Argentina On Its Own

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Now for the hard part: Duhalde takes office

South America's third-largest economy now has a president, Eduardo Duhalde, and an economy minister, Jorge Remes Lenicov, who just may be in office long enough for the IMF to write down their names in pen. And the pair has a plan that makes sense: free the Argentine peso from its 1-to-1 peg to the U.S. dollar and let it float (downward) some 40 percent. Then pass a balanced budget (and a debt restructuring plan) that will allow Argentina once again to borrow in — and attract investment from — the international markets that have left the country for dead.

But it could take a while. Duhalde is a Peronist, a political descendant of the populist policies of his idol, Gen. Juan Domingo Peron. The party has been at least partly responsible for Argentina's demise, dominating a provincially-minded Congress that has successfully resisted recent attempts to pare down the country's staggering $130-odd billion debt load by cutting federal spending. Duhalde himself ran up billions in debt as governor of the Buenos Aires province in the late '90s — and the supposed fiscal hawk Lenicov, his economic right hand for most of that tenure, evidently had no luck hiding his boss' checkbook.

Now, a decade of free-market policies in Argentina, discredited by the ultimate failure of the dollar-pegged currency system, are about to end. The Peronists are on top again, riding a wave of public nostalgia for the nationalist/protectionist policies of the country's pre-global-economy past — for anything different than the last couple of years. And if Duhalde has been accurate about diagnosing the seriousness of the current crisis — "we cannot afford to make mistakes," he said Thursday at his swearing-in — saving Argentina is going to be make it very tough to be a populist and a reformer both.

First, the de-dollarization that can no longer be denied. An estimated 80 percent of Argentines' debts are contracted in dollars, so a 40-percent devaluation means a 40-percent increase in those debts. Not to mention a 40-percent increase in prices in Argentine shops. That was why Argentina adopted the dollar peg in the first place, to curb runaway inflation, and it worked. And an instant 40-percent dose of the bad old days is going to cure a lot of cases of Peronist nostalgia in a hurry.

Neither is Duhalde's government likely to be shy about regulating its way through the rocky transitional phase from the pegged currency to one able to find its natural level in a country stuck in a four-year recession. Argentina's other Peronist president of this winter, Adolfo Rodriguez Saa, found out about those tradeoffs when his government partially froze private savings accounts to keep people from changing all their pesos into dollars (and sticking them under the mattress) before the de-pegging. The middle class took to the streets and Saa was gone in a week.

Duhalde will probably last longer than that. While not exactly a dynamic leader as far as Argentine politics goes — after finally nabbing the Peronist nomination in 1999, Duhalde got only 38 percent of the vote, the weakest Peronist showing in history — he's a familiar and thus credible face in Argentine politics, and known for his skill in the smoky back rooms where the real obstacles to reform will have to be overcome. And most economic analysts say if he listens to Lenicov this time around, he'll get some sound advice. But Lenicov, too, has no love of the tough love of the modern global economy. Any new Argentina that these two Peronists are able to rebuild is likely to look less like Mexico and more like Malaysia. Economic walls to the outside world will be thrown up, and talk of trade liberalization shut down.

The good news for the rest of the world about Argentina's 18-month slide into the national version of Chapter 11 bankruptcy — officially reached Thursday when the country defaulted on some Italian lira bonds — is that it's been so predictable for so long. Financial markets adjusted long ago, an Asian-style regional contagion is deemed unlikely, and the White House and the IMF have both cut the country off without another dime in aid until it gets its economic act together, declaring for all to hear that the global economy can do without Argentina for a while.

But in a year or two, when the Bush administration starts to return its gaze to free-trade issues and the administration's dream of a hemispheric, NAFTA-style pact with the Brazil- and Argentina-led Mercosur, Bush may find that the feeling is mutual.