Argentina close to default on her external debt

Argentina woke up this week to an uncertain future, which began with the sudden resignation of the newly appointed finance minister, Lopez Murphy, today, Tuesday, 20th March.

Lopez Murphy's resignation came after the panicky appointment of former finance minister Domingo Cavallo ("saviour of the markets" in Menem's government) - days after Murphy had announced massive budget cuts.

"Instead of the military dictatorships of the past, Argentina is now confronted by a market dictatorship", said Liana Cisneros, Head of Jubilee +'s Latin American and Caribbean Programme. "Argentina's government, refusing to prioritise the needs of its population, has chosen instead to bolster confidence in the international financial markets. The consequences could be very grave for the ordinary people of Argentina and Latin America".

Measures were announced last week to demonstrate that Argentina would not renege on its external (short-term) debt payments of $22bn this year. Last Friday (16th March) the then new finance Minister Ricardo López Murphy, against a vocal clamour of resistance from Argentine political and trade union leaders, announced massive cuts to the budget. Mr. Lopez Murphy had been appointed only days before, and is a former defence minister. He is considered the most orthodox of the economists close to president de la Rua, and as a graduate of the University of Chicago, was formerly a consultant with the World Bank and International Monetary Fund.

Domingo Cavallo, former Finance Minister in the government of Carlos Menem and former president of the Central Bank during the dictatorship (1982), staged a come-back in the midst of the crisis, as a powerful defender of the interests of international investors. Cavallo who will now replace Lopez Murphy, has indicated that he will not work with the IMF, and instead will appeal over their heads to the US President, George Bush, for support.

In the meantime, Standard and Poor's, the rating agency, said it could downgrade the country's debt "if the political uncertainty continued".
 
Lopez Murphy's unpopular measures cut nearly $2bn from this year's budget in order to remain within the fiscal targets set by the International Monetary Fund - one of the conditions of a $40bn rescue package in December, 2000. The provinces were told they would receive $970m less this year, universities $360m less; while parliamentarians would have a range of benefits reduced; and some reforms in the social security agencies are expected.

Cavallo, immediately after Lopez Murphy's resignation, announced a reversal of some of Lopez Murphy's planned cuts, assuring the Argentinian parliament that funds for education and the provinces would not be cut, if the Parliament would support "a group of simple, but important legislative changes".

Lopez Murphy's proposed austerity measures found support only amongst the business community: the majority of Argentinians continue to defy the government with protests. Unions announced a series of general strikes over the next days and weeks. Three government ministers and six senior officials resigned in the wake of Lopez Murphy's announcements. A hundred university faculties were occupied by their students.

Argentina is due to pay $22bn this year in debt service, a figure that has remained constant since 1998. Debt repayments represent about 58% of exports, one of the highest in the world. Of its total debt of $123.7bn, almost $40bn is due originated with the military dictatorships, including $6bn of phantom loans from the Petroleum Estate Company. In July 2000, after a sustained campaign by Alejandro Olmos, a High Court of Argentina ruled that these loans were illegal.

The next few days are crucial for Argentina. Argentinians are losing patience with their government after repeated failures to tackle the real needs of its people.

This article has been prepared by staff at Jubilee +