O'Neill, Free Speech, and Free Trade


There will likely be encouraging words and sympathy from U.S. Treasury Secretary Paul O'Neill when he visits Argentina, Brazil, and Uruguay on a three-day swing through South America on Aug. 5-7. But belated promises of future aid and the renewed pledges of a regionwide free-trade pact might not be enough to repair the economic damage already done because of the perceived indifference of the U.S. to the region's economic plight.

Off-the-cuff remarks by O'Neill on July 28 that the U.S. was unwilling to grant aid to countries only to see it end up in Swiss bank accounts sent currencies and markets tumbling in Brazil and Uruguay.

COLD SHOULDER, COLD HEART. The comments were interpreted to allude to an investigation underway into corruption charges against the former President of Argentina, Carlos Menem. But South American nations were outraged to be tarred with the same brush as their deadbeat neighbor, which defaulted on its $141 billion public debt in December.

In Brazil, O'Neill's remarks touched off a minor diplomatic row with President Henrique Cardoso, who demanded a formal apology as a condition for hosting the U.S. Treasury Secretary. Washington retreated, and O'Neill and White House officials promised Aug. 1 to continue supporting the Herculean efforts Brazil and Uruguay are making to ward off financial collapse.

The problem wasn't so much the inappropriateness of O'Neill's comments, but the ongoing perception of the U.S. policy that preceded it. Since pulling the plug on the International Monetary Fund's aid program to Argentina in December, Latin Americans continue to believe that Washington has largely turned a blind eye to the region's mounting problems of swooning currencies, mounting debt, and a surge of populist sentiment that threatens to derail economic reforms, such as privatizations.

TRADE PACT. The IMF is now mulling fresh aid for Uruguay and Brazil, but it may take more than a check and an apology from O'Neill to repair the rift. "No amount of public mea culpas by O'Neill would alter Latin America's perception that the U.S.'s instinct is to let Latin America fend for itself while it focuses on its own domestic economic problems and the war on terrorism," says Carlos Escudéa professor of international relations at Buenos Aires' Di Tella University.

Ironically, O'Neill's trip should provide the ideal platform to tout progress on the one major foreign policy objective the U.S. shares with the region: a free-trade area of the Americas (FTAA) stretching from Alaska to Tierra del Fuego. Prospects for an FTAA got a boost on Aug. 1 when the Senate gave President Bush final approval to negotiate market-opening trade deals that Congress can approve or reject but not amend. Unfortunately, the resentment generated by the perception of the U.S's benign neglect of the region's economic hardship has temporarily cooled enthusiasm among Latin American leaders to embrace a pact that many criticized as one-sided from the outset.

Although most nations still support an agreement, rising poverty and unemployment are testing the public's tolerance for policies that require sacrifice upfront, so reaching a final deal won't be very easy. "The U.S. may want a deal but I don't think anyone will be surprised if Latin America turns a deaf ear," says Rita Lavin, senior economist at Standard & Poor's Market Analysis Group in New York (which, like BusinessWeek, is owned by McGraw-Hill).

SIMPLISTIC VIEW. And some analysts continue to argue that the Bush Administration is lumping together Argentina, Brazil, and Uruguay and failing to take note of these nations' varying commitments to free-market principles. "The enormous distinctions between how these three countries are handling their crises hasn't been contemplated by Washington's simplistic view of the region," says Walter Molano, head of research at BCP Securities, a brokerage in Greenwich, Conn.

Argentina should get low marks for the slow pace with which it has moved to clean up its scorched banking system, rein in double-digit inflation, and restore investor confidence in its institutions. But Brazil has routinely met fiscal and inflation limitation targets set by the IMF, despite a 55% slide in its currency this year and a virtual freeze in external credit lines following Argentina's implosion.

There are concerns that a possible victory by leftist presidential candidate Luiz Inácio "Lula" da Silva's in October elections could lead to the country defaulting on its $290 billion debt and a retreat from the market-friendly reforms implemented by the outgoing government. But seasoned Brazil watchers say that Lula is being unfairly painted as a radical, particularly since he has repeatedly pledged to honor the country's obligations if elected. "There's a near-zero possibility Brazil, even with Lula in charge, is either capable or willing to trample over property rights like Argentina did," says Lavin, referring to Argentina's default on billions worth of government bonds, as well as its decision last December to impose a partial freeze on bank deposits, which remains in place.

CONTAGIOUS CONDITIONS. Since then, of course, Argentina's crisis has spilled over into Uruguay, traditionally Latin America's most stable economy and, until recently, the only country in the region besides Mexico that boasted investment-grade debt status. Uruguay's unfortunate distinction as the offshore banking center and beach playground for wealthy Argentines has pushed its economy to the brink of collapse and accelerated fears of an imminent debt default. Uruguay's peso has fallen 54% since being floated in mid-June. Meanwhile, yields on Uruguay's government debt have soared to 2,700 basis points over U.S. Treasuries, making the country the riskiest investment option in Latin America after Argentina.

The trip in early August is important to both O'Neill and his boss in the White House and the Latin American leaders who are facing daunting challenges. But if O'Neill gets a chilly reception in South America on his upcoming trip, he'll have more than wintry temperatures to blame for it. By Joshua Goodman in Buenos Aires


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