The International Monetary Fund has engineered another bailout, this one a $20-billion to $25-billion rescue of Argentina that analysts say is the only way to avoid a debt default next year that would reverberate throughout the hemisphere.
Argentina probably will be unable to repay $21 billion in public-sector debt due next year, and the IMF--having learned from the Asian financial crisis of 1997 and the economic collapse when aid for several countries arrived too late--is trying to defuse this problem early.
A default on Argentina's debt could spill over into neighboring Brazil and Chile, wrecking investor confidence in free-market reforms and causing economic chaos, said UCLA professor Sebastian Edwards, who is a former top World Bank economist for Latin America.
"Argentina is trapped in a vicious circle where people doubt its ability to get out of its problems. It's gotten to a level of debt that's considered dangerous. If Argentina goes under, there is a possibility there could be contagion that could engulf the rest of Latin America," Edwards said.
The IMF's early response--and its public proclamations that it is on the case--are a big reason emerging market bonds in general have not been as hard hit as they might have been by jitters over Argentina, according to Fitch, an international debt-ratings service that Tuesday downgraded the bonds of Buenos Aires province.
"The IMF is being responsive. It is making it clear it won't allow Argentina to drop through the precipice," said Gerson Zurita, a Fitch director and Latin America bond analyst in New York.
Merrill Lynch, however, has noted a moderate draining of U.S.-based mutual funds' investments from Latin America, partly because of fears over Argentina's situation.
The bailout is being put together by an IMF team now in Buenos Aires "working on the amount and the time frame," IMF spokesman Francisco Baker said Wednesday. Observers said the package would range between $20 billion and $25 billion, although Baker said about $22 billion is likely.
An announcement is likely on or after Dec. 18, assuming that the Argentine Congress approves fiscal austerity measures that the IMF wants to see before handing over the aid package.
The funding will include an undetermined amount from Spain, sources said. Spain has billions of dollars invested in privatized Argentine energy and telecommunications industries and has a big stake in the nation's stability.
The bailout represents only a short-term fix for Argentina's problems, which have been building for some time but were exacerbated by the currency devaluation in early 1999 by neighboring Brazil, which conducts one-third of its foreign trade with Argentina. The 40% devaluation of Brazil's currency, the real, suddenly made Argentina's products less competitive in Brazil and at home in competition with Brazilian imports.
That lack of competitiveness has contributed to a two-year recession in Argentina and a widening foreign trade deficit. Unemployment has wavered between 15% and 18% for several years, threatening political support for one of the most aggressive free-market transitions of any Latin American nation.
Wracked by hyper-inflation in the 1980s and early 1990s, Argentina switched to "dollar convertibility" in 1991, meaning each peso in circulation was backed by one U.S. dollar in reserve. The move brought an end to severe inflation and made foreign firms comfortable investing in Argentina, but the dollar peg locks the peso in against the cheaper Brazilian currency.
The Argentine economy is also notoriously underproductive, with padded payrolls protected by labor laws that have been targeted for reform but have prevailed. Such underlying problems are difficult to tackle amid the recession, high unemployment and anemic trade.
Nancy Birdsall, senior fellow and Latin America specialist at the Carnegie Endowment for International Peace, said Argentina's problems closely resemble those of Brazil in 1998 and Mexico in 1995, when each received bailouts.
Those two countries devalued their currencies as part of the recovery, a tactic Argentina can't employ because so much of the country's bank debt is in dollars. A devaluation would throw thousands of businesses into bankruptcy because a weakened peso would make those debts harder to pay off, Birdsall said.
A more likely scenario, said Birdsall and others, is that the Argentines would try to completely dollarize their economy, much as Ecuador has, a move that would require cooperation by the incoming U.S. presidential administration.