Argentine Budget Cuts Get Support

In a move designed to reassure nervous investors, President Fernando de la Rua reached agreement Monday night with the main opposition governors to back a plan that would cut the budget.

The agreement was announced hours after the stock market continued its plunge. The pact’s details are to be announced today.

“We have arrived at an agreement in fundamental concepts to arrive at zero deficit,” Cabinet chief and lead negotiator Chrystian Colombo told reporters. Salta Gov. Juan Carlos Romero said the pact will be signed today.

The agreement with a group of opposition governors follows four days of talks between the central government and the provincial leaders. De La Rua reached agreement with governors of his own political alliance Sunday night, but governors from the rival party had balked at the severity of the cuts.

It was unclear Monday night whether the agreement would halt the slide of the Argentine stock market, which fell an additional 1.55% on Monday. The market went into free fall last week, creating waves in emerging markets from the Pacific Rim to Latin America.

An agreement with the governors is considered crucial to reassure the markets and to forge local political support. Two of Argentina’s largest unions have rejected the austerity measure as unfair to the lowest-paid groups. The cuts include shaving 13% from all government salaries and pensioners who receive more than $300 in monthly benefits.

Union demonstrations against the cuts are planned for Wednesday in the downtown district and union leaders said they were organizing a nationwide general strike Thursday to continue the protest.

Economists say adoption of the so-called zero deficit spending cuts may well be Argentina’s last opportunity to avert economic collapse.

De la Rua and his economy minister, Domingo Cavallo, are portraying the plan as Argentina’s last chance to avoid “catastrophic consequences”: a default on about $128 billion in debt or a devaluation.

In separate talks to businessmen and economist groups Monday, Cavallo promised that the program “would begin to bear fruit” over the next three months in the form of lower interest rates and the “economic reactivation” that would result from cheaper credit.

“We can’t take on another peso of debt,” Cavallo told a group of bankers and businessmen convened at Argentina’s central bank auditorium.

Argentina’s high debt, epitomized by the sale of $828 million in short-term notes at an interest rate of 14.1%, touched off sharp declines in stocks and bonds last week.

Cavallo also promised Monday to crack down on tax evaders and purveyors of contraband who are robbing the government of tax revenue, as well against the “waste and corruption that increases the cost of government.”

But Argentina’s policy managers know that a recovery depends not just on cutting costs but also in somehow reactivating an economy that has been in hibernation for more than three years. Some economists warned that the spending, salary and pension cuts would only put Argentina’s economy into a deeper sleep.

Unemployment is still rising, and the total output of goods and services shrinking.

“It’s easier to get to Mars than achieve a zero deficit in Argentina,” economist Alvaro Alsogaray told Clarin newspaper.

But Ricardo Lopez Murphy, an economist who briefly served as economy minister in March before his extreme budget cut proposals forced his resignation, said the nation had no choice but to take the bitter medicine because “tomorrow things will only get worse.”

A profile of Argentine consumers produced by the FIEL economics research firm here paints a discouraging portrait of individual and business buyers.

For example, the percentage of business purchasing managers who said they planned to make a major investment in durable goods in the upcoming six months has fallen from 14% in March 1999 to 4.7% last month.

Auto sales over the first six months of this year fell to just 96,000 units, a 41% drop from last year’s already depressed figure of 164,000 vehicles sold.

Perhaps most discouraging is that the percentage of Argentines who regularly save part of their incomes had declined last month to only 6.6% of the population, down from 36.6% in March 1999. The decline shows that more and more citizens are dipping into their savings” to meet everyday costs.