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Is gold headed for its longest rally since the Nixon years?

Section: Daily Dispatches

Economic Rally for Argentina Defies Forecasts

By Larry Rohter
The New York Times
Sunday, December 26, 2004

BUENOS AIRES, Dec. 23 -- When the Argentine economy collapsed in
December 2001, doomsday predictions abounded. Unless it adopted
orthodox economic policies and quickly cut a deal with its foreign
creditors, hyperinflation would surely follow, the peso would become
worthless, investment and foreign reserves would vanish, and any
prospect of growth would be strangled.

But three years after Argentina declared a record debt default of
more than $100 billion, the largest in history, the apocalypse has
not arrived. Instead, the economy has grown by 8 percent for two
consecutive years, exports have zoomed, the currency is stable,
investors are gradually returning, and unemployment has eased from
record highs -- all without a debt settlement or the standard
measures required by the International Monetary Fund for its approval.

Argentina's recovery has been undeniable, and it has been achieved at
least in part by ignoring and even defying economic and political
orthodoxy. Rather than moving to immediately satisfy bondholders,
private banks, and the IMF, as other developing countries have done
in less severe crises, the Peronist-led government chose to stimulate
internal consumption first and told creditors to get in line with
everyone else.

"This is a remarkable historical event, one that challenges 25 years
of failed policies," said Mark Weisbrot, an economist at the Center
for Economic and Policy Research, a liberal research group in
Washington. "While other countries are just limping along, Argentina
is experiencing very healthy growth with no sign that it is
unsustainable, and they've done it without having to make any
concessions to get foreign capital inflows."

The consequences of that decision can be seen in government
statistics and in stores, where consumers once again were spending
robustly before Christmas. More than two million jobs have been
created since the depths of the crisis early in 2002, and according
to official figures, inflation-adjusted income has also bounced back,
returning almost to the level of the late 1990s. That is when the
crisis emerged, as Argentina sought to tighten its belt according to
IMF prescriptions, only to collapse into the worst depression in its
history, which also set off a political crisis.

Some of the new jobs are from a low-paying government make-work
program, but nearly half are in the private sector. As a result,
unemployment has declined from more than 20 percent to about 13
percent, and the number of Argentines living below the poverty line
has fallen by nearly 10 points from the record high of 53.4 percent
early in 2002.

"Things are by no means back to normal, but we've got the feeling
we're back on the right track," said Mario Alberto Ortiz, a
refrigeration repairman. "For the first time since things fell apart,
I can actually afford to spend a little money."

Traditional free-market economists remain skeptical of the
government's approach. While acknowledging there has been a recovery,
they attribute it mainly to external factors rather than the policies
of President Nstor Kirchner, who has been in office since May
2003. Increasingly, they also maintain that the comeback is beginning
to lose steam.

"We've been lucky," said Juan Luis Bour, chief economist at the Latin
American Foundation for Economic Research here. "We've had high
prices for commodities and low interest rates. But if we want to grow
in 2005, we're going to have to settle the debt question and have
foreign capital come in."

The IMF, which Argentine officials blame for inducing the crisis in
the first place, argues that the current government is acting at
least in part as the IMF has always recommended. It has limited
spending and moved to increase revenues, a classic prescription when
an economy is ailing, and has built up a surplus twice the size of
what the fund had asked before negotiations were put on hold several
months ago.

"The return to these encouraging numbers has been helped a lot by a
fiscal discipline that is almost unprecedented by Argentine
standards," said John Dodsworth, the senior IMF representative
here. "We've had a primary surplus, which has increased steadily over
these past few years at both the central and provincial levels, and
that has been the main anchor on the economic side."

But some of that record budget surplus has come from a pair of levies
on exports and financial transactions that orthodox economists at the
IMF and elsewhere want to see repealed. About a third of government
revenues are now raised by those taxes, which have surged.

"The IMF wants these taxes to be eliminated, but on the other hand
they also want Argentina to improve its offer to creditors and pay
back the fund so it can reduce its own exposure here," said Alan
Cibils, an Argentine economist associated with the independent
Interdisciplinary Center for the Study of Public Policy here. "In
other words, they are saying, 'You have to pay out more and take in
less,' which is a sure prescription for another crisis."

Because of the absence of a debt accord and a stalemate over utility
tariffs, some investors, mainly European, continue to shun Argentina,
citing what they call the lack of "judicial security." But others,
mainly Latin Americans used to operating in unstable environments or
themselves survivors of similar crises, have increased their presence
here amid expanding opportunities.

"These are slogans that people repeat without thinking, as if they
were parrots," Roberto Lavagna, the minister of the economy, said
when asked about the predictions that investment would disappear. "In
2001 and the beginning of 2002 all kinds of contracts were
destroyed," he said. "So why are they investing? Because today
clearly they can get a very good rate of return."

The Brazilian oil company Petrobras bought a stake in a leading
energy company. Another Brazilian company, AmBev, has acquired a
large interest in Quilmes, Argentina's leading beer brand, and a
Mexican company has bought up control of a leading bread and cake

Asian countries, with China and South Korea in the lead, have begun
to move in. During a state visit last month the Chinese president, Hu
Jintao, announced that his country plans to invest $20 billion in
Argentina over the next decade.

But the bulk of the new investment comes from Argentines who are
beginning to spend their money at home, either bringing their savings
back from abroad or from under their mattresses. For the first time
in three years more money is coming into the country than is leaving

That has given Mr. Kirchner the luxury of taking a hard line with the
monetary fund and with foreign creditors clamoring for repayment.

"The thing is that Argentina has a current account surplus, so they
don't really need so much foreign investment," said Claudio Loser, an
Argentine economist and the former Western Hemisphere director for
the I.M.F. "Domestic investment is taking place because there are
opportunities in agriculture, oil and gas."

Just this week the government announced that reserves of foreign
currency have climbed back to $19.5 billion, their highest level
since the crash and more than double the low recorded in the middle
of 2002, a year with a net outflow of $12.7 billion.

"The peak of investment in the 1990s was 19.9 percent" of gross
domestic product annually "and today it is at 19.1 percent, having
risen from a low of 10 percent," Mr. Lavagna said. The Kirchner
administration continues to seek an accord on the $167 billion in
debt that is still outstanding, and plans to make what it calls its
final offer early next month. But the turnabout here has inspired
such confidence that the government is not only talking about cutting
its last ties to the IMF but also insisting that any payback to
bondholders be linked to Argentina's continued good economic health.

"It's very simple," Mr. Lavagna said. "Nobody can collect from a
country that is not growing."


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