Lack of Credibility May Put Off International Bailout Package

Amid the Argentine government’s myriad problems, one stands out: its lack of credibility at home and abroad. That may prove the biggest obstacle to securing a desperately needed international assistance package and starting down the road to economic recovery.

After all the turmoil of the last two months--with five presidents, a devaluation and a default on most of its $150 billion in public debt--Argentina is still fighting the perception that it isn’t facing up to tough budgetary and political choices. Until it does, chances of an International Monetary Fund bailout are slim to none, experts say.

The federal government has yet to sort out its tangled relations with its provinces, which are free to spend more money than they receive in transfers from the federal government. The government took a positive step in allowing its peso to float freely this week--the peso gained 10% on Tuesday, trading at 1.80 to the dollar--but has yet to outline its monetary policy or put forth a credible federal budget.

Although the government is projecting an annual deficit of 3 billion pesos, economists say it will rise higher as early as this month because of poor tax collections.

And while the government maintains that inflation will be 15% in 2002, economist Michael Gavin of UBS Warburg says 25% is a “conservative estimate.”

The banking system is a shambles, partly because depositors no longer trust the government with their money. After years of promises that dollar deposits would be respected, President Eduardo Duhalde converted all accounts to devalued pesos last month. Depositors still are denied their “property rights” of full access to their accounts.

The government has made no public effort to outline how it might resume payments on the public debt it stopped paying last month. Until it does, a bailout is an impossibility, said Carina Lopez, an analyst with Standard & Poor’s debt rating firm in Buenos Aires.

Argentina’s confidence problem is made even more acute because it has fewer resources to help it out of its crisis in comparison with Mexico and Brazil, which devalued their currencies in 1994 and 1999, respectively.

Mexico was helped by booming trade with the United States. Brazil benefited from a massive influx of foreign investment and the credibility of central bank chief Arminio Fraga, a former associate of financier George Soros. Argentina’s central bank, on the other hand, lost its autonomy last month when the legislature handed jurisdiction to the executive branch.

The prospect for a new spurt of foreign investment in Argentina is practically nil, because companies that spent billions of dollars over the last decade buying up privatized companies--including utilities, energy concerns and banks--have been left holding the bag. Duhalde decreed a freeze last month in energy and telephone rates in devalued pesos, even though most of the companies are loaded with debt in dollars.

Caught in the bind are companies such as Metrogas, a Buenos Aires gas distributor owned by a consortium including British Gas and Repsol. The company must meet its dollar-denominated debt obligations with a reduced revenue stream based on devalued pesos.

Last week, the company missed a $1.6-million payment on its debt, although finance director Luis Domenech said Tuesday it was due not to a lack of cash but to government restrictions on external payments of dollars. “It’s a problem,” Domenech said of the new government policies.

Meanwhile, Argentina’s economic panorama darkens by the day. In what some economists call a “fiscal rebellion,” many Argentines have stopped paying taxes, another sign of popular distrust. January tax collections were 20% less than the same month last year. Unemployment could reach 30% this month--up from 21% in January--and industrial output is off by more than 16% so far this year, says the Fiel think tank here.

Demonstrations, often violent, continue daily, putting pressure on President Duhalde, who inherited a crisis when he took office Jan. 2, the fifth president in two weeks. On Tuesday, angry retirees broke windows of banks in the affluent resort town of Mar de Plata, complaining to television reporters they couldn’t access their accounts to pay living and medical expenses.

Economy Minister Jorge Remes Lenicov visited the International Monetary Fund and U.S. Treasury Secretary Paul H. O’Neill on Tuesday to open a dialogue in hopes of securing an assistance package estimated in the local press here at between $15 billion and $25 billion.

“We are conscious that Argentina has lost its credit and credibility in the international financial system,” said presidential spokesman Eduardo Amadeo on the IMF steps in Washington. “We know it will be a long negotiation,” Amadeo told La Nacion newspaper.

Indeed, no one has any illusion that such a sum is forthcoming, partly because Argentina still hasn’t put together a credible recovery plan. Its targeted budget deficit, for example, is unrealistically small, given the deep drop in tax collections, said Fabio Rodriguez, an economist with Fundacion Capital think tank.

It’s an important point because many fear that the government will print money to make up for the shortfall, leading to a recurrence of the hyperinflation that bedeviled the country in the 1980s. Economist Abel Viglione of Fiel sees a possible “Hurricane Mitch” of inflation in coming months as the government loosens banking restrictions and Argentines buy dollars at any cost, which would weaken the peso and drive prices higher.

With depositor and investor confidence waning, Argentina will see a massive restructuring of its banking industry under any scenario, including bank closures and mergers, according to S&P; economist Gabriel Caracciolo.

“All the functions that banks serve--mortgages, consumer and retail loans and project financing--are gone. There are too many banks for the structure of the economy in coming years,” Caracciolo said.

Argentina’s road to recovery will be slow and more difficult than others in recent Latin American history, said Gustavo Canonero, head of research at Deutsche Bank here.

“Argentina’s devaluation has forced the government to destroy institutions, like the banking system and property rights. The consequences are far reaching. Institutions take time to rebuild. So does confidence,” Canonero said.