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FINANCIAL CRISIS

Argentina has no choice but to default

by Cesar Chelala

NEW YORK — Argentina is now experiencing one of its most severe economic and social crises in recent history. Riots are spreading through the country and the government seems increasingly unable to control the situation. The declaration of a state of siege for 30 days, although a necessary measure to control riots in which more than 5 people were killed and dozens injured, shows the seriousness of the situation. If not controlled, the crisis could bring about a popular revolt with incalculable consequences for peace and democracy in this beleaguered country.

Increased borrowing from international lending institutions, notably the International Monetary Fund, has not done much to improve the country’s economic situation and overcome the present crisis. If Argentina is to go back to being a state under the rule of law and with sound social and economic development, it has no alternative but to default on its current debt. The sooner this is done the better it will be for the country and — in the long run — for the international community.

The government’s efforts to reach a zero-deficit budget proved to be impossible, and in its eagerness to satisfy foreign creditors it imposed on Argentines draconian conditions that have had a negative effect, particularly on the poorer sectors of the population. In addition, if not controlled, the crisis in Argentina may spread to Brazil and Chile, whose currencies have depreciated almost 20 percent this year.

Argentina’s total public debt, both internal and external, amounts to about $155 billion, a huge sum given the size of its economy. This amount is five times the value of the country’s annual exports.

In addition, Argentina still has principal repayments of over $40 billion due between 2003 and 2005. Argentina recently paid $900 million in interest on its foreign debt, in part using money confiscated from private pension funds.

And common Argentine citizens cannot but wonder where all the money the government received from international lending agencies has gone, since the country has been in a steep economic decline for the past several years.

What is happening now is to a large extent the result of the corruption and inefficiency of the previous Peronist government headed by former President Carlos Menem, whose economic policies had been widely praised by international financial institutions. By irresponsibly lending to that government, those institutions share responsibility for Argentina’s present financial condition.

Over 14 million Argentines — out of a total population of 35 million — are living in poverty on less than $4 a day. Pensions have been cut by 13 percent, while many state employees have not been paid for months. People cannot withdraw more than $250 a week from their bank accounts, a paltry sum if one considers that some prices in Argentina are on a par with those in New York. Unemployment is at least 20 percent, an estimate many people consider to be low.

In short, the conditions have been created for a social crisis that could lead to a bloody popular revolt if it continues much longer. By all criteria, the day of reckoning has come for Latin America’s third largest country.

Three steps are unavoidable if Argentina is to emerge from the present crisis: It has to default on its foreign debt, devalue its currency — presently pegged to the dollar — and undergo a significant fiscal readjustment.

International financial circles agree that Argentina must declare default and start immediately to restructure its economic policy rather than continue in a downward spiral that hurts most the poorer sectors of the population.

Only these dramatic steps can save Argentina from a social crisis of unpredictable consequences.