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 Argentina's Fallen Economic Czar Is Held in Arms Deal

By: Larry Rohter
 The New York Times, April 4, 2002

Rio de Janeiro, April 3 — After being hauled before a judge and questioned for more than an hour, Domingo Cavallo, Argentina's all-powerful minister of the economy in the 1990's, was arrested in Buenos Aires early today.

Mr. Cavallo, who was credited with the country's rapid growth in the 90's and then blamed for the economy's collapse last year, was detained on suspicion of involvement in "aggravated contraband."

The accusations stem from Mr. Cavallo's supposed role in illegal arms deals attributed to the Argentine government in the early 1990's. But supporters and independent political analysts were quick to argue that he was being made a scapegoat for the crisis, which forced his resignation in December and plunged Argentina into economic and political turmoil.

"This is fundamentally a political decision," Rosendo Fraga, director of the New Majority Studies Center, a political research group in Buenos Aires, said in a telephone interview. Mr. Cavallo's arrest, he added, is part of a broader government campaign of "going after banks and foreign investors" in order to "create a distraction" from the country's economic disaster.

For Mr. Cavallo, who last month was prohibited by judicial decree from leaving Argentina, the imprisonment order caps a startling fall from grace. Less than a decade ago, he was the toast of Wall Street and Washington, celebrated for his commitment to free-market principles and the huge profits they guaranteed foreign investors and cited constantly to other so-called "emerging markets" as an infallible economic miracle worker.

But Mr. Cavallo was never as popular in Argentina as he was abroad. His acerbic, impatient and self-assured manner alienated many Argentines, especially those who did not share in the "pizza and champagne" bonanza of the 90's, and when he made a run at the presidency himself in 1999, he was resoundingly rejected.

Since taking power three months ago, President Eduardo Duhalde and his Peronist government have consistently been targets of street demonstrations demanding the prosecution of the political and economic leaders blamed for the debacle. Mr. Cavallo, a member of a small center-right party, is especially unpopular because of an order he issued in December to freeze banking deposits, a move followed by a 66 percent devaluation of the Argentine peso.

One of Mr. Cavallo's political allies, Guillermo Cantini, described Judge Julio Speroni's action today as "more in the line of political persecution than a judicial decision." Mr. Cavallo's lawyer, Rafael O'Gorman, dismissed the charges as "ridiculous," saying that "there is no explanation for his detention" other than "the frivolity of a magistrate."

Under Argentine law, Judge Speroni now has 10 days in which to decide whether to file criminal charges against Mr. Cavallo and bring him to trial. If convicted, Mr. Cavallo could face up to 12 years in prison.

He was economy minister from 1991 through 1996, the chief advocate and administrator of a policy that linked the Argentine peso to the American dollar at a one-to-one value. The move eradicated inflation, encouraged foreign investment and allowed middle-class Argentines to splurge on travel abroad and imported goods.

But it eventually proved a straitjacket for the economy. with exporters finding it harder to sell their goods, unemployment starting to climb and deficits expanding.

During the financial heyday before that happened, Argentina was also secretly defying international arms embargoes and selling 6,500 tons of cannons, rifles and ammunition to Croatia and Ecuador. As the head of the ministry that included the customs service, Mr. Cavallo was required to sign documents stating that the weapons were actually being sold to Panama and Venezuela. His arrest stems from those actions.

Former President Carlos Saúl Menem, a Peronist who was Mr. Cavallo's original boss, was held under house arrest for nearly six months last year in connection with the same weapons smuggling scheme, which he was accused of organizing. But he was released as a result of a controversial ruling by the Argentine Supreme Court, whose nine members include friends, political allies and one of his former law partners.

There were hints today, however, that Mr. Cavallo's arrest could force a reopening of the investigation involving Mr. Menem. "If Cavallo tells the whole truth, there is going to be a very complicated scenario for some former ministers and for an ex-president," said Ricardo Monner Sans, the lawyer who started the original inquiry.

Early last year, Mr. Cavallo returned as economic czar at the request of President Menem's successor, Fernando de la Rúa, a member of the Radical Party. But he was unable to halt a four-year recession, reduce government spending or win over foreign investors and lending agencies like the International Monetary Fund. He resigned in disgrace on Dec. 18.

Mr. de la Rúa, who stepped down two days later after a wave of street demonstrations and supermarket lootings, is also under investigation by Argentine courts, which do not enjoy a reputation for judicial independence. On Tuesday, Mr. de la Rúa was questioned about orders he gave the police to quell the civil unrest, which resulted in the deaths of 27 people.

On the floor of the Argentine Congress today, Elisa Carrío, the leader of a new center-left movement critical of both of the country's traditional parties, said she felt "immense joy" at Mr. Cavallo's arrest. But she argued that further action was needed in the form of treason trials for both Mr. Cavallo and Mr. de la Rúa because of the way they had handled a debt swap with foreign creditors last year.

In fact, Mr. Cavallo is already facing a separate judicial investigation into charges that he conspired with foreign bankers to increase Argentina's indebtedness and inflate commissions to investment banks in return for their agreeing to renegotiate $29.5 billion in bonds.

Despite those efforts, Argentina ended up defaulting on most of its $141 billion foreign debt in December.

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