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Lack of confidence: is the crash coming?
La Vanguardia
June 29, 2008

By Robert Mur

The fear is reborn because the elements of a new "default" in Argentina begin to emerge

In 1998, an Argentine rock band with an unpronounceable name - Bersuit Vergarabat released a song which became popular. "Here comes the crash!", they sang, and three years later it became a premonition, when Argentina declared the default, sinking it into the greatest crisis in its history.

Almost seven years after that black December of 2001, the economic situation in Argentina is infinitely better, but the dragged-out conflict that the farm sector and the government are facing has led some to begin to raise their voices to warn of a new default.

The first daring to venture this risky hypothesis have been Aldo Abram and Martin Krause, two prestigious economists from the Center for Research of Argentine Institutions and Markets (CIIMA). In a report entitled "Debt and Inflation", the researchers indicate that only three years after the restructuring of the private debt, "the public debt has surpassed the level reached at the 2001 default that, if you include the total amount of debt in cessation of payments, is up to some US$170 billion, or 67% of GDP."

Abram and Krause argue that, while in the short term there are sufficient reserves to deal with payments, Argentina's credibility is on its way down and that is costing it more to obtain credit. If you add to this the international crisis and galloping inflation, along with manipulated official statistics, the result could be "dramatic", the economists argue. "And one is not to speculate whereupon this crisis doesn't occur, the government must be prepared for the worst scenario," the report says, estimating that in 2009 the country needs some US$11.8 billion and another US$10.5 billion more in 2010 to deal with the debt.


"I can't guarantee that we will have a default," Krause told this newspaper," because one of the alternatives that the government has next year is to use Central Bank reserves to pay maturities, like how it paid off the debt to the IMF," he explains. "It could be done again, but it would be very delicate because it would generate uncertainty in the markets and with the people, who could speed up their conversion of pesos to dollars, provoking a run against the currency."

According to Krause, the risk differential is one of the more relevant indicators. "Last year Argentina had a country-risk similar to Brazil or a little lower, and now it is double Brazil's. "Brazil has placed bonds at 6% and Argentina places them in Venezuela at 13%," Krause says, remarking that only Venezuelan President Hugo Chavez is willing to lend money to Argentina.


For his part, Abram said that "credibility is falling by greater levels than those at the time of Fernando de la R a", and warns that the government must begin to react now, containing inflation and modifying the little-trusted official consumer price index. "We are heading down a road which ends at a cliff, from which could possibly end up generating positive expectations inside this model, we aren't even demanding a change in the model," Abram warned.

La Vanguardia wanted to contrast the hypothesis of a new default with a reputed economist, not suspected to have positions close to the ruling Kirchners. It was put to Jose Maria Dagnino Pastore, who was Economy Minister in two military governments and whose opinion is very respected among top businessmen. Dagnino says that "it's very early to make statements like this" and qualified them as "ominous."


Dagnino recognizes that "inflation has become a bit complicated" and that "measures must be taken," but said that "countries with oil and food, like Argentina, are very well situated" in the world. The ex-minister explains that real inflation is 25% (the official figure doesn't surpass 9%) and that the expectation is that it will arrive at around 36%.

He doesn't believe in a new default, but Dagnino believes that the Argentine economy has a high level of unpredictability. "The decisions are concentrated with Kirchner and that makes it difficult to predict the economy, differing from when the course was set by economic teams," he said, pointing to an open secret in Argentina, where it is said that the real Economy Minister is ex-president Nestor Kirchner.