The Perils Ahead For Argentina

As you say in "The panic has subsided--but not the debt" (Latin America, Nov. 27), there are plenty of banana peels in President de la Rua's path. The main banana peel left over by the Menem administration is the convertibility law of 1991, which overvalues the peso by fixing the parity at one peso=one dollar, while the true equilibrium exchange rate is around two pesos=one dollar.

The wrong parity has profound depressive effects. To counteract those effects, former Finance Ministers Domingo Cavallo (1991-96) and Roque Fernandez (1996-99), with the support of the International Monetary Fund, proposed large fiscal deficits financed with increasing amounts of foreign debts and sales of government assets.

But now the external debt is seven times the country's annual exports. Moreover, fiscal deficits were unable to combat unemployment plus underemployment, which after 1995 added up to 30% of the labor force. This critical employment situation continues today, and if it is not resolved soon, it is a time bomb. The annual interest payments on external public debt are now close to half the size of the government budget. Under the circumstances, more loans will be of only short-term help, but they will exacerbate the problem of solvency over the medium and long term.

Only with a freely floating exchange rate, fiscal austerity right now, and appropriate monetary reform and policy, including the undoing of the partial dollarization of the economy, will Argentina be able to reach full employment over the short and medium term and repay foreign debt over the long term.

Eduardo Conesa

Buenos Aires