Two Crises, Two Cures

In the financial turbulence triggered by Mexico's peso debacle, Argentina and Brazil have taken a heavy battering--but their currencies haven't collapsed. To survive the onslaught, the two countries have taken opposite tacks. Argentina has opted for economic belt-tightening as the price of avoiding a new cycle of devaluation and hyperinflation, while Brazil, less committed to maintaining a strong currency, is letting the real depreciate gradually in order to keep its exports price-competitive.

Paradoxically, both courses could help lay the basis for strong economic recoveries and an eventual return of investment flows to the region. That's because the crisis is forcing the countries to accelerate free-market reforms, from reducing deficits to selling state-run companies.

PUSH FOR PARITY. Argentine President Carlos Menem and Economy Minister Domingo Cavallo have been under the severest pressure. Since 1992, they have been committed to keeping the peso freely convertible at 1-to-1 parity with the dollar. The approaching May 14 presidential election would seem to put Menem in a bind. Imposing austerity measures to halt the capital flight that has drained hard-currency reserves wouldn't seem to be a vote-getter.

Still, Menem, who is leading comfortably in the polls, has hit voters with tax hikes, spending cuts, tight credit, and curbs on pension claims and workers' benefits. In Argentina, Menem knows, that's good politics. Like Germans of an earlier generation, Argentines have become highly allergic to inflation. That makes them willing to accept even a possible recession to avoid a return to the frightening bouts of inflation and worthless currencies of past years.

To further bolster the peso, Cavallo is speeding sell-offs of state-run companies, and he has assembled emergency credits from lenders such as the International Monetary Fund. If the peso looks secure by May 14, his boss Menem should be a shoo-in for reelection.

REAL SUCCESS. For Brazilians, a currency with a fixed parity is less important. They learned to live with currency depreciation and chronic inflation long ago. Now, though, they are enjoying relatively low inflation by Brazilian standards, estimated at 20% to 30% this year, and a consumer boom. This is partly the result of Brazil's success with the real, launched by President Fernando Henrique Cardoso when he was Finance Minister last year.

To pull in imports and dampen inflation, Cardoso has spent part of Brazil's $42 billion hard-currency reserve to keep the real strong. But the rundown of the reserve, which may now be as low as $30 billion, made investors nervous. In response, Cardoso recently let the real slide to $1.10, and he may lower it to parity with the dollar by midyear, analysts say. To some, that signals a return to Brazil's traditional strategy of devaluing its currency to stay competitive in world markets. But, reflecting Brazil's new discipline, Cardoso is curbing consumer credit and cutting government spending to brake inflation.

Both Brazil and Argentina seem likely to emerge with more competitive economies. Eventually, that should lure back some of the faint-hearted investors who fled.

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