Argentina’s Woes Ripple Across Latin America

Stocks in Argentina slid to their lowest level since 1999 on Tuesday amid a new wave of doubts that the country can solve its economic ills. The plunge also drove down stocks and currencies in other Latin American countries.

Argentina’s main stock index, the Merval, fell 6.1% after the government was forced to pay investors more than 14% interest on 91-day treasury bills to help refinance $850 million in dollar-denominated debt. The unusually high rates reflect the degree of the government’s desperation, analysts said.

In Brazil, whose economy is closely tied to Argentina’s, stocks fell 2.4% and the currency sank to its lowest value ever against the dollar. Analysts said Brazil’s problems reflect a certain amount of Argentine contagion as well as its own economic problems, including an energy crisis severe enough to stunt growth this year.

The exorbitant interest rates exacerbate Argentina’s double bind of crushing debt and shrinking economic growth. The country is in the third year of recession and suffers from 15% unemployment. A succession of fiscal measures has not changed the crux of the government’s problem: It spends vastly more than it takes in and borrows heavily to make up the shortfall.

The latest rates on Argentine t-bills are up from 9% paid on similar bills last month and are more than 10 points higher than what the U.S. government pays on comparable securities.

As global investors’ doubts about Argentina have mushroomed in recent days, investors have demanded higher yields on bonds of other developing economies as well.

Argentine stocks, which had held steady for much of this year, have crumbled over the last two weeks. On Tuesday, the Merval index plunged 22.70 points to 347.11, its lowest since January 1999.

The decline comes a day after Argentine President Fernando de la Rua made an impassioned Independence Day speech warning Argentines that they had to stop living beyond their means, calling for further government budgets cuts and sacrifices. But De la Rua lacks the political clout to carry out belt-tightening measures.

Analysts agreed that Argentina has hit a low point. “The only way this can work is if Argentina makes a strong announcement in the area of fiscal austerity and a multi-party political agreement to make spending cuts,” said Fernando Losada, senior Latin America economist at ABN Amro in New York.

Observers say Argentina needs to cut at least $3 billion, and maybe twice that, to put its financial house in order and restore investor confidence. The stakes are high not just for Argentina but also for Brazil and other Latin American countries, said Gray Newman, economist at Morgan Stanley.

“We are in a classic mode of financial contagion,” Newman said, referring to Brazil’s problems. Brazil’s key share index slid 2.4% to 13,569.70 on Tuesday, its lowest since December.

The darkening panorama comes only weeks after Argentina’s Economy Minister Domingo Cavallo engineered a $29-billion debt swap in early June that seemed to buy the beleaguered country time and briefly heartened investors.

But a succession of bad news, including continued deflation, high unemployment and poor tax collections, has turned the outlook sour.

Fears pushed yields on Brazil’s bellwether 14-year C bond to 14.7% Tuesday, up from 11.84% as recently as March, said James Sha of ABN Amro. The difference between U.S. government bond yields and those of emerging-market bonds, as reflected in the J.P. Morgan EMBI Plus index, has increased from 7.10 percentage points in early June to 8.38 points now, a sign of investor apprehension, Sha said.

Argentina’s debt accounts for 23% of all emerging-market debt.

Among other Latin markets, Chile’s main share index fell 0.7% on Tuesday and Peru’s lost 1%, but Mexico’s IPC index inched up 0.1%. The Mexican market has been a relative safe haven this year and still is up nearly 19% year to date.

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As Debt Costs Soar, Stocks Sink

The Argentine government has been paying sharply higher interest rates to refinance its huge debt amid deepening investor concerns about the country’s fiscal health. Those fears have sent share prices plummeting.

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Yield on 91-day Argentine T-bills (monthly and latest)

Tuesday: 14.01%

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Argentine Merval stock index (monthly closes and latest)

Tuesday: 347.11

Source: Bloomberg News