Personality politics

Argentina is on the ropes. Can Domingo Cavallo save it one more time?

Argentina is on the ropes. Can Domingo Cavallo save it one more time?

By Jenny Anderson
September 2001
Institutional Investor Magazine

Graciela Morro stands at the edge of the Plaza de Mayo in downtown Buenos Aires, directly across the street from the Casa Rosada, Argentina’s presidential palace, holding a simple white poster-board sign, conducting a solitary protest. On this sunny winter day in July, pedestrians amble around the square, while vendors hawk small blue-and-white Argentinean flags. Sporting large, black Jackie O. sunglasses and black leather boots, Morro talks fast and passionately to passersby, while taxi drivers honk, smile and wave in response to her sign.

“Get out, Cavallo,” it reads. “Liar, traitor, guilty of the sale of our motherland.”

A commercial real estate broker, Morro, 53, has not made a sale in more than a year. “How can I rent office space?” she snaps. “People do not spend money. They save because they don’t know what will happen.” Morro is angry at her government, at the International Monetary Fund and at Americans, but mostly, she is angry at Domingo Cavallo, Argentina’s economy minister. “Cavallo caused this problem, and I want him to go,” she says.

The personal is the political in the modern age, and nowhere is the political more personal than in Argentina today. And no single person is more of a lightning rod for his country’s supercharged political and economic crisis than Cavallo, who returned to power in March for his second attempt in a decade to rescue a country on the verge of disaster. Certainly, he inspires passion. On the weathered stone walls of the city’s colonial buildings, signs demand, “Say no to Cavallo’s genocide of 4 million retirees and pensioners.” In front of the Economy Ministry, state workers chant, “Cavallo, son of a whore, son of the whore who bore you.” At the wedding of Cavallo’s daughter, Sonia, in July, airline workers greeted the bride and her father with a fusillade of eggs.

Yet for all the loathing he inspires in his many enemies, and for all the gnashing of teeth he causes even among his allies, Cavallo is by almost all accounts - not least his own - Argentina’s last best chance to avoid economic anarchy. With $128 billion in costly debt, sky-high interest rates and a stubborn, three-year recession that cost two previous economy ministers their jobs, Argentina has come perilously close to the brink, flirting with devaluation and default. Its increasing precariousness threatens to bring down its biggest trading partner, Brazil, as well as other, weaker emerging-market nations, and is a source of embarrassment to the IMF, whose ward the country has been for years.

“Everyone knows that Cavallo is the only one who can save the economy,” says Luis Moreno Ocampo, the Buenos Aires lawyer who heads the Argentinean branch of Transparency International, a nonprofit anticorruption group. “Even people who hate him think that he’s the only one.”

Last month, after 12 tense days of negotiations, Argentina secured an $8 billion bailout loan from the IMF that included an agreement to look for a way to restructure Argentina’s $128 billion debt - a move that could hurt banks and investors globally. The deal came with pressure to adopt further austerity measures, which Morro and her fellow Argentineans are sure not to like. And it’s unclear whether the package can actually save Argentina from calamity. “They received $40 billion ten months ago, and that had little impact,” says Amer Bisat, who manages $4 billion in emerging-markets debt for Morgan Stanley Investment Management. “It’s not clear to me why an additional $8 billion will make much of a difference now.” This October’s congressional elections add further uncertainty to the durability of austerity measures.

CAVALLO RETURNED TO OFFICE IN GRAND STYLE, from a virtual political wilderness. He had lost a bid for the presidency in 1999 and failed in an attempt to become mayor of Buenos Aires last year, but when President Fernando de la Rúa announced his appointment, the markets rallied. Credible, clean and politically independent, he returned as the superhero who had saved Argentina a decade ago, slaying inflation with his introduction of currency convertibility, pegging the peso to the dollar. Decisive and defiant, he seemed the very antithesis of the vacillating de la Rúa, whose popularity had plummeted from 72 percent in February 2000 to 18 percent this July, according to Ipsos-Mora y Araujo, a local polling agency.

