Argentina's Other Crisis
Living hand to mouth is nothing new for Francisco dos Reis. At age nine, he dropped out of school to peddle candy on the streets of Buenos Aires and help his parents put food on the table. After scraping together enough capital to start his own company 40 years ago, dos Reis thought his days of poverty were behind him.
Now, as Argentina creeps closer to the edge of an economic meltdown, he is struggling to stay afloat. These days, instead of turning out rubber rollers for printing presses, the seven workers at dos Reis's modest factory on the outskirts of the capital keep busy by performing mundane tasks like repainting the shop-floor bathroom. And it's not just his business that's in jeopardy. Earlier this year, when he didn't have enough cash to cover his payroll, the 60-year-old entrepreneur pledged his home as collateral for a $45,000 loan. "At any moment I could lose everything," he says.
As investors the world over speculate whether the government of Argentina will default on its $130 billion debt or devalue its dollar-pegged peso, the country's economy is caught in a tailspin. Interest rates are soaring, capital flight is intensifying, and consumer spending has plummeted to levels that have surprised businesses already numb from a three-year recession. "It's a toss- up right now if Argentina can avert a crisis or not," says Martin Redrado, chief economist at local think tank Fundacion Capital.
PERNICIOUS. The government's eleventh-hour scramble to shore up public finances has temporarily overshadowed the slow-motion collapse of the private sector. Economy Minister Domingo Cavallo has imposed draconian cuts in public-sector salaries and pensions in a last-ditch effort to erase a pernicious fiscal deficit. And he persuaded the International Monetary Fund to give Argentina $8 billion in new money to supplement a $40 billion emergency aid package delivered in December.
The burning question, though, is whether any of this will revive an economy that seemingly has already given up the ghost. Publicly, big Argentine companies endorse Cavallo's moves. Privately, they confess they're switching from pesos to dollars. Demand for currency futures has surged as big businesses hedge their peso positions in preparation for the worst. Haunted by memories of 1990, when the government froze bank deposits, Argentines are emptying out their accounts. Close to $9.5 billion, or slightly above 10% of total deposits, has fled the financial system since July 1. "We are monitoring the situation closely but are confident the money will return once things calm down," says Manuel Sacerdote, president of BankBoston Argentina.
Business execs might breathe easier if they could detect a pickup in domestic demand, the main driver of the Argentine economy. No chance: Consumer confidence has been all but crushed under the weight of rising unemployment, higher taxes, and uncertainty about the future. Alto Palermo, a local company that manages some of the country's leading shopping malls, saw sales fall 17% in July--a stunning decline considering that is the month in which all Argentine workers collect their midyear bonuses. It's also a sign that the belt-tightening has penetrated into the upper reaches of the middle class. "For too long, Argentina has been living beyond its means," says Mariano Rodriguez Giesso, president of Giesso, a century-old men's clothier that has suffered a 20% drop in sales in recent months. "Finally, we're realizing what a poor country we've been all along."
Even sectors of the economy that were supposed to be recession-proof are feeling the squeeze. When Argentina liberalized its telecommunications sector last year, international heavyweights such as AT&T (T ) and BellSouth Corp. (BLS ) pledged investments in excess of $9 billion. Now, most of them are scaling back their business plans, while incumbent operators are fighting to sustain call volumes. Telecom Argentina (TEO ), the carrier controlled by Telecom Italia (TI ) and France Telecom (FTE ), has slashed long-distance rates by 50% this year, but has only a 4% increase in traffic to show for it. "We knew this year would be tough, but frankly we were caught off-guard by the magnitude of the recession," says Telecom Argentina President Juan Carlos Masjoan.
To stay afloat, companies across a variety of industries are cutting salaries between 15% and 30%, with little resistance from Argentina's normally feisty unions. Foreign auto makers, including Ford (F ), Volkswagen (VLKAY ) and Fiat (FIA ), have idled assembly lines for as long as 30 straight days to compensate for a collapse in car sales. Workers at those plants have had to swallow 35% reductions in wages during the down times. Other manufacturers are slashing payrolls, helping push up unemployment to a six-year high of 16.4% in May.
Some businesses are downsizing themselves right out of existence. A total of 726 companies filed for bankruptcy in the first half of 2001, a 16% increase from the same period last year. Sky-high interest rates are partly to blame for the closures. Annual rates on 30-day peso loans for top-rated borrowers are hovering near 40%, up from 15% at the start of the year. "Credit today simply does not exist," says former Economy Minister Roberto Alemann. On Aug. 8, Argentina's top breadmaker, Compania de Alimentos Fargo, missed a $1.5 million payment, signaling what may be the start of another dismal trend.
BOND WORRIES. And even the bluest of Argentina's blue-chips are now cut off from the capital markets. That's worrisome, because large businesses must roll over some $5 billion in bonds in what remains of the year. At the same time, supplier financing--in many cases the only source of credit available to small and midsize firms--has all but dried up. "Anyone delivering merchandise on credit today is taking a huge risk," says Alberto Grimoldi, president of Grimoldi, a leading shoe retailer and manufacturer with $63 million in sales last year.
Wage cuts, layoffs, bankruptcies--all of these are aggravating tensions in a country that has long prided itself as one of the most socially equitable in Latin America. In recent weeks, mobs of angry out-of-work citizens have intensified a campaign to block major highways in a bid to draw attention to their plight. Although the roadblocks are more of a headache for the government than for companies, they're contributing to the generalized fear that things could unravel at any moment. "Nobody wants a default, but I'm afraid it's already too late," says toolmaker dos Reis. The same can possibly be said for many of the companies that once made Argentina thrive.
By Joshua Goodman in Buenos Aires