue rising so long as Lula continues to lead
in the polls and investors remain convinced that the "tango
effect" has invaded the country of the samba.
The dollar had strengthened by 1 ().2 percent in the first
25 days of June. Neither the 1.1 billion in dollars sold in just
12 days by the central bank of Brazil nor the additional $10 billion
in aid approved by the IMF succeeded in calming the market. "There
is a crisis of confidence. If the central bank had not intervened,
the dollar would have shot up even more," said Alvaro Brandao,
director of the Brazilian consulting firm Agora Senor.
The central bank of Brazil had to raise its inflation projections
for this year and 2003 as a result of the rise of the dollar.
Inflation this year will be 5.5 percent, a half-point more than
previously expected, and 6.1 percent in 2003,1.6 percentage points
more than the earlier forecast. The flight of foreign capital
from the Sao Paulo stock exchange totaled $274 million over 20
days in June. At the same time, the country-risk premium [on Brazilian
debt in international markets], which was around 700 basis points
just five months ago, now exceeds 1,500 basis points. Meanwhile,
foreign investment is falling sharply. In May, the registered
total was 30 percent lower than that in the same month of 2001.
The authorities expect an inflow this year of $18 billion, against
$23 billion in 2001 and $33 billion in 2000.
Cardoso appeals to the spirit of the nation's soccer fans
to shore up the confidence of the country. "Today we must
seek what Felipao (Luiz Felipe Scolari, coach of the national
soccer team) said: 'We have done well up to now, but we can do
more, and we are going to do more,' " said Cardoso before
Brazil played Germany in the final of the World Cup in Japan.
But the big difference that separates what is happening in
Brazil from what has occurred in the rest of the region is that
no one here is going out to bang pots-rather, they take to the
streets to dance the samba over the triumphs of the national team
in the World Cup. When all is said and done, the joy of the samba
tends to drown out the melancholy of the tango.
In Chile, meanwhile, the contagion has had only a glancing
effect on investments, although there has been a small devaluation
of the peso. "The minor contagion that Chile suffers is totally
indirect. There is pressure on the currency, but that is due to
the deterioration of the image of the region. The banks are not
exposed to the Argentine crisis, although some companies with
business ties to that country may suffer the ripple effects of
the crisis," said Krossler. In Abram's view, "Chile
has a tradition of economic stability and will be able to face
the effects successfully."
In the meantime, Argentines are wondering if the IMF has erred
again in its predictions. "They have got it wrong again,"
said analyst Julio Sevares in Clarin, the nation's largest-circulation
newspaper. "Suddenly Uruguay was forced to devalue, and in
Brazil the dollar and country risk have surged. Then everyone
looked at Argentina and began to cry, 'Contagion!' as in a medieval
city attacked by the black plague," he wrote.
But no one believes that the IMF will come to the rescue of
Argentina so soon. "Argentines are saying now: 'You've seen
what's been happening, so help us-and if you don't, it will be
worse each time. 'But they are not scaring anyone," Krossler