It's winter in Argentina, but the chill that country is feeling isn't seasonal. It's economic. Argentina is on the verge of defaulting on its debt, and people have taken to the streets to protest economic policy. A debacle in Argentina is by itself no big threat to the U.S., and Treasury Secretary Paul O'Neill has said as much. Nor is a meltdown in Turkey. But Argentina is only one of several dangerous financial storms brewing overseas that in combination could damage the U.S. economy. Think about sharply rising energy costs, lower output and an even shakier stock market.
As if we don't have enough to worry about. Last week the government reported that the domestic economy barely has a pulse. It grew at a 0.7% rate in the second quarter, the weakest in eight years. Yet beyond Argentina lurk at least three more insults that could make things worse. In the Middle East, OPEC is flexing its muscles again. Last week it vowed to cut oil production 4% to prop prices. In Europe, the single-currency system called the euro may be fighting for its survival if stagflation continues to cripple the region. And in Asia, Japan's new Prime Minister is struggling to carrying out his ambitious reform to revive economic growth. Failure will deepen Japan's coma and take Asia with it.
Why should we worry? Because the U.S. economy's ability to take a punch isn't as great as it was in the late 1990s. Then we were swept up in the most powerful expansion in modern history, and a Russian debt default or even the Asian crisis of 1997 couldn't stop it. Now, with the U.S. economy ailing, the damage from the same kind of crisis gets magnified. Here's how:
ARGENTINA: THE FIRST DOMINO?
Just four years ago, Argentina was sizzling like one of its famous steaks. Its economy was firmly linked to the dollar, and this kept a lid on inflation, a longtime scourge. But dollarization has limitations. Argentina's neighbors began depreciating their currencies to sell more goods in world markets. Worse yet, the dollar continued to soar, making Argentina even less competitive.
Last week Argentina moved closer to defaulting on its $128 billion in debt, an amount equal to about half its GDP. "Argentina's domestic financial shield may be beginning to crack," observes international economist Shandra Modi of IDEAglobal, a consulting firm in New York.
WHAT IT MEANS TO THE U.S. Beware contagion. Argentina will not be able to service its debt much longer. "A technical default is all but inevitable," says a banker. But the danger to the U.S. is not so much Argentina as the spillover. Brazil and Mexico are the critical economies south of the U.S. border, and Mexico's is in a recession. U.S. bank exposure to Argentina as of March was about $12 billion; now add Brazil's $24 billion and Mexico's $18 billion. During the past decade, thousands of U.S. firms have invested heavily in Latin America, buying companies, building plants and partnering deals. O'Neill has said he rejects the idea that "contagion" is inevitable in global financial markets. But consider that foreign direct investment in Brazil, which it needs to keep its accounts buoyant, fell about $3.5 billion in the first half of 2001.
OPEC GETS POLITICAL