Perhaps more than any other part of Latin America, Argentina is staggering under the weight of Mexico's financial crisis. The nation has had to scramble this week to assemble its own emergency package.
In efforts to bolster confidence, the government has announced austerity measures, tax increases and new financial support from abroad--including, Economy Minister Domingo Cavallo said, $4 billion in credits offered by multinational lending agencies.
Cavallo also said he plans to raise more than $2 billion by selling off state petrochemical companies and the remains of the government's stock in previously privatized gas and electric utilities. He announced $3.55 billion in new revenues, to come from an 18% higher value-added tax and bigger social security contributions from employers.
The package aims partly to ensure that the country can pay its foreign debt--a legitimate concern.
Since the Mexican crisis erupted with the devaluation in December, the deposit base in Argentina's banks has shrunk by more than $4 billion. Analysts say the capital flight is a sign that many nervous depositors question the stability of this country's peso, the strength of its banking system and the soundness of government finances.
Juan Luis Bour, chief economist for the Latin American Economic Research Foundation in Buenos Aires, said Argentina's biggest worry is that financial panic could cause a run on banks. He said the government must boost confidence by making "overkill" budget adjustments and showing a substantial fiscal surplus.
The government's actions this week sought to address exactly those needs, and they quickly produced a jolt of confidence in Argentina--as shown by sharp jumps in the Buenos Aires stock market, which had lost half its value since the Mexican devaluation.
The Merval index of preferred stocks finally dipped 3% on Wednesday, as investors scrambled to realize gains from a 31% run-up over three days.
But the stock market has been erratic, and there was still no sign of a reversal of the drain from the banking system. And Wednesday's news from Mexico--interest rates surging to nearly 100%--underscored the volatility that continues to infect much of Latin America.
There have been days here when mass withdrawals from both peso and dollar accounts seemed to threaten a run on banks. On March 6 alone, depositors pulled out $460 million. Panic has been avoided so far, but uncertainty remains.
Credit is so tight that annual interest rates on inter-bank call money have rocketed to 75% from as low as 5% in November.
The fears are partly a hangover from Mexico's crash, but Argentina has its own financial troubles. Its overvalued peso contributed to a record trade deficit of $5.8 billion last year, and the government's previous operating surplus gave way to deficit later in 1994.
But Argentina remains wealthy in foreign monetary reserves. A 1991 law requires all pesos in circulation to be backed by central bank holdings in hard currencies. The same "convertibility law" fixes the exchange ceiling at one peso to the dollar and guarantees that anyone can trade currencies at that rate.
A recession would sharply reverse four years of booming growth that made Argentina an economic star of the hemisphere. The economy expanded more than 6% in 1994, while inflation ran at 3.9%--the lowest rate in Latin America. Foreign reserves were estimated at $14 billion.
In the third quarter of '94, many economists began to worry that deficit spending would be inflationary, make the economy less competitive and further erode the trade balance.
Then came the Mexican crisis.
Suddenly, critical attention was on Argentina's problems. Then capital flight and the credit crunch made those problems a crisis.
Since then, Cavallo has been trying to explain why Argentina is different from Mexico, as he scrambles to patch up old and new cracks in his economic edifice. To plug a federal revenue shortfall projected at $4.5 billion or more, Cavallo scheduled cuts of $1 billion in the 1995 budget, along with revenue increases of $2.5 billion due from cracking down on tax evasion and reducing deductions.
Government salaries of more than $2,000 a month will be reduced by 5% to 15% on a sliding scale. A wealth tax has been proposed.
Legislators have just passed a $3,100 ceiling on monthly social security pensions. The law says that if the government lacks funds, it can postpone overdue pension payments ordered by courts. The measure aims to lighten the government's burden of $20 billion a year in social security payments.
In a news conference Monday, Cavallo predicted that the government will end the year with a $4.4-billion operating surplus.
This week, he said, the International Monetary Fund agreed to offer Argentina a new, $2-billion line of credit in addition to a $420-million credit that had been held up last year. He said Argentine corporations and foreign banks will help by underwriting $2 billion in government bonds. The World Bank and the Inter-American Development Bank have signaled willingness to lend $1 billion.
"Certainly, the Argentine economy is going to grow at a slower pace in 1995," he said. "But we can avoid, and we are going to avoid--I am convinced--a recession. What I am absolutely sure of in any case is that there will not be a deep recession."