New Fears Send Latin American Stocks Tumbling

Latin American stock markets, among the world’s best performers this year, were rocked Wednesday by new economic worries--led by rumors that Argentina may dump its anti-inflation policy of pegging the peso to the U.S. dollar.

Argentina’s government scurried to quell fears that its cherished dollar peg was headed for the junk heap, but markets slumped amid growing perceptions that the social costs of the peg are becoming too high.

The Buenos Aires stock market dove 4.3%, and the country’s bonds--which are a gauge of the government’s ability to repay its debts--were harder hit, with the benchmark global bond maturing in 2027 falling more than $4 per $100 face value before closing at $80.50, down $2.50 on the day.

Traders said rumors that Argentina was considering dropping the peg--which since 1991 has fixed the peso at par to the dollar--started in Brazil, where markets also declined.

Brazil’s Bovespa stock index fell 1.2% after President Fernando Henrique Cardoso backed off a bid to decree a minimum retirement age for government employees. The decision could set back government efforts to trim a $72-billion budget deficit.

Budget worries are at the heart of the rumors about Argentina: The government last week backed down on $280 million of cuts in education spending in the face of mass protests against the measure.

The cuts were part of a wider $1-billion package of spending reductions agreed with the International Monetary Fund in return for needed credit. The reversal means the government is now targeting a $5.1-billion budget deficit rather than $4.95 billion as agreed with the IMF in April.

“It seems . . . Argentine society doesn’t want to pay the social cost” for peso stability, said Walter Molano, economist at brokerage BCP in New York. The IMF is warning that it will cut access to a $2.8-billion standby loan if Argentina’s deficit widens.

Undersecretary of Finance Miguel Kiguel insisted that “Argentina is not going to change its monetary regime. There is no reason to.”

Presidential elections in October are clouding the outlook for investors as the two top candidates appear to have little of the economic reformist zeal of President Carlos Menem.

In Mexico on Wednesday, the main stock index slid 2.1% to 5,731.20 points. A slump in consumer demand slowed the economy in the first quarter to its lowest level of growth in three years, data show.