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Argentina: The White Knight Rides in Again


In the end, Domingo Cavallo's return to power was every bit as triumphant as he could have hoped. On Mar. 20, Argentines awoke to the news that the 54-year-old Harvard University-trained economist who rescued their country from hyperinflation more than a decade ago was back in his old job. Cavallo is the third man to hold the post of Economy Minister in as many weeks.

Argentina's center-left government has been lurching from crisis to crisis since it took office 15 months ago. Buffeted by corruption scandals, a rash of high-level resignations, and a 33-month recession, President Fernando de la Rua had nowhere else to turn. With his fragmented Alianza coalition facing mid-term elections in October, the beleaguered President desperately needs to start the stalled economy. "Cavallo, quite simply, is the last resort," says Felipe Noguera, an independent political consultant in Buenos Aires. "There is no one else."

Cavallo at least has the right credentials for the job. In his previous stint as Economy Minister, from 1991 to 1996, he stopped runaway inflation by firmly pegging the Argentine peso to the U.S. dollar at a rate of 1 to 1. Under his stewardship, gross domestic product grew by as much as 9% annually, one of the highest rates in the world.

Now, relishing the chance to reenact the role of White Knight, Cavallo is demanding from Congress the same "superminister" powers he enjoyed under former President Carlos Menem--before their highly public falling-out. In a dais-thumping speech, he said the time had come for "decisive" action to attack the country's economic ills. "I'm going to tell Congress we need powers to cut the deficit by about 3 billion pesos [$3 billion]" Cavallo thundered.

Problem is, Cavallo's predecessor, Ricardo Lopez Murphy, wanted a decisive attack, too. However, he had to step down shortly after unveiling a controversial austerity package that called for $4.5 billion in cuts in government spending. The announcement sparked a wave of strikes and demonstrations by teachers, students, and transport workers and prompted the resignation of several government officials who are members of Frepaso, the junior partner in the coalition.

To win the support of opposition politicians, Cavallo must take a different tack than Lopez Murphy. Cavallo has already abandoned his predecessor's plan to push through draconian spending cuts. Instead, he aims to narrow Argentina's fiscal deficit by $3 billion this year by rekindling growth, thereby boosting tax collection. Possible measures include cuts in some corporate tax rates to promote the reinvestment of profits, and a reduction in banks' reserve requirements, which would free up money for loans.

Cavallo also will have more clout than Lopez Murphy. Analysts suspect that de la Rua privately ceded broad powers to his new Economy Minister to get him to take on the thankless job. "[The President] will still be chairman of the board, but he has given up the job of CEO," says Martin Redrado, president of Fundacion Capital, a Buenos Aires think tank.

OUT OF REACH? The markets have responded favorably to Cavallo's return. Argentina's benchmark interest rate has sunk to 35% from 70% on Mar. 19, when the Lopez Murphy plan sparked a political uproar. Yet investors want to see results fast: U.S. rating agency Standard & Poor's is considering downgrading Argentina, a move that would make it more costly to service the $124 billion public debt.

And Cavallo's room to maneuver remains limited. As a condition for a $40 billion emergency aid package arranged by the International Monetary Fund, Argentina must slash its fiscal deficit to $6.5 billion this year, a target that looks increasingly out of reach. Cavallo's options also are narrowed by convertibility, the exchange-rate system he introduced in 1991.

Although it deprives Argentina of control over its money supply, Cavallo vows he won't abandon the peg. "Convertibility is here to stay," he said during a press briefing last week. Recovery, for the moment, remains elusive. By Colin Barraclough in Buenos Aires, with bureau reports


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