Beyond Argentina's Default Drama

The country's private sector is in a tailspin as well

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, with Argentina's economy mired in a three-year recession, he is struggling to stay afloat. These days, instead of turning out rubber rollers for printing presses, the seven workers at his tiny factory on the outskirts of the capital keep busy by performing mundane tasks like repainting the shop-floor bathroom. Earlier this year, when he didn't have enough cash to cover the payroll, dos Reis, 60, pledged his home as collateral for a $45,000 loan. "At any moment I could lose everything," he says.

DRACONIAN. As investors the world over speculate whether Argentina will default on its $130 billion debt or devalue its dollar-pegged peso, the economy is caught in a tailspin. Interest rates are soaring, capital flight is intensifying, and consumer spending has plunged to new lows. The slow-motion collapse of the private sector has been overshadowed by the government's scramble to shore up the public finances. Economy Minister Domingo Cavallo has imposed draconian spending cuts in a last-ditch effort to erase a pernicious fiscal deficit. And he recently persuaded the International Monetary Fund to give Argentina $8 billion in new money, on top of the $40 billion 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 businesses hedge their peso positions in preparation for the worst. Meanwhile, Argentines are emptying out their bank accounts. Close to $9.5 billion, or roughly 10% of all deposits, has fled the banking system since July 1. "We 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 economy. No chance: Consumer confidence has been battered by rising unemployment and higher taxes. Alto Palermo, which manages some of the country's leading shopping malls, saw sales fall 17% in July--a stunning decline considering this is the month in which all Argentine workers collect their midyear bonuses. "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.

SALARY CUTS. Companies across a variety of industries are cutting salaries, with little resistance from Argentina's normally feisty unions. Workers at Ford, Volkswagen, and Fiat have had to swallow 35% reductions in wages during periods when assembly lines are idle. Overall unemployment rose to a six-year record 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: The prime rate is now hovering at near 40%. "Credit today simply does not exist," says former Economy Minister Roberto Alemann. On Aug. 8, Compania de Alimentos Fargo, a top breadmaker, missed a $1.5 million payment on its debt, signaling what could be the start of a worrying trend.

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. Mobs of angry out-of-work citizens have intensified a campaign to block major highways in a bid to draw attention to their plight. The roadblocks are 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. It may also be late for many of Argentina's companies.

By Joshua Goodman in Buenos Aires

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