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http://www.economist.com/world/la/displayStory.cfm?Story_ID=916977 Patience wears thin Dec 20th 2001 | BUENOS AIRES From The Economist print edition For developments after this article was written, see our Country Briefing on Argentina) Get article background (Vedi sotto) IN 1989, Raul Alfonsin was forced to step down as Argentina's president when mobs began to loot supermarkets amid hyperinflationary chaos. That event is burnt into the country's political memory. So it looked like a grim augury for Fernando de la Rua, the current president who, like Mr Alfonsin, is a member of the Radical party, when looters attacked supermarkets in several cities recently to obtain food. A one-day general strike on December 13th attracted more support than had seven previous stoppages during Mr de la Rua's term. After 42 months of recession, the patience of some Argentines has snapped. Since July, Argentina's economy has contracted at an annual rate of 11%, according to Miguel Angel Broda, a local economic consultant. The latest official survey says that in October unemployment exceeded 18% (it is now probably 20%). And that was before the government this month imposed limits on cash withdrawals from banks, which have hit retail sales and the informal economy hard. The looting is still isolated. But it comes as Mr de la Rua and Domingo Cavallo, his economy minister, try to persuade Congress, dominated by the opposition Peronists, to approve a stern budget, aimed at restoring $2.7 billion in loans suspended by the IMF and other multilateral bodies. Those loans are the government's last hope of avoiding a unilateral debt default and the collapse of the currency board which pegs the peso at par to the dollar. Though much-delayed, the budget is still vague on details. It includes no estimate for economic growth, but does recognise that tax revenues will fall (by 3.8%). To reach the government's balanced-budget target, spending is to fall by $9.2 billion, or almost a fifth, compared with this year. Mr Cavallo claims that $5 billion will be saved in lower interest payments as a result of debt restructuring. Some $3 billion will be saved by maintaining for a full year the cuts in provincial finances and in public-sector salaries introduced in August. But that still leaves more savings to find. Mr Cavallo has hinted at further wage cuts. The Peronists have blocked attempts to eliminate the extra month's wage paid by tradition in December. Other potential targets for cuts include regional-development funds, teachers' pay and university financing. None of this is politically easy. To rally support for his frail government, the hapless Mr de la Rua has recently held talks with Carlos Menem, his Peronist predecessor. Mr Menem, who last month was cleared of arms-smuggling charges, has an interest in seeing Mr de la Rua stay in office until his term ends in 2003, since he would be constitutionally ineligible to run were a presidential election to be brought forward. But by cosying up to Mr Menem, Mr de la Rua risks alienating other Peronist leaders. The currency board has become a sham The government still clings to the hope of escape: approval of the budget would probably liberate IMF aid, giving time for a planned restructuring of the debt held by foreigners. They are likely to be offered interest rates of no more than 4%—less than the 7% offered to domestic creditors last month. Meanwhile, the government is scrambling to meet debt payments by hook or by crook: to do so this month, it delayed the payment of state pensions and forced private pension funds to hand over bank deposits for government paper. But even if Mr Cavallo pulls off the debt swap, it is hard to see how growth will return and the currency board survive. The president's meeting with Mr Menem has widely been seen as a nod towards adopting the dollar, a step favoured by both men as a last resort. So too has the appointment of Miguel Kiguel, a member of Mr Menem's economic team, as Mr Cavallo's chief adviser, replacing Daniel Marx, the finance secretary, who resigned last week. Local bankers are lobbying hard for dollarisation, since a devaluation would cause many of their dollar loans to go bad. But Argentina may not have enough dollar reserves to replace the pesos in circulation without first devaluing. Dollarisation has drawbacks too: there would no lender of last resort for the banks and, unless it came with a devaluation, it would not help the economy's trading problems. Mr Cavallo has said the peso is overvalued by 20%. The currency board has become a sham. The dollar now buys $1.10 in pesos on the streets, and the government may plug its budget gaps with non-convertible promissory notes. Most investors already view outright debt default as inevitable. Even in Buenos Aires, debate increasingly dwells on what form the country's economic conflagration will take, and whether Mr de la Rua's presidency will suffer a fate similar to that of Mr Alfonsin's. Argentina's economy BACKGROUND Dec 19th 2001 The Argentine economy, hit hard by Mexico's currency collapse in 1994-5, staged an export- and investment-led recovery—only to be buffeted by further external troubles, including the emerging-market malaise of 1997-8, Brazil's devaluation in January 1999, a strong dollar (to which the peso is pegged) and low prices for farm exports. Fernando de la Rua took office as president in December 1999 and tightened fiscal policy, hoping to win back investors' confidence. But tax hikes pushed the recovering economy into a deflationary trap. Worn thin by political infighting, investors' nerves snapped in November 2000 and bond rates soared. The IMF stepped in with an aid package. In spring 2001 Mr de la Rua reshuffled his cabinet, bringing back Domingo Cavallo as economy minister. The arrival of Mr Cavallo—who bought himself time by refinancing the government's debt—initially cheered investors. But his unorthodox policies have not worked. One innovation, in effect a floating exchange rate for foreign trade, sent bond prices tumbling. Visions of an Argentine default have scared financial markets worldwide. As money flees the banks and popular anger mounts, the increasingly desperate government has resorted to capping cash withdrawls from bank accounts.