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Map of South America |
CIAO DATE: 04/03
Argentina Alert: What Next?
Hemisphere Focus: 2001-2002
December 21, 2001
Overview
President de la Rua Resigns
Argentina's president Fernando de la Rúa resigned on December 20, leaving the country in the hands of the head of the Senate leader, Ramon Puerta, as mandated by law. De la Rúa's departure followed by less than 24 hours the resignation of Domingo Cavallo, the economics minister, who has now been barred from leaving the country by a court order. De la Rúa's government was toppled by a wave of looting and rioting that gripped the country beginning December 19, and by the latest count has left 23 dead and thousands injured. Although it is unclear whether the 30-day state of emergency called for by de la Rúa on December 19 is still in effect, the public disturbances continue, albeit abated by the resignation of de la Rúa. In an effort to stabilize matters, the banks were ordered closed today, December 21. Also today, Puerta convened Congress to deliberate on what to do next. By law, Congress has 48 hours from the time it convenes, in this case by 11:00 AM on December 23, to pick a new president from the ranks of public servants (i.e. congressmen or governors) or call for new elections within a period of 90 days. The next meeting of Congress is scheduled for December 22 at 7 PM.
The Transition
In all likelihood, Argentina will make an orderly, legal transition to a new government like it was able to do after the resignation of Raul Alfonsín in 1989. Odds favor that the new president will be a Peronist, as the Peronists control both houses of Congress, where the decision will be made. Given that at this time the presidency is not a highly appealing option for the leading presidential candidates and, if anything, carries great political risks, one should not discount the possibility that Congress, will decide on letting Puerta (who has no presidential ambition) stay in office through the rest of de la Rúa's mandate or until new elections can be arranged. However, there are powerful Peronist politicians who may see in the current political vacuum their best chance of getting into the Casa Rosada and are actively lobbying for the job. It is most unlikely that the next president will be former president Carlos Menem, whose approval ratings are almost as low as those of de la Rúa's.
Challenges for the next President
Whoever takes over the country will inherit a political and economic mess. On the political front, the challenge will be to get the political elite to march to a compatible tune, difficult in Argentina under any circumstances, but more so in the highly tense and volatile atmosphere of the moment. Moreover, with presidential elections scheduled just a year-and-a-half away, it will be difficult to squelch the natural disposition of the presidential aspirants to differentiate themselves. At this point, the country can ill afford to be without a strong leader, but that is exactly what the immediate future portends, at least until someone receives the imprimatur of the national electorate.
The Economy
On the economic front, nothing has changed with the departure of de la Rúa. The nation remains in economic disarray, with multiple currencies circulating, and a lack of tools to lift itself out of the crisis. For starters, the country has no funds to service its international debt, making a formal declaration of a moratorium imminent. In fact, there are already reports that Argentina failed to deliver on debt payments due last Friday. With the continued bleeding of foreign exchange reserves, Argentina also lacks the reserves to make a transition to dollarization on a one-to-one basis, leaving the country no option but to devalue the peso. The question now is whether Argentina devalues and then dollarizes, or floats the currency and lets the market determine its value. Given the general political and economic environment of the country, and the lack of reserves to defend the currency, the country risks having the currency spiral out of control if the peso were to be called upon to fend for itself in the markets. A spiraling currency, in turn, could unleash a bout of hyperinflation, like those Argentina has experienced in the past. Because of the hardship that the latter connotes, especially on the poor, my recommendation is to devalue and then dollarize. It is important to note that any devaluation will need to be accompanied by a conversion of the dollar-denominated national debt into pesos.
Free-Market Critics
The events of the last few days have given resonance to those calling for a reversal of the free-market reforms implemented during the last decade. For instance, a number of politicians in the last 24 hours have come out championing the imposition of high taxes on privatized businesses and the nationalization of pension funds, a move that has significant short-term appeal, as it would provide nearly U.S.$4 billion to the empty government coffers. These free-market critics will have their 15 minutes of fame in the next few days, but their message will likely not gain traction, as the public is fully conscious of the fact that the country cannot live forever on borrowed money. Other countries, like Brazil, in similar circumstances, succeeded in making the transition to economic orthodoxy and are now prospering. Notwithstanding, the debate over what model to apply should be loud and colorful. Any way you look at it, the outlook for Argentina has not gotten any rosier, nor any clearer, now that de la Rúa has left the scene. The situation could even get uglier.
Miguel Diaz directs the CSIS South America Project, which focuses primarily on advising U.S. policymakers and the private sector on political and economic developments in the region through the U.S.-Mercosur Study Group (a bipartisan group in the U.S. Congress). The project also provides briefings for the Washington policy community and private sector. Diaz brings to CSIS nearly ten years of investment banking experience, having worked most recently as the senior Latin American economist/strategist for Nikko Securities Inc. in New York. Diaz has worked as a consultant and journalist, and remains a regular columnist for the Economist Intelligence Unit, and other publications focusing on Latin American financial issues. Also, in the early 1990's, Diaz worked as an economist for the Central Intelligence Agency and as a strategic market analyst for Eaton Corporation. He holds an MA degree in Latin American studies from the Johns Hopkins School of Advanced International Studies and a BA degree in political science from Hobart College. Born and raised in New York, Diaz has also lived in Colombia, Venezuela, and Mexico.
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