US bankers: Argentina has ability, but not the will, to pay debts. Restoring nation's self-confidence could help its battered economy by halting flow of money out of the country
Argentina is again torn by an old problem: how to equitably divide the national economic pie and exercise economic discipline in a democracy. That is what United States bankers and other experts see behind the one-day nationwide protest strike launched Thursday by the powerful General Confederation of Labor (CGT) against the economic policies of Argentine President Ra'ul Alfons'in.
The strike is considered the most serious test of Mr. Alfons'in's government since it took office on Dec. 10, 1983.
Nonetheless, one top Argentine banker doubted the challenge would prevent the government from going ahead with an austerity program that cuts state spending by 12 percent and begins a controversial revision of its financial system. Argentina's budget deficit is massive, exceeding 10 percent of the nation's total output of goods and services.
The austerity program is considered essential to deal with Argentina's three-sided economic crisis.
The nation's inflation rate is approaching 1,000 percent, which discourages investment. In addition, the economy is in the throes of a recession.
A banking crisis is adding to the troubles. It was triggered by the government's decision to close the nation's third largest bank, Banco de Italia y Rio de la Plata, on May 10, which prompted a run on dollar deposits in other banks. The government was forced to put a 120-day freeze on all dollar deposits last Friday to preserve its badly needed reserves of foreign exchange.
The government must reach an agreement with the International Monetary Fund (IMF) on austerity conditions for a $1.7 billion loan. Once that is done, other elements in a support package negotiated last September will fall into place. These include $4.2 billion in new money from some 350 commercial banks, $2 billion from official creditors (governments), and rescheduling of some $16 billion of public- and private-sector debts by commercial banks and almost $2 billion of government debts.
The IMF blocked Argentina's access to its credit line in March when the nation failed to meet its economic targets. These include reducing the nation's deficit to 5 percent of gross national product by the end of 1985 and lowering inflation. Fresh targets are now being negotiated.
Argentina's debt at the end of 1984 reached $48 billion. On a per capita basis, that burden is almost the heaviest among developing countries. Argentina is well behind in interest payments on that debt.
One New York banker charged the Alfons'in government with being ``incompetent.'' He said it ``dawdled away 18 months with very erratic policies.''
``I don't see any indication of a firm resolve to tackle policy stabilization,'' said Komal S. Sri-Kumar, head of New York-based Country Risk Consulting Service, which specializes in Latin America.
Most analysts interviewed, though, figure Alfons'in would now like to go ahead with an anti-inflation program. However, it is especially difficult for him because in his election campaign he promised to avoid austerity and continue growth. Further, his own party, the Radical Civic Union, is divided on the question. It has a four-vote majority in the lower house and is outnumbered in the Senate.
``There is a lack of political cohesion needed to implement adjustment measures,'' noted J. Antonio Villamil, senior economist with Southeast Banking Corporation in Miami. ``Over time, an economic crisis of stagnant output and hyperinflation would tend to undermine democratic institutions.''
With midterm elections looming in November for half of its deputies, the ruling party is increasingly nervous about the possibility of losing power to the opposition Peronist Party, which controls the trade union's CGT. An unpopular austerity program would, of course, hurt workers.
``Still missing is a commitment to a bold strategy for economic recovery and expansion in the years ahead,'' notes Morgan Guaranty Bank in a February report on Argentina. ``Alfons'in has yet to persuade Argentines that government can no longer afford to expend all of its energy and authority settling distributional claims at the expense of efficiency and growth.''
The cost of Argentina's past fights over shares of the economic pie have been enormous. Since 1925, real per capita incomes in Argentina have risen by a cumulative total of only 65 percent -- a yearly growth rate of less than 1 percent, among the lowest in the world.
Meanwhile, such countries as Australia and Canada, which in 1925 were at a comparable stage of development, have seen their real per capita incomes increase by 165 percent and 265 percent, respectively. Mexico and Brazil tripled and quadrupled their real incomes per person in the same time span.
At the moment, Argentine politicians blame their economic plight on their debt-servicing problem. Many politicians are calling for lower interest rates or other concessions on the nation's debts.
But ``you can't expect debt relief to solve this domestic inflation problem. That is primarily a political problem,'' said William R. Cline, a senior fellow at the Institute for International Economics in Washington.
Argentina had a trade surplus last year of some $3.6 billion, and it is expected to enjoy a similar surplus this year. But interest on its external debts exceeds $5 billion, leaving the nation modestly in the red on its international payments.
If Argentines regained confidence in the domestic economic and political situation, the return of money that they have parked abroad would easily cover the remaining deficit. It's estimated that perhaps $24 billion of Argentine money fled the nation in recent years.
``This country of all countries has the ability to pay its debts,'' said one bank economist. ``But so far it hasn't had the political will.''
Indeed, because Argentina is economically self-sufficient to a large degree -- with an enormous food surplus, adequate oil supplies, and an industrial sector built behind protective tariffs -- it could repudiate its external debts with relative immunity. But Argentina could still find its exports or other assets seized abroad by creditors. It would be denied access to world capital markets for years. It might have trouble financing trade.
Default, said Mr. Cline, ``is a much less attractive option than continuing to negotiate.''
If Argentina does not reach a deal with the IMF by the time of an interagency meeting of bank regulators in Washington scheduled for June 10, the regulators may declare Argentine loans ``value-impaired.'' US banks that have lent money to Argentina could then figure it wise to set aside further reserves against the possibility of losses on these loans. They probably would put the loans on a ``cash,'' rather than an ``accrual,'' basis, meaning interest would be recorded only when actually received.
According to Donaldson, Lufkin & Jenrette, a New York brokerage house, Argentina's biggest US creditors are Citicorp ($1.4 billion), Manufacturers Hanover Trust ($1.3 billion), Chase Manhattan Bank ($850 million), Morgan Guaranty Trust ($750 million), and Bank of America ($475 million). With a capital base of $3.2 billion, about half that of Citicorp, Manufacturers Hanover has the most at risk in Argentina.
Morgan Guaranty argues that Argentina must introduce more competition to the economy, that the government should end the monopolies and quasi-monopolies enjoyed by state-run companies and financial institutions, and that it should sell shares of these numerous state-owned companies to the public.
The bank says the country should also remove taxes on exports, which discourage agricultural production. Tax evasion is so widespread in Argentina that the government has difficulty raising the revenues it needs.
Consultant Sri-Kumar charges that the IMF has been politically unrealistic in its targets for reducing government spending. Even if Argentina signs a new deal with the IMF, he is skeptical about the nation keeping to the new targets.
``It is sort of a knife-edge situation,'' said Cline. If the government does impose a genuine austerity program, he sees the possibility of inflation falling ``rather fast.'' If it does not, he warns of the danger of inflation in the four-digit range or worse.