The International Monetary Fund announced Monday a $39.7-billion bailout package for Argentina aimed at heading off a massive default here and the shock waves that could result throughout Latin America and beyond.
The financial rescue, echoing bailouts of Mexico and Brazil in the 1990s, was seen as a concrete confirmation of the fears among Argentines that a living standard that was once the envy of the continent is deteriorating fast.
President Fernando de la Rua declared that the announcement marks the start of an economic turnaround in a nation that was until recently a model of free-market reform for the region. But other Argentines worry that the IMF loan package--despite its hefty price tag--is only one step toward untying the knots of their national malaise: stubborn unemployment, a yawning budget deficit and disillusionment with the government.
“The situation of the country is bad,” said Susana Boite, 34, an unemployed mother of three. “I’ve never gone so much time without finding even a little part-time gig. Everyone’s down in the dumps.”
The low-key De la Rua took office a year ago promising prosperity and honesty. But unfavorable currents dragged down Latin America’s third-largest economy: Trade suffered because neighboring Brazil’s currency devaluation last year made its products more competitive. Argentina’s economy is expected to grow by only about 0.5% this year. Joblessness, now at 14.7%, has pushed tens of thousands of middle-class families into poverty.
The IMF put together the loan package to ward off the specter of a default on Argentina’s $21-billion foreign debt, which probably would have been necessary next year. That could wreak widespread havoc reminiscent of the “tequila effect” of Mexico’s peso devaluation in 1994, a phenomenon repeated across Asia after Thailand devalued its currency in 1997.
The nearly $40-billion Argentine bailout, announced in Washington and Buenos Aires, is almost double initial estimates. The IMF will contribute $13.7 billion. The World Bank and Inter-American Development Bank will add $2.5 billion each. Argentine banks and pension funds will kick in $13 billion, and Spain, a leading investor here in telecommunications, banking and oil, will open a billion-dollar credit line. A $7-billion debt swap rounds out the package.
The loans will “bulletproof” the economy, buying time and investor confidence, Argentine leaders say. Coming weeks will bring tax cuts and incentives to industrial production, according to Economy Minister Jose Luis Machinea, who started his tenure by raising taxes. Many of the reforms are a condition of the bailout.
“This operation will bring back to Argentina the dose of optimism that is necessary to engage the economic recovery,” De la Rua said.
Nonetheless, analysts say the government must capitalize on the opportunity and jump-start both investment and reforms such as cuts in bloated, inefficient provincial governments. Without decisive action, the crisis will merely be postponed, critics say.
Agentines expect the worst. They are among Latin America’s most prosperous and best-educated citizens, but they are also among its most melancholy and self-critical.
Their pessimism is fueled by the government, which has seemed nearly paralyzed after a multimillion-dollar bribery scandal in the Senate in September caused the resignation of reformist Vice President Carlos Alvarez, straining the center-left Alliance party to the breaking point. De la Rua has fought the image, accurate or not, that he is unable to force through austerity measures to balance the budget, improve tax collection and otherwise revive the economy.
Argentina’s woes are on daily display at the small San Jose del Talar church in the middle-income Villa Devoto neighborhood, home of a gated shrine enclosing a 17th century painting of Our Lady That Unties Knots. The icon has drawn crowds since it was brought from Germany in 1996. Pilgrims arrive in busloads to ask the Madonna, which has reputedly miraculous powers and its own Web site, to help them find work or hang onto the jobs they have.
The nation is at the mercy of weak leaders and heartless world finance officials, said Raul Pissero, a baker. He came to implore the Virgin, which in the painting is depicted with an angel holding out a cord full of knots, to protect his business and his family.
“I voted for De la Rua,” said Pissero, a muscular, gray-haired man in his 40s. “A disaster. I regret it. We’ll never get anywhere with these politicians. We should kill them all. The IMF has us by the short hairs and our debt keeps getting worse. That’s our history: We will always be dominated. Before it was Spain, now it’s the IMF.”
Juan Luis Bour, an economist at the Foundation for Latin American Economic Research here, is somewhat less despairing: “What is needed is a marking of the course. . . . The government is going to have to make a change to show it has defined its course--to show that there will be no default, no devaluation, and that all necessary reforms will be undertaken so we that are not having the same conversation a year from now.”
Argentine leaders are flirting with a dramatic but risky remedy: recruiting opposition Congressional Deputy Domingo Cavallo, the hard-charging, Harvard-educated technocrat who made Argentina a model of free-market transformation in the 1990s.
As economy minister for former President Carlos Menem, Cavallo vanquished hyperinflation by pegging the Argentine peso to the dollar and enacted aggressive privatization and modernization programs. Though a threat to the leadership, his return to the Cabinet would delight the investment community and, according to his admirers, deliver a “confidence shock.”
The Argentine bailout marks a change in IMF interventions, which in the past have come after a country has faced a run on its currency or its international reserves are nearing depletion. The IMF now aims to intercede before the contagion from a country’s problems can spread.
“The perception among investors was that if we were to suffer another big crisis [in emerging markets] an already damaged asset class might not ever recover,” said Michael Henry, Latin American economist at ABN AMRO, a Dutch investment bank with offices in New York.
Latin American stocks and bonds have recovered somewhat over the last month as it became known that the IMF was working on a rescue package, Henry said.
“This is very good for Argentina. It gives them breathing room and a welcome time out to put in place the type of program they need allowing it to resume growth,” said Sebastian Edwards, a former World Bank economist and now a professor at UCLA’s Anderson School.
Outside the shrine of Our Lady Who Unties Knots, the pilgrims talk of survival.
“If I could, I would leave the country,” said Valeria Torrens, 29, who came to thank the Madonna after landing a job as a clerk at a pension fund company. “I don’t know where we are headed. The answer is not in politicians. Perhaps the answer is in faith.”
* Sebastian Rotella reported from Buenos Aires and Chris Kraul from Los Angeles. Times researcher Vanessa Petit in the Buenos Aires bureau contributed to this report.