CAVALLO RETURNS TO HOT SEAT, PROMISES SWEEPING CUTS IN ARGENTINA.
Domingo Cavallo, who won an international reputation for defeating hyperinflation in the early 1990s, yesterday returned to government in the midst of political crisis in Argentina and fears of a debt default, reports the Financial Times (p.1). The new economy minister promised sweeping spending cuts to allow the country to meet fiscal targets agreed in December as part of an IMF-led $39.7 billion international support program.
He said he would retain the currency board he introduced a decade ago, under which the Argentine peso trades at a fixed one-to-one relationship with the US dollar. Cavallo's appointment and initial remarks are widely reported in international media.
Cavallo's appointment followed the departure of Ricardo López Murphy, whose austerity plans had triggered the resignation of six ministers and provoked fierce opposition, especially from teachers and students who would have borne the brunt of spending cuts. Two powerful trade unions have called for a general strike today. Cavallo has promised to increase the cuts from $2 billion to $3 billion. But his plans will have no effect on the education sector, focusing instead on what he describes as a "struggle against bureaucracy." The Wall Street Journal (p. A14) also reports on Cavallo's plans to cut deficit by $3 billion this year.
The Financial Times continues, noting that the country's bonds make up a quarter of traded emerging market debt, the story says prices of Argentine bonds rose yesterday for the first time in a week. "We have to see his precise plans and proof of political support, but Cavallo is the individual with most credibility and power in the markets," an analyst is quoted as saying. Reuters also reports, noting markets welcomed Cavallo's appointment, which steadied the local bourse and bonds.
The IMF also responded positively to Cavallo's appointment, although it warned that a broad political agreement was essential. "Cavallo has the prestige, presence and political savvy to provide support for President Fernando de la Rúa, but no one individual can work miracles," said Claudio Loser, director of the Fund's Western Hemisphere Department.
Cavallo hopes to travel to Washington shortly to make contact with the new US administration and with IMF and World Bank officials, El Cronista (Argentina) reports, noting that the government's intense negotiations with Argentina's Congress mean no date for the trip has yet been set.
Cavallo and his small right-wing party will seek to fashion a complex political alliance with the opposition Peronist party and the ruling coalition, notes the FT, but Peronist deputies yesterday refused to concede special executive powers to Cavallo until more details of his economic program are known. Cavallo will seek to stimulate growth, the story notes, possibly through tax cuts.
Meanwhile, the Washington Post (p. A23) notes economists say they believe Argentina has enough cash and credit to cover $20 billion in short-term debt that it must repay in coming months. But the government's inability to get the economy moving or reduce its deficit has sent up warning flags about its ability to meet medium- and long-term commitments. Argentina, the story notes, represents about 20 percent of developing world debt on world markets; its issues are widely held by institutional investors across the US.
Also reporting, Agence France-Presse quotes Cavallo as saying to reporters yesterday that they need not expect any "packages of measures or big announcements." He would start by focusing on "reactivating the economy" and "battling excessive bureaucracy, contraband, corruption and tax evasion." Most major media report on the change of economy minister for the country.
Separately, the New York Times (p. W1) quotes Cavallo as saying, "All the attention of my ministry will be directed at rapid reactivation and vigorous economic growth, to increase employment and increase family income, so people will consume more, and we will exit this recession that has gone on for three years." The story continues noting investors reacted cautiously. The benchmark Merval stock index rallied early in the day and then settled back to close off 0.6 percent.
In other news, the Wall Street Journal (p. A16) reports Brazil's economy, which had been set for its strongest performance in years, now must grapple with the unexpected spillover from Argentina's economic crisis and a set back to the country's energy-modernization program following the sinking of the country's largest offshore oil rig.
Commenting on the news, Martin Wolf of the FT (p.17) writes that the economy's problem now is credit risk, not currency risk. Dollarization would do nothing about the former. The lesson is that very hard exchange-rate regimes do not eliminate risks. They change them. Countries choose them to control politicians and eliminate inflation. But if politicians remain ill-disciplined and economies unstable, the risks will re-emerge elsewhere.
Today, says Wolf, Argentina is learning this lesson. Cavallo eliminated inflation with a stroke. Restoring growth to the economy and confidence to markets will be harder.