Cavallo was surefooted, even brilliant, at the start: sweet-talking the Partido Justicialista, the opposition Peronist party, into granting him extraordinary decree-making powers and imposing a financial transactions tax that, paradoxically, cheered investors eager for signs of fiscal discipline. His personal approval rating in March topped 70 percent.

But Cavallo may have taken the huzzahs too much to heart. Hailed as a savior, he very nearly spoiled Argentina’s chance for rescue. Smart, creative, with a passion for policy and boundless energy matched only by his soaring and frustrated ambitions, Cavallo nonetheless lacks the common touch. The flip side of his decisiveness and determination is a pronounced tendency toward impatience and high-handedness, even arrogance. Cavallo appeared to believe that his mere presence would be enough to calm investors at home and abroad, not to mention the IMF.

At a decisive moment, say critics, he chose the wrong path. He compounded the country’s woes by tinkering with currency convertibility, unnerving investors, who concluded that devaluation was in the offing. He lowered some taxes while raising others, confounding even some admirers, and supported the removal of central bank president Pedro Pou in late April - a violation, to many, of the principle of central bank independence. Pressed by Wall Street bankers to pare near-term interest expenses with a bond exchange, he held off for weeks, insisting it was not necessary. Finally, in June, he engineered a $30 billion swap, earning a respite that lasted just two weeks.

Along the way, he airily rejected persistent market fears of imminent fiscal insolvency. If investors did not understand him, well, that was their fault. Even in July, as the crisis reached a peak, Cavallo, in an interview with Institutional Investor, dismissed the markets’ concerns.

“The markets are acting like Saint Thomas - they want to touch it to believe it,” Cavallo scoffed. “They will believe when they see everything that Argentina is doing in the area of public finance.”

He resisted doing the very thing that the markets - and the IMF, which had engineered a three-year, $40 billion package for the country in December - clamored for him to do: Slash the budget deeply. To be sure, that was easier said than done. His predecessor, Ricardo López Murphy, was sacked by de la Rúa after just two weeks when his attempt to cut spending ignited widespread political unrest.

Instead, Cavallo insisted on offering a package of half measures that he labeled his “competitiveness plan.” And he steadfastly dismissed investor worries about a deterioration in the country’s risk profile. As he told II, “We see no risk of default. We have the resources to pay punctually all of the interest that Argentina owes at the national and provincial level, because we make that a priority.”

Nonetheless, confidence in the country eroded. Citizens yanked deposits from banks; tax receipts diminished; the interest rate on local government bonds soared. “If Cavallo has made one PR mistake - and I’m bullish - it’s that he’s consistently underestimated the skepticism investors have,” says James Barrineau, who manages $145 billion worth of fixed-income assets for Alliance Capital Management.

By July, Cavallo had no choice but to embrace another round of sharp cuts in the budget, the seventh ajuste since de la Rúa took office in 1999. In fact, Cavallo’s false steps may have helped him do what he wanted to avoid - ax the budget - by accelerating the crisis to the breaking point. Things had gotten so bad that even the opposition joined with de la Rúa’s fractious coalition to approve the new “zero deficit” plan, which rules out any new borrowings and imposes sharp cuts in such previously sacrosanct areas as government workers’ salaries and pensions. The irony, of course, is that in the short run the cuts are likely only to deepen Argentina’s recession-driven problems.

Cavallo was unquestionably dealt a bad hand, and many believe that he only got the job by convincing de la Rúa that he could reactivate the economy without further spending cuts. His options were limited, both by the legacy of debt from the previous administration and by the vacuum of political leadership in de la Rúa’s cabinet and coalition. Moreover, no easy solutions were available for multilateral or bilateral aid. Notwithstanding its December rescue package, the IMF under Horst Köhler at first wanted to eliminate big bailouts, as did the newly elected Bush administration: Treasury Secretary Paul O’Neill initially dismissed Argentina’s woes as endemic, the result of decades of poor decisions.

But arrogance - and, perhaps, hope for his own political redemption - may also have prevented Cavallo from making immediate, difficult decisions. He is universally expected to run for the presidency in 2003, prompting concern about whether his decisions were politically expedient. “His ambitions are limitless,” says a friend and co-worker of many years.

“Cavallo made the mistake of believing that the crisis could be solved by his reputation,” says Roque Fernández, the former central bank governor who succeeded Cavallo as economy minister in 1996. “But investors were worried about the debt to be serviced and fiscal solvency, and they wanted more fundamental problems addressed.”

THAT ARGENTINA SHOULD BE IN SUCH straits today is one of the great economic puzzles - especially for those who embrace the free-market philosophy of the Washington consensus. More than any other Latin American country except for Chile, Argentina has been a model student of the IMF’s push for liberalization. It was one of the first Latin American economies to deregulate its industry and to entirely privatize its banking and pension systems, along with virtually everything else in the economy. It even sold off its state-owned oil company, something Brazil and Mexico refuse to do. Between 1993 and 2000, Argentina attracted $53.5 billion in foreign direct investment.

Says David Mulford, international chairman of Credit Suisse First Boston: “Argentina effectively eliminated inflation and carried out a privatization program that transformed the country fantastically. That was Cavallo’s work.”

Moreover, thanks to Cavallo’s efforts the country has a stable currency. In 1991 Cavallo stamped out hyperinflation by creating the currency board, which backed every peso with a dollar. The move essentially made it all but impossible for the central bank to print money. It worked: Between 1993 and 1996, during Cavallo’s first stint as economy minister, Argentina’s economy grew on average 6 percent per year. Between 1996 and 1997, after he had left, growth again averaged 6 percent per year. Argentineans gladly ditched the stigma of living in one of the world’s basket-case economies and reembraced their preferred self-image: sophisticated Europeans living in Latin America.

But in 1995 Carlos Saúl Menem was reelected, and his promised “second reform of the state” - further privatizations and budget cuts - never materialized. By the time Cavallo returned to power, the economy was dogged by too much debt, too little growth and no political consensus on how to handle either. Since 1996 a profligate Argentina has had to finance a fiscal deficit that has averaged between $5 billion and $7 billion a year, or 1.5 to 2.5 percent of GDP. The country today has $128 billion in external debt, more than double what it had in 1989.

Even this might be manageable if the economy were growing and tax revenues were rising. But since the third quarter of 1998, following Russia’s debt default, Argentina has been mired in recession. When Brazil - which buys one quarter of Argentina’s exports - devalued its currency in January 1999, the floor fell out. Argentina’s debt-service ratio (the ratio of amortizations and interest to exports) skyrocketed from 49.1 percent to 60.1 percent. Unemployment now hovers at about 16 percent.

Argentina has few tools to address these woes. Convertibility, for example, restricts the government’s ability to use monetary policy to help ignite the economy.

A dysfunctional political system compounds the economic problems. De la Rúa was elected in October 1999 on a platform of reactivating growth and cleaning up the government. His center-left Unión Cívica Radical party and the left-leaning Frepaso formed a coalition, Alianza para el Trabajo, la Justícia y la Educación. When de la Rúa took office in January 2000, the economy showed anemic signs of recovery. But José Luis Machinea, the president’s first economy minister, raised taxes and cut spending in an effort to instill more confidence in the economy. In fact, his measures halted any recovery. He resigned in March. In October the vice president, a Frepaso member, resigned, along with three cabinet ministers, over a pay-for-votes scandal in the Senate that was linked to some of de la Rúa’s closest advisers. As the governing coalition crumbled, so did the economy.

The president’s next economy minister, López Murphy, a known deficit hawk and ultraorthodox economist, lasted less than two weeks.

By turning to Cavallo, who ran for president against him in 1999 and whom some members of the governing coalition disdain, de la Rúa sent the message that he had lost control and that Cavallo was in charge. The markets - having lost faith in the president and the country - rallied.

But Cavallo faced a challenging political landscape. The governing coalition disagrees about what measures should be taken to stimulate growth. De la Rúa’s Unión Cívica Radical party is headed by former president Raul Alfonsín, who was forced out of office in 1989 for mismanaging the economy. Now a candidate for the Senate, Alfonsín has persistently questioned whether deep public spending cuts can jump-start the economy - creating doubts about the president’s support within his own party. Alfonsín is also a known foe of Cavallo’s. “Alfonsín doesn’t like Cavallo because he personifies capitalism,” says Manuel Sacerdote, president and CEO of BankBoston in Argentina.

FROM THE START, CAVALLO’S TASK WAS daunting. Perceived country risk was soaring, and Argentina still had $11 billion in amortization and interest payments to make, while its tax revenues were falling. The government overshot its first-quarter IMF deficit target of $2.1 billion - by $1 billion.

Cavallo certainly has the background to tackle the problems. Born and raised in the western province of Córdoba, where his father owned a broom factory, he has a Ph.D. in economics from Harvard University. In 1977 he helped to found Fundación Mediterránea, a think tank designed to work with the business sector to solve Argentina’s endemic economic problems. In 1982, with the Argentinean economy in shambles, Cavallo, just 36, was named president of the central bank, where he worked with the private sector to restructure debt. He was the secretary of foreign affairs and worship from 1989 to 1991, when he was promoted to economy minister; in that job, he saved the country.

This time around, critics say that Cavallo has exacerbated the crisis he was trying to resolve, by taking a series of actions that confused investors and by failing to heed the market’s increasingly strident warnings. He returned to office indicating that he would not implement another draconian “adjustment,” or cut in spending, but instead would focus on reactivating demand. The resulting tax receipts would offset the impact of government spending, which he would trim a mere $900 million, compared with the $3 billion to $4 billion economists estimated was needed.

Initially, investors were cheered. Cavallo’s first days were splendid. He won special powers that allowed him to change tax and labor laws and reform some of the government’s state agencies.

Cavallo did not budge from his vow not to slash spending. Instead, in late March he submitted to Congress a bill that would change the structure of convertibility: When the dollar and peso reached parity, the peso would be tied to a “basket” - the average value of the euro and dollar. In the meantime, he awarded exporters an effective devaluation of about 8 percent, by giving them a rebate on the difference between the dollar and euro. In many ways, this was an eminently sensible idea, because Argentina exports more to Europe than to the U.S. But the stable dollar peg also has had a powerful symbolic effect, and instead of inspiring confidence, Cavallo’s announcement caused panic among investors, who assumed a devaluation was on the way. “Convertibility is more important than the constitution in Argentina,” says Alejandro Reynal, chairman and CEO of Argentinean investment bank MBA Banco de Inversiones. “And Cavallo touched the two sacred cows in Argentina: One was convertibility, and the other was the tenure of the chairman of the central bank.”

“He made master political moves in the first month, but it had the negative effect that he thought he was infallible, and a lot of the measures he announced were just bad policies,” says the director of emerging-markets research at a European investment bank.

Cavallo dismisses criticism that his moves were heterodox. “They are measures that correspond to a country that has suffered three years of recession and in which increased taxes raised the cost of investment and the cost of production,” he told II in July. “We had to reverse these increases in taxes. We had to change the anchor of the currency and move to one that is more stable, like the dollar-euro.”

Cavallo also went to the markets and engineered a massive, $30 billion debt swap that reduced government debt service by $16.1 billion between 2001 and 2005. This gives Argentina room to continue to phase out its pay-as-you-go public pension system (estimated to run about $8 billion per year) but ensures enormous debt loads after 2005. For some, including the banks that reaped more than $100 million in fees, the swap was a brilliant reengineering that bought Argentina the time it needed to get its act together. To others, it was one more sign that the country was nearing the brink.

In the spring road show for the bond swap, Cavallo lacked the commanding presence - and credibility - of the past. During his 1991-'96 stint as economy minister, he packed the ballroom of New York’s St. Regis hotel and received standing ovations. “Everyone would tell him how brilliant he was,” says Walter Molano, senior managing director at Greenwich, Connecticut-based BCP Securities. “He could do no wrong, and when he left he had an incredible perception of himself.”

Now, back at the St. Regis, Cavallo chided investors who estimated that Argentina could grow perhaps 5 percent in the second half of the year. He insisted that growth would be at least 7 percent. “It was laughable,” says one participant, who did not participate in the swap. (The IMF recently lowered its estimate to 1 percent.)

Rather than explain the rationale for his moves, he chose to attack his critics. When economists at the Centro de Estudios Macroeconómicos de la Argentina, a respected think tank, criticized some of Cavallo’s policy measures, he lashed out by calling them “traitors to the motherland.” By early July it became clear that Cavallo’s policies were not working. Interest rates reached 400 percent, and the price on the benchmark floating-rate bond fell to $60, down from $91 in early March. The economy remained stalled. Retail sales dipped, while tax avoidance jumped.

“For four months people have been saying that it can’t get any worse - and it continues to get worse,” says Guillermo Jofre, CFO of local broadband company Impsat Corp.

For the remainder of the year, Argentina had to finance $2.4 billion in amortizations on the debt and $4.3 billion in the short-tem govenment bonds known as Letes to pay interest and the fiscal deficit. The country got no comfort from Treasury Secretary O’Neill, who told The Economist that Argentina had a long history of missteps: “Nobody forced them to be what they are today.”

The breaking point came on July 10. The day before - Independence Day - the president had issued a call for austerity. But when the government auctioned $850 million in Letes, it found no takers until the rates shot up to 14.01 percent, far above the 9.1 percent it had had to pay just two weeks before and even more than the 13.96 percent it paid in 1998, after Russia’s default. If such levels continued, Argentina would surely default.

Out of options, Cavallo caved. The next day he and the president issued a sweeping decree that authorized sharp cuts in spending - the seventh such adjustment in de la Rúa’s term in office. This “zero deficit” policy means the government will no longer borrow in the markets and will spend only what it receives in tax revenues.

“The reality is, there is no more credit,” Cavallo said when he announced the plan, in a speech at the Argentine Stock Exchange. He criticized the president’s party for not supporting his efforts to lower public spending (a point de la Rúa refuted in a speech of his own half an hour later) and lauded his own effort to run for president in 1999, insisting that he had known he could not win but had hoped to create a “new current of thought.” In the heat of the crisis, Cavallo appeared to be fighting not only for Argentina but also for his own reputation.

Yet the markets that had waited so long for this move failed to respond. Perceived country risk soared. By week’s end the premium on Argentina’s bonds jumped from 1,100 basis points over U.S. Treasuries to more than 1,600 over. The stock market plunged 8 percent in one day and 11 percent for the week. Cavallo’s approval rating fell to 21 percent in July.

Investors doubted that the zero deficit plan had enough support. Because the plan was announced by decree, the government did not need the support of Congress. But a majority of legislators are up for reelection in October, and investors wanted to be sure that the measure had their backing, as well as that of the nation’s governors. Under Argentina’s co-participation law, governors control the spending of half of the country’s tax revenues - and they overwhelmingly belong to the opposition Partido Justicialista. In late July the legislature and governors approved the zero budget policy.

Investors had reason to worry. De la Rúa’s own party was divided on the measure. Former president Alfonsín denounced the plan. Other Unión Cívica Radical party members called Cavallo “deaf and dumb.”

Cavallo’s advisers, however, denied there was a problem. “There is no political crisis,” said Caro Figueroa, the president of Cavallo’s political party, Acción por la República, and a member of the president’s cabinet. “We have the absolute support of the president, which is what is needed, and we feel growing support from Argentina’s population. They are confident the recession will end after 40 months, due to the term of Cavallo.”

Still, Cavallo and de la Rúa hustled to round up support, while announcing other measures designed to build confidence. They convinced the private sector - including oil company Repsol YPF and Spanish banks Banco Santander Central Hispano and Banco Bilbao Vizcaya Argentaria - to make $1 billion in forward tax payments. And the government concluded a swap with local banks to cover $1.3 billion of the $4.3 billion remaining in government bonds.

Most critically, the government began negotiations with the IMF. In early August it agreed to accelerate disbursements under the terms of its December agreement. Then in mid-August the Fund agreed to extend an additional $8 billion to the $14 billion it had provided in the $40 billion package. But the money came with conditions that could further strain the economy. The first $5 billion will be delivered immediately to shore up depleted reserves; the remaining $3 billion will be contingent on a voluntary debt restructuring, which could take the form of a collateralized debt swap to lower interest costs or a request that the private sector take a haircut on the net present value of the debt.

“Is Washington ready to put enough financial resources behind a debt operation effort that permits Argentina to swap its expensive debt for cheaper debt - debt it can successfully sustain?” asks Morgan Stanley’s Bisat. “That’s the big question.”

Many believe the IMF’s money does not address Argentina’s issues. “There’s no reason for us to change our rating, since it is not clear if the economy can grow once the elements are implemented,” says Mauro Leos, senior analyst at Moody’s Investors Service, which has downgraded Argentina three times since March. (It is now on par with Cuba and Pakistan.) “It’s difficult to see if there can be an improvement of the profile of the debt without a haircut,” he adds.

Not everyone is so pessimistic. Credit Suisse First Boston’s Mulford, a longtime ally of Cavallo’s, is upbeat. “Mistakes have been made,” he says, “but there is no case for devaluation or default. The worst is behind Argentina right now.”

IN THE END, CAVALLO DID THE RIGHT THING, even if he pushed Argentina closer to implosion by waiting until his back was against the wall. He may have helped to deliver the one thing Argentina desperately needs - a restructuring of its debt - in spite of the fact that he was muscled into it by the markets, and it remains to be seen whether the markets will oblige. But Argentina still must make its economy grow, and until investors agree to a restructuring, Argentina has too much debt to pay with no growth.

October’s elections are sure to prove devastating for de la Rúa and will likely reconfigure the political landscape, as he will have to negotiate a way to work with the Peronists, many of whom are campaigning on the president’s inability to govern. De la Rúa could be forced to step down. If, however, a restructuring proves to be the impetus Argentina needs, Cavallo may be able to claim credit, although a move from the Economy Ministry to the Casa Rosada remains a long shot: He lacks the backing of any major political party.

Cavallo is still optimistic about Argentina’s economy. “What remains certain is that a debt restructuring will be an operation that is market friendly and voluntary,” he said the day after the IMF package was announced. “The reduction in cost will inspire more confidence, which will come from the medium- and long-term measures we are implementing and greater guarantees to deliver to Argentina’s bondholders and creditors.”

While Graciela Morro brandishes her protest sign in the Plaza de Mayo, other Argentineans give credit to Cavallo for entering the fray. “Everyone talks, but no one does anything. Politicians blame the previous politicians for their problems. Everyone complains and then goes on strike instead of doing anything,” says Martiniano Corbetta, a 26-year-old auditor at HSBC Bank Argentina in Buenos Aires. “I don’t know if Cavallo is doing the right things or not. But he’s the only one doing anything.”

A man, a plan, Argentina

Argentina’s Economy Ministry has long been a magnet for protest. On a bright morning in mid-July, a large banner denouncing the country’s port privatization rests against the stone façade near the main entrance. The banner has been there for four years; so has the elderly man collecting money in a can for port workers.

Today Paulo Vasquez, a 25-year-old ministry worker, is scraping dried egg off the building with a small, dull knife.

The eggs were thrown days earlier by state workers who had gathered outside the ministry, banging drums, to condemn the decision by Economy Minister Domingo Cavallo, amid the deepening economic crisis, to cut their salaries and pensions.

“Eggs. Why eggs?” Vasquez says. “It’s very difficult to get off.”

Five floors up, Argentina’s economic brain trust is abuzz, and no brain is buzzing faster than Cavallo’s. Intense, rotund, balding, he commands attention with his sharp focus and his professorial command of detail. This morning he is preparing to meet with key Japanese fund managers, part of his effort to convince investors that his new “zero deficit” policy - a draconian measure to balance the country’s books - is working.

Argentina has slid into critical condition since Cavallo took over in March, inheriting an economic morass. International markets have all but shut down credit, and the country has turned to the International Monetary Fund for an additional $8 billion loan. (Just last December the Fund had arranged a package of $40 billion.)

Today’s meeting with the Japanese is just one item on a packed schedule. But Cavallo remains inexhaustible. His daughter was married the preceding weekend, keeping him up dancing, in fine local fashion, until dawn. Hours later he was at Los Olivos, the president’s residence, conferring with Fernando de la Rúa in a weekendlong session to try to resolve this crisis.

Despite all the troubles - and all the criticism he has received - Cavallo is supremely confident, convinced of the wisdom of his decisions. He took time out from his frenetic meeting schedule to sit down with Institutional Investor Staff Writer Jenny Anderson to discuss the crisis in his country.

Institutional Investor: How would you describe the past week?

Cavallo: Very difficult. We had to commit ourselves to the fact that neither the federal nor provincial governments will be able to increase their net debt levels. And we had to decide to comply with - to the extreme - a zero deficit law. That will play the same role that the convertibility law played in the past decade. It means we will keep the national and provincial debt levels constant. In the decade of the ‘90s, the emission of money without backing disappeared. In the decade 2000, additional public sector debt will disappear in much the same manner.

Why has Argentina’s country risk level deteriorated so much?

The markets are acting like Saint Thomas - they want to touch it to believe it. They will believe when they see everything Argentina is doing in the area of public finance. We will punctually pay all of the interest, and Argentina will not need to solicit new credit from international or domestic capital markets. When they see that the public sector behaves this way, credit will return abundantly.

Will Argentina default?

No. The banks made an agreement in December of last year regarding the rollover of the Letes [short-term government notes] that come due. We convinced the IMF that the private sector involvement would take the form of an agreement with the private banks to renew the debt coming due, in particular the rollover of Letes. We hope the banks will comply with this agreement. So we see no risk of default. We have the resources to pay punctually all of the interest that Argentina owes at the national and provincial level, because we make that a priority.

When you arrived in March, you undertook a series of heterodox measures. But the crisis worsened. Why didn’t they work better?

They are working, and they will work even better. And they are not, by any means, heterodox measures. They are measures that correspond to a country that has suffered three years of recession and in which increased taxes raised the cost of investment and the cost of production. We had to reverse these increases in taxes, which were a mistake. We had to change the anchor of the currency and move to one that is more stable, like the dollar-euro, which will only take place when the value of the dollar is equal to the value of one euro. And we had to benefit the exporters with this new anchor for our currency. Also, we had to simplify the tax system. This we are doing, and we will continue to do until the economy takes off. In other words, the competitiveness plan is working.

You spent 25 years writing about Argentina’s public sector spending problem. Why didn’t you cut public spending immediately? Did President de la Rúa not want to do another adjustment?

Quite the contrary. The government of de la Rúa has been reducing public expenditures since his first day in office, through the reform of the state, which is well under way. Notice that consolidated national and provincial primary spending came down $3 billion in 2000, and at the end of 2001, it will be down another $3 billion. In the last three years of Carlos Saúl Menem - ’97, ’98, ’99 - that number increased $9 billion, and in the first two years, de la Rúa has cut $6 billion. Since I’ve been in the Economy Ministry, we began with a simplification of the tax system and more efficient methods to fight against tax evasion. We are totally with the program of the IMF and other multilaterals - we more than met our second-quarter targets, and we will comply without any problems with the goals for the third and fourth quarters and the rest of the program. But we were not even able to secure credit for the reduced deficit levels that are set in this program. If we wanted to finance these deficits, we’d have to pay interest rates that we consider too high. So we decided to emphasize the fiscal adjustment, through a mechanism in the financial administration law that consists simply in adjusting our spending on personnel and pensions. This quarter we reduced 13 percent across the board all expenses except interest on debt, transfers to the provinces and pensions less than $300 a year, so the deficit for the third quarter will be zero. We will do the same in the next quarter and in all the quarters after that.

Your critics say that since you returned to government, you have acted more like a politician than an economist. Would you agree?

The economy minister is always a politician. I was a politician when I was the economy minister the first time, and I am a politician now. To govern a country is not the work of technocrats. To govern a country is the work of a public man, a political man, because governing a country means that every day you adopt political decisions. Those who believe that governing a country is like giving a class at the university or giving an academic seminar think that because they have absolutely no experience.

Will you run for president in 2003?

I don’t have any plans whatsoever for this. With the urgency of the situation in Argentina, the political class that has the responsibility of governing - the president of the nation, ministers, governors - should be utilizing 100 percent of their energy to govern and resolve the urgent problems of our country. To speculate about political positioning for the future or personal ambitions is a waste of time.

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