Will Argentina Soon Be Crying For Its Economic Guru?

No one in Latin America is as closely identified with a country's success as Argentina's Economy Minister, Domingo Cavallo. His so-called Cavallo Plan, setting the peso at parity with the dollar, buried hyperinflation and contributed to strong economic growth in the early 1990s. Earlier this year, Cavallo headed off a run on the banks by rustling up $6 billion in credits from international lenders.

But the notion that Cavallo is indispensable is starting to haunt Argentina as the economy falters and he comes under fire for not doing enough to revive it. In recent days, the darkening economic outlook and rumors that Cavallo might leave his post have roiled the Argentine markets. Cavallo himself unnerved investors with erratic pronouncements on the economy and by whining that certain influential business figures wanted him ousted.

GREAT STRAIN. Predictions of Cavallo's demise have been common since he took office in 1991. He is a prickly man who irritates both executives and fellow Cabinet members. But it would be very risky for President Carlos Menem to allow him to go. Few people in Argentina or abroad believe that the fixed exchange rate against the dollar would survive Cavallo's departure. His going would probably trigger a renewed bout of capital flight like the one Cavallo fought off after the Mexican peso debacle this past December. "It would be traumatic, chaotic," says Buenos Aires-based analyst Carlos Rivas.

Although both Cavallo and Menem have said the Minister will be staying, the relationship between the President and his chief economic official is clearly under great strain

as Menem prepares for his second term, which begins on July 8.

Despite Cavallo's accomplishments, Menem's aides, and even the President himself, have long resented Cavallo's receiving the credit for Argentina's big economic strides. Cavallo's abrasiveness adds to his problems. Barely a week passes without his clashing with some official or politician. Menem has tried to make peace between Cavallo and his enemies in Congress, but it may not last. Even if the minister stays, Menem may use his new chief of staff to check Cavallo's free rein.

Even as discontent with Cavallo builds, Menem probably realizes that he still needs a fiscal and monetary disciplinarian at the helm. With $80 billion in foreign debt to service, the government is going to have to keep cutting costs to keep a $2.4 billion credit package from the International Monetary Fund on track. Concern is also growing about the state of provincial government finances.

SEVERE SQUEEZE. But the temptation to backtrack on austerity is growing. Cavallo is an easy target for executives angry that they are not selling anything. Unemployment has already reached a record 14%.

Menem hoped that his big win in the election on May 14 would boost the economy. Although bank deposits have risen slightly after last winter's crisis, the swift return of capital and easing of the severe credit squeeze that Menem was counting on for a boost haven't materialized.

To foreign investors, Argentina is becoming a critical test case for all of Latin America. With Mexico still floundering, if Argentina unravels, "confidence in the region as a whole would be damaged almost irreparably for several years," says Nigel Rendell, emerging-markets analyst for James Capel & Co. Rendell is telling clients to "underweigh" Argentina. With such pessimism building, Menem would be playing with fire to let Cavallo depart.

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