To much of the world, Argentina seemed bent on committing collective suicide the week before Christmas. Two consecutive years of rising unemployment and austerity measures, meant to combat a $132 billion foreign debt, finally boiled over into the country’s worst disturbances in 12 years. But as Argentina stood on the verge of the largest default in recorded history, something historic happened in the rest of South America. Nothing. Foreign business executives did not bolt for the nearest airport. The U.S. dollar rose slightly against the continent’s currencies, but not enough to drown the weaker ones. Like distant relatives at a wake, leaders in South America looked at their afflicted neighbor with more sympathy than dread.
In these days of relentless globalism, one nation’s woes can still hobble an entire hemisphere. So it was in 1994, when Mexico’s peso collapsed, dragging down economies from Costa Rica to Chile–and in 1997, when Thailand keeled over, taking Asia and, later, most emerging markets with it. But this time most of Latin America escaped Argentina’s startling descent with little more than scrapes. After a bruising session of trading on the day of de la Rua’s resignation, the So Paulo Stock Exchange bounced back a day later. Nissan Renault inaugurated a brand-new, $236 million plant in the Brazil the very same day.
What went right? Chalk it up to some Latin countries convincing the world they are not all alike. At a time when many statesmen have talked up the advantages of creating a common market stretching from Tijuana to Tierra del Fuego, individual countries have quietly worked to disentangle their economic destinies from less prosperous neighbors. Economists call it decoupling."
Also, the unique nature of Argentina’s debacle steadied investors’ nerves. Outright default had been a virtual certainty since early December, when the International Monetary Fund withheld $1.3 billion in loans needed to meet upcoming debt payments. As Buenos Aires burned, the IMF and the Bush administration came under fire for their refusal to even consider a last-ditch bailout package. For their part, investors had long since taken steps to protect themselves. “This was a slow-motion collapse,” says Walter Molano of BCP Securities. “Most of the selling had already taken place long before.” Accordingly, the regional fallout isn’t expected to approach the contagious investor hysteria set off by the Mexican peso crisis.
The consequences inside the country will be far more painful. After de la Rua’s resignation, power fell to the opposition Peronists. Within 24 hours they nominated provincial Gov. Adolfo Rodriguez Saa as interim president and scheduled a general election for early March. That timetable may not come off as planned. The scion of a family that has long exercised power in the central province of San Luis, Rodriguez Saa, 54, showed signs of wanting to serve out the remainder of de la Rua’s term at the end of 2003. However long he stays, he is expected to heed his party’s long clamor for a suspension of debt payments, leading to default and a complete freeze of foreign credits.
Rodriguez Saa will also have to decide on the future of the peso. There is no easy option. De la Rua inherit-ed an overvalued currency that–pegged one-to-one to the U.S. dollar–made exports too costly to compete in foreign markets. Many economists called for devaluation; others advocated replacing the peso with the dollar. De la Rua did neither. Nor, it seems, will his successor. Within hours of being named president, Rodriguez Saa announced plans to keep the dollar peg, rejecting both devaluation and dollarization. His economic advisers are reportedly considering a wide range of emergency measures aimed at boosting government revenues by raising import tariffs and suspending interest payments to Argentines who hold government bonds. But the currency issue will have to be resolved sooner or later, and if Rodriguez Saa gets his wish to rule the country for the next two years, the risky decision to devalue the peso will fall on his shoulders.
Over the long term, Argentina’s future will sit in the hands of the Peronists. Within the party there is no clear-cut consensus on economic policy. Former president Carlos Menem had junked the party’s traditional populist nostrums and carried out the most aggressively liberal economic program in Latin America during the 1990s. He’s still the party’s nominal chief, but effective control is wielded by politicians cut from typical Peronist cloth. If they prevail, Rodriguez Saa or whoever follows him may restore costly social-welfare schemes that would further strain the government’s already shaky finances.
Whoever rules Argentina will find his room for maneuver drastically limited. The likely default on Argentina’s debt will present the government with a Hobson’s choice: impose yet more taxes on workers and businesses or make more of the same spending cuts that fueled the violent upheavals of mid-December. Things will go from bad to worse; gross domestic product is expected to shrink by as much as 8 percent in 2002–coming after a disastrous year that saw economic output fall at a yearly rate of 11 percent in the second semester.
Argentina’s neighbors won’t be completely spared, of course. Brazil will be hardest hit. Even now Rio’s exporters are waiting to collect $1 billion from Argentine clients, and deepening doldrums across the border could cost Brazil up to 120,000 export-related jobs next year. But most analysts don’t expect the malaise in Argentina to plunge other emerging markets into renewed economic turmoil. “I’d be really surprised if you saw a huge impact throughout Latin America,” says Pamela Starr, an Argentina expert at the Autonomous Technological Institute of Mexico in Mexico City. “The assumption of Argentina’s collapse has already been built into the system… Everybody was prepared for it.” In other words, it will be Argentina’s funeral.
