Copyright 2001 Globe Newspaper Company  
The Boston Globe
December 23, 2001, Sunday ,THIRD EDITION
SECTION: NATIONAL/FOREIGN; Pg. A14
Scott Bernard Nelson, Globe Staff

Globe correspondent Sophie Arie in Buenos Aires contributed to this report.;
ARGENTINA'S PESO, AND CONFIDENCE, HIT NO QUICK ARGENTINE FIX IS SEEN

The economic crisis that swept across Argentina last week and led to President Fernando de la Rua's abrupt resignation was decades in the making, analysts said. The question now is whether the situation will take decades more to fix and what the immediate impact will be on Argentina's neighbors and on the global financial system.

Argentine lawmakers met in special session yesterday in the capital of Buenos Aires to approve the appointment of Adolfo Rodriguez Saa as the acting president to replace de la Rua, who resigned last week because of widespread looting related to a crushing economic recession.

    Rodriguez Saa, 54, known for improving business in his desert province, is expected to take over from the Senate president, Ramon Puerta, who took over for one day as required by the country's constitution. Rodgriguez Saa is expected to serve until elections scheduled for March 3. The elected leader then will finish out the two years of de la Rua's term. The acting president's top priority will be to tackle an economy that has spun out of control and caused panic and anger throughout the country of 36 million people - and a lack of confidence among international creditors.

"The economic and political crisis Argentina is going through is the kind of thing a country only goes through once or twice in its entire history," said Larry Birns, director of the Washington-based Council on Hemispheric Affairs. "It would be surprising if that didn't have an impact, given the size of Argentina's economy."

Argentina has the world's 17th-largest economy, and the third-biggest in Latin America. Economists worry that a complete meltdown could destabilize neighboring countries, including Brazil, and set off a chain reaction of investors pulling their money out of developing economies worldwide.

That's essentially what happened during the 1997-98 "Asian Flu" that spread across the globe, forcing Russia to default on $26 billion in Soviet-era bonds and Brazil to devalue its currency, the real.

But Standard & Poor's chief economist, David Wyss, said that the economic forces buffeting Argentina are more localized than those in Asia in the late 1990s, and that widespread ripple effects are likely to be minimal this time.

"This isn't a case of the first domino falling, but of the last domino starting to come down," Wyss said. "When Brazil devalued in late 1998, it left Argentina with a grossly overvalued currency that made it hard to trade internationally."

While that's good news for other countries, it puts Argentina under increasing pressure to devalue its currency by removing the peso from its one-to-one exchange rate to the US dollar. That would boost exports and spur job growth, but it also could bankrupt millions of middle-class borrowers and add to the strain on the financial system.

The problem is that most bank loans are repayable in dollars, not pesos. If people are paid in pesos that are suddenly worth 50 percent less, but still have to repay loans in dollars, their debt payments have essentially doubled overnight.

Jeffrey Sachs, a Harvard University economist who met informally with Argentine finance minister Domingo Cavallo six weeks ago, said "there are no good options left" for the country.

"He told me what he was doing and I told him I thought something more drastic was needed," Sachs said of Cavallo, who resigned amid last week's turmoil. "The one drastic thing he decided to do, freezing peoples' bank accounts, I would have argued against. Now, Argentina has nothing but miserable prospects going forward."

Argentina's economy eventually will recover, Sachs predicted. But the complete lack of confidence in Argentina's government and financial system both domestically and abroad will take a long time to reverse.

"Argentina is in a profound crisis of confidence," Sachs added. "They need a Roosevelt to come in and tell them that the biggest thing they have to fear is fear itself, but I don't see it happening quickly."

Argentina linked its currency to the dollar in 1991, hoping to end decades of hyperinflation and the resulting boom-and-bust swings in the economy. The fix worked, to the extent that inflation fell from thousands of percentage points a year during the 1980s to single digits in the 1990s.

The price, though, turned out to be steep. By keeping the peso valued higher on foreign-exchange markets than it would have been naturally, Argentina unintentionally made the products made by its companies more expensive in foreign markets.

Rodriguez Saa, a member of the Peronist party, is expected to declare a moratorium on repaying the country's debts and vowed to try to keep a key economic law pegging the Argentine peso to the US dollar - something a majority of Argentines support. He also was considering easing banking restrictions imposed by the de la Rua government that limited Argentines to withdrawing $1,000 each month from their accounts.

Specialists like Sachs said Argentina will have no choice but to let the peso float free on the world currency-exchange markets, although that might leave the country vulnerable to fluctuating prices and even inflation.

Ecuador last year adopted a dollarization policy by replacing its currency, the sucre, with dollars. Other Latin American nations, most notably El Salvador, have considered similar measures.

A former governor of San Luis province, Rodriguez Saa transformed the local economy by bringing in modern industry to replace old mines, and building highways, housing, and sewage systems.

Birns, of the Council on Hemispheric Affairs, agreed that most of Argentina's recent free-market-type reforms - like the currency policy and the selling of state-owned assets - were ill-advised. The issue now, he said, is how long it will take to reverse course and improve the situation.

"It's a whirling dervish of helplessness," he said. "People aren't working, they're not paying taxes, there are no new investments coming in, and tourism has plummeted. And it's going to be a while before any of those things turn around, unfortunately."

Scott Bernard Nelson can be reached at nelson@globe.com.

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