By:  Thomas Catan and Richard Lapper
 Financial Times,  December 17, 2001

Argentine legislators are threatening not to co-operate with government budget plans for next year, endangering an agreement with the International Monetary Fund and bringing the country closer to a formal default on its Dollars 155bn (Pounds 108bn) foreign debt.

Social unrest - including the looting of supermarkets in at least two cities on Friday and Saturday - has also raised the political pressure on President Fernando de la Rua and could accelerate the abandonment of the long-standing convertibility exchange rate regime.

Congressional approval of the 2002 budget proposal is required if Argentina is to win access to some Dollars 1.26bn of funds from the IMF but congressional leaders said that they will oppose any further spending cuts. These would "not be approved even by chance", said Eduardo Camano, the president of the deputies. He belongs to the opposition Peronist party, which controls both houses of congress.

The imposition of bank controls two weeks ago has heightened political tensions. The measures, which limit savers to withdrawing Dollars 1,000 a month in cash, are further squeezing an economy now in its fourth year of recession.

There are signs that they could be having a devastating effect on the cash-dependent informal sector, which contributes about 30 per cent of economic output. On Friday and Saturday there were mob attacks on supermarkets in the cities of Rosario and Mendoza, reviving memories of the economic and social turmoil that led to the resignation of President Raul Alfonsin in 1989, several months before the end of his mandated term.

All this is leading to an ever more open debate on the sustainability of Argentina's currency regime, long a taboo subject. Domingo Cavallo, the economy minister, signalled on Friday night that a de facto dollarisation is already occurring.

"The uncertainties surrounding the value of the peso have provoked a growing dollarisation," said Mr. Cavallo. "The government's attitude has been to facilitate the transformation of pesos into dollars to the extent that people have wanted them to do."

Mr. De la Rua is opposed to dollarisation but last week won the backing of Carlos Menem, his Peronist predecessor, for the budget plans. Mr. Menem is the most prominent proponent of dollarisation. Other factions of the opposition Peronists - as well as leaders of Mr. De la Rua's own Radical party - are opposed.

Carlos Ruckauf, the governor of Buenos Aires province and one of the most powerful Peronist leaders, favors a third currency that would circulate alongside the dollar and the peso but be non-convertible. This new currency would replace bonds issued by a number of provincial governments to pay workers. Mr. Ruckauf said that if measures were not taken soon the "market would devalue".