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Argentina Presents Austere Budget In Hopes of winning More IMF Aid

 By: Jonathan Karp and Michelle Wallin

 The Wall Street Journal, February 10, 2002

Buenos Aires -- Argentina delayed by at least two days the flotation of its currency, while aggressive moves to squeeze dollars out of the economy heightened Argentines' jitters, clouding the debut of the new peso and the credibility of the government's economic-stabilization plan.

Seeking International Monetary Fund approval, Economy Minister Jorge Remes Lenicov presented a federal budget that imposes more austerity on crisis-wracked Argentina. Spending is to be slashed 15%, or $3.6 billion, but economists said that the government's gross domestic product; inflation and deficit forecasts are too optimistic.

The government, which had planned to float the peso Wednesday, extended the closure of foreign-exchange houses and a ban on some bank functions through Thursday as officials write new banking regulations. The banking system has been shut since the government Sunday scrapped a dual exchange-rate system, announced an easing of account withdrawal restrictions and ordered all dollar deposits and debts converted into pesos. The government then instructed banks to sell all their dollars -- including reserves -- to the central bank

That executive decree generated confusion about foreign-exchange operations at banks, which already are reeling from Argentina's four-year recession, a government debt default and billions of dollars in losses from the forced conversion of loans into pesos at below-market rates. The central bank subsequently told banks to curtail dollar sales to retail customers, hoping to avoid a repeat of the panic buying last week. The peso has lost more than half its value against the dollar since being devalued in January.

But instead of shoring up consumer confidence and the peso's value, the government's move to restrict access to dollars will increase pressure on the local currency, bankers said. A declining peso, just as the government forces Argentines to hold their savings in the local currency, could further undermine confidence in President Eduardo Duhalde.

"All this is doing is rearranging chairs on the deck of the Titanic," said Arturo Porzecanski, managing director for emerging markets at ABN-Amro in New York. "Argentines only trust the greenback."

Floating the peso, which had been pegged at parity to the dollar since 1991, has been a central demand from the IMF. Another has been spending cuts, which Mr. Remes, the economy minister, addressed in the budget. The plan pledges to cut the government's deficit to around 1% of GDP, while paying debts to multilateral and domestic creditors, and seeking a new deal with foreign bondholders.

Mr. Remes said the economy is expected to contract 4.9% this year, after shrinking 3.7% in 2001. A raft of monthly indicators released Tuesday showed how a freeze on bank accounts and political disarray had hurt the economy. January car sales plunged more than 80% from a year earlier; retail sales tumbled between 35% and 90%, depending on the sector; and real-estate transactions fell 90%.

Mr. Remes estimated that consumer prices will rise 14% this year. In its first report on inflation since abandoning the dollar peg, Argentina said Tuesday that January consumer prices rose 2.3% from December and 0.6% from January 2001, in line with expectations.

The U.S. and IMF want to see a sustainable Argentine economic plan. The successful flotation of the peso is critical to inspiring confidence, but initial moves belied Mr. Remes's pledge Sunday to create "clear, simple rules" for the economy.

"The government doesn't want a panicky beginning, and this shapes up as one," said Kevin Harris, an economist at MCM Currencywatch in New York.

Bankers were bewildered after central bank officials told them in a meeting that they should halt dollar sales in Buenos Aires but continue selling them outside the capital, where exchange houses are rare. Bankers said they were awaiting official central-bank notification of the new rules, but by late Tuesday, nothing had arrived.

With all dollar deposits and bank reserves to be held by the central bank, the government controls most dollars circulating in Argentina, effectively closing foreign-exchange operations at commercial banks.

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