Online Extra: Q&A: "We've Finally Bitten the Bullet"

Martin Redrado's job is to rebuild international confidence in Argentina's economy. Here's what he thinks it'll take

Martin Redrado is Argentina's new secretary of international economic affairs at the Foreign Ministry. The Harvard-educated, 40-year-old economist until recently was the chief economist at Fundacián Capital, a Buenos Aires think tank. Redrado, who worked five years for Salomon Brothers in the U.S., is well known in international financial circles. In the early 1990s, he was asked by then-President Carlos Menem to head Argentina's National Stock Exchange Commission, where he revamped the country's capital markets regulations.

Redrado's task now will be to help explain Argentina's devaluation and debt default to skeptical foreign investors and governments. Redrado spoke with BusinessWeek Latin America Correspondent Geri Smith and Argentina Correspondent Joshua Goodman a few days after the devaluation, on his second day on the job. Here are edited excerpts of their conversation:

Q: What will be your message to investors and trading partners?

A:

I'm just basically trying to show that Argentina is not isolating itself from the rest of the world, that this is not a backlash against free market economics in Latin America. Unfortunately, due to a major inconsistency in our macroeconomic policy over the last decade -- a rigid monetary policy with an expansionary fiscal policy -- Argentina has come to a crisis where we have no credit. We have lost substantial credibility because of a lot of improvisation of economic policy. So, unfortunately we need to [rely only] on ourselves now and look inwards to try and put together a macroeconomic policy.

Q: What does Argentina have to do immediately to win back credibility?

A:

We need to show three things at work: First, we have to present a balanced budget. That's unavoidable for Argentina in this situation. Second, we have to put forward a debt-restructuring plan that is serious, sustainable, and sensible for our foreign creditors. Third, we need to have the backing of international multilateral organizations.

Q: Why should the world believe Argentina will have the discipline to cut its fiscal deficit?

A:

Your point is well taken: Argentina has a credibility gap. It needs to deliver [on its promises] to show the world that this time it's serious. Why is Argentina going to be serious this time? Because it has no credit.

Q: Argentina has been in a deep recession for nearly four years. There is 20% unemployment. How are the devaluation and default going to help reactivate the economy?

A:

There is a lot of idle capacity, and a lot of repressed consumption. Industry has been working with no inventories and needs to renew its stock of raw materials. If there is economic certainty and a tough fiscal program, and if Argentina has backing from multilateral organizations to support the exchange rate and not have an overshooting [of the exchange rate] that would bring more misery to the streets, it can work.

As you know, when devaluation is without control, real salaries drop dramatically, and we could face the same scenario as Thailand or Indonesia in 1997. Unfortunately, we lost a lot of reserves to keep the exchange rate afloat, almost $15 billion in the last year, but finally we've bitten the bullet.

The only way to grow is via investment. We've taken the first step [devaluation] to improve relative costs. Argentina was expensive. The only competitive advantage we had was oil. The cost differential we had in terms of labor, tax, financing, and transportation costs [was prohibitive]. So Argentina has moved to improve the investment climate by having a better set of relative prices. Now we need to deliver on the other areas.

Q: How much support does New President Eduardo Duhalde have for his economic emergency measures? Congress seems divided and the public is furious.

A:

One of the things this administration has is "governability." Unfortunately, the last administration, of President Fernando de la Rua, was crippled when Vice-President [Chacho] Alvarez left the coalition. Now, you have a strong government with strong support from both sides of the aisle, which assures you legislative majority to carry out the reforms. So I expect the budget will be rapidly approved by Congress. That will show that we have political support. And then Argentina will have to show, on a month-to-month basis, that it's really doing its homework.

Q: What's your timetable for tasks Argentina must do in the coming months?

A:

The first three months Argentina needs a balanced budget, needs to start showing a proposals to our creditors showing that this is a temporary moratorium on our payments, not a default. And start talks with the IMF.

Domestically, we need to tame any inflationary outbursts that may happen. The memory of hyperinflation is still there [from 1988], and many people have marked up prices. One of the things that made this country go into a depression was the shrinking of the monetary base during the last year. The money circulating in the economy came down from 11.5 billion pesos to almost 8.2 billion pesos. People will raise prices, but they won't be sustainable [because there's little money in circulation], and they'll have to come back down.

Q: What hopes do you have for getting help from the IMF? They've bailed Argentina out on numerous occasions but they precipitated this crisis by refusing to disburse $1.3 billion in December because Argentina missed yet another fiscal target.

A:

The Minister of the Economy will visit Washington at the end of the month or the first days of February. It will probably take at least 30 to 45 days, but in the meantime the IMF will look at the fiscal numbers, the performance of January and February, to see how serious this government is.

Q: A lot of people in Washington and throughout Latin America fear political contