Meltdown
As enraged Argentines violently protest economic collapse, a new President, Eduardo Duhalde, takes power. Can he solve the crisis?
On Buenos Aires' Bartolomé Mitre and Rodríguez Peña streets, something like a mini-civil war was taking place last week, as knots of leftist antigovernment protesters fought it out with gangs of Peronist toughs. Just two blocks away, in the ornate congressional palace, the atmosphere was only slightly less tense as Argentina's embattled political leaders gathered to name yet another President, the fifth in two weeks. Finally, Eduardo Duhalde, 60, a Peronist and former governor of the province of Buenos Aires, was given a two-year term. With that, Argetnina's political élite hoped to quell the tidal wave of protest that had swept elected President Fernando de la Rúa and three hastily appointed caretakers out of office. Duhalde's chances of lasting longer than his recent predecessors hang on whether he can turn back an economic collapse that threatens to drag down the entire political system. "There is no alternative to Duhalde within our existing institutions,"says Argentine political consultant Felipe Noguera. "But he has only one shot at getting it right."
Above all, getting it right means holding back the complete collapse of Latin America's third biggest economy. After one of the longest and most debated crises in its erratic history, Argentina is rapidly running out of money. Hundreds of thousands of salaries and pensions are being paid completely or in part in unbacked bonds; private bank accounts are partly frozen to protect banks from running out of cash; 500,000 Argentines have been pushed out of the formal economy; joblessness is nearing 19%. Argentina has stopped servicing its $132 billion foreign debt, prompting concern about spillover among other loan-dependent emerging-market countries and their lenders — as well as among Argentina's neighbors and trading partners. But despite the dimensions of the biggest socioeconomic catastrophe to hit Latin America in recent memory, Argentina was hearing nothing from the George W. Bush Administration and the International Monetary Fund about bailouts or loans.
Duhalde's first move to try to restore calm was to name a cabinet made up mostly of veteran politicos, the majority of them fellow Peronistas. For the key post of Economy Minister, he chose longtime associate Jorge Remes Lemicov, a congressman who also served as economy minister in Duhalde's Buenos Aires provincial government. The Foreign Minister is Peronist Party heavyweight Carlos Ruckauf, who resigned as Buenos Aires provincial governor to take the job. The cabinet also includes a former textile magnate, Jose de Mendiguren, most recently president of the National Industrial Union. Their first task was to draft and promote acceptance by Congress and big business of the economic-rescue plan on which the fledgling Duhalde presidency hangs. It includes a long-feared devaluation of the peso, as well as fast-track powers to introduce economic fixes by decree.
The peso devaluation is both the easiest and the toughest measure. The currency, long pegged at par with the U.S. dollar, is the main cause of the country's financial hemorrhage. Argentina is so short of hard currency that Brazilian President Fernando Henrique Cardoso has agreed to donate lifesaving medication such as insulin before pharmacies that can't pay their suppliers shut their doors. But devaluation will also cause more pain to ordinary Argentines, who will see their purchasing power immediately cut.
The main thrust of Duhalde's plan is to overhaul the economy while protecting the savings of average citizens-no small order. Fury over the partial freeze of what they thought was their own money was the biggest factor in driving traditionally quiet middle-class Argentines into the streets, leading to De la Rua's Dec. 21 resignation. "I've got no confidence at all in the political class," says Mariano Ferrari, 37, a Buenos Aires architect who marched on the Plaza de Mayo last month in the first of the demonstrations that toppled De la Rua. It was Ferrari's first-ever protest march. Another first-time demonstrator was Victoria Robles, 33, owner and manager of a month-old restaurant in the trendy Palermo Viejo neighborhood. "Politicians are going to think twice from now on," she says. "We mistrust all of them; they're all basically alike."
HE LOCKING UP OF BANK DEposits followed an avalanche of rumors that devaluation was I imminent. And it is. But I Duhalde's economic advisers are planning to cushion the shock, at least to Argentines who owe debts denominated in U.S. dollars. The new President's rescue plan advisers are floating the idea of converting all debts up to $100,000 into pesos at a 1-to-1 rate. Similarly, Duhalde plans to convert all credit-card debt from dollars to pesos on the same basis. "We are giving a privileged position to small-scale savers and borrowers," a top finance official says. The circle that Duhalde has to square is to simultaneously devalue, allow Argentines access to their money and prevent banks from collapsing under the weight of withdrawals and debt repayments at the predevaluation rate.
Despite the chaos at home, the financial crisis has so far caused few ripples abroad at least for now. The most concerned foreign observer is Argentina's biggest neighbor, Brazil, which is also its biggest partner in the Mercosur trading zone. Brazilian exports to Argentina fell by half last month compared with December 2000. Mario Mugnaini, executive director of the influential Sao Paulo State Federation of Industries, says some Brazilian companies are worried that they may not get paid for goods already sent to Argentina, while others are concerned that Argentine customers will quit buying altogether for lack of hard currency. "Trade will shrink in the next two or three months because Argentina won't get credit," he says.
On the whole, though, "the world financial markets in the last couple of days, and even months, have been relatively unaffected by Argentina, " says Fred J aspersen, Latin America director of the Institute of International Finance, a Washington-based trade association of international banks. CapitaImarket experts say Argentina's suspension of payments on its $132 billion debt and its devaluation of the peso had been expected so long that they didn't scare investors out of all emerging markets. While that may be true, bankers from Wall Street to London to Hong Kong have been watching Argentina like hawks for months. The biggest danger: lifting the partial bank freeze that led to a run on deposits, which cleaned banks-including institutions owned by U.S. and Spanish banks-out of all their cash. That could be enough to send investors fleeing all emerging markets.
The biggest single factor in keeping the international community calm is that even though Duhalde's economic team has suspended foreign-debt repayments, the new President is taking care to avoid the easy route of walking away from the country's financial obligations. "We're not saying, 'To hell with the debt,'" a top official says. "We're just trying to put our house in order first." In fact, the new government is desperate for a $15 billion-to-$16 billion loan from the IMF to help shore up its rescue plan. Economy Minister Lemicovwas planning to lobby for the loan in Washington this week.
He is likely to receive a lukewarm hearing. In the U.S. capital, the Argentine crisis was sparking a low-key debate about whether the U.S. should have been paying more attention to the biggest event to hit a region that Bush had called his No.1 foreign policy priority-before the attacks of Sept. 11. But the criticism hasn't moved Argentina off the back burner. "There's not a lot for us to do until they've settled on an outlook on where they want to go," says U.S. Treasury Department spokeswoman Michelle Davis. For now, the Treasury is maintaining low"-level contact and letting them get settled."
While some Argentine experts criticized the IMF for supporting the policies by Duhalde's predecessors, most of the demonstrators who have shaken Argentina over the past two weeks have laid the blame squarely on the shoulders of what they see as a corrupt and inept political leadership. And that is itself a significant change. "It was once fashionable to place 90% of the blame for anything abroad," says writer and former Culture Minister Marcos Aguinis. "But a big share of the blame lies at home-and a big share of that lies with political leaders."
Duhalde made clear in a televised speech last Friday that he got the message. "It's been we Argentines and Argentine leaders-fundamentally, political leaders who have led this country to this situation that afflicts us, anguishes us-and shames us," he declared. A major problem, he said, is that Argentine politicians have kept themselves ignorant of economic matters, which are what shape the country's possibilities.
The irony is that Duhalde himself is a fully paid-up member of that political group. A former mayor of a Buenos Aires suburb, he was first voted into Congress in 1987. Two years later, Carlos Saul Menem picked him as a vice-presidential candidate. After Duhalde spent two years at Menem's side, his relationship with the President chilled, and he departed to win the election as governor of the rich Buenos Aires province, one of the country's key leadership posts. But it wasn't a springboard to the presidency, as Duhalde had hoped. In 1999 he suffered the worst defeat in Peronist presidential-campaign history, losing the top job to De la Rúa. But last fall, as voter disillusionment with the now resigned President rose, Duhalde returned to national politics, winning a Senate seat.
By then, De la Rua's resignation was already a matter of speculation, and Duhalde was eager to step into the breach. By Dec. 30, he had formally proposed himself to his fellow Peronists, who controlled Congress, as an interim President-but only if he could serve out the rest of De la Rúa's two-year term rather than face new presidential elections on March 3. To overcome suspicions raised by his proposal, Duhalde agreed to renounce future presidential ambitions. He also reached out to non-Peronists, including former President Raw Alfonsin, leader of the influential Radical Party, and to the smaller Frepaso (Frente Pais Solidario), led by Buenos Aires Mayor Anibal Ibarra. "The country could not with stand 60 days of drifting before an election," Ibarra says.
One loser in the deal was former President Menem, who left office in 1999 under a cloud of financial scandals but clearly wanted to return to the presidential Casa Rosada. Menem was released from house arrest only last November, after the supreme court cleared him of racketeering charges arising from illegal arms trafficking to Ecuador and Croatia.
The trial just added to a long list of corruption allegations that have dogged various members of the Peronist Party for decades-one more reason ordinary Argentines are unlikely to give Duhalde much time to succeed in his risky plans. Buenos Aires Congresswoman Elisa Carrio, an anticorruption crusader and leader of the independent Alliance for a Republic of Equals, says Argentina's aroused middle class is ready to take to the streets again at a moment's notice. "People have seen that they can topple one President after another. They will not stop," she says. At least, not without a good reason.
It's up to Duhalde to convince Argentines they're better off with a President than with another season of protest. But patience is running thin and desperation high. Unless Duhalde can produce sustained economic relief soon, the country's political system, and its hard-won democracy, could face its worst challenge since the violent turbulence of the '70s. — With reporting by Bernard Baumohl/New York, Andrew Downie/Rio de Janeiro, Uki Goñi/Buenos Aires and Karen Tumulty/Washington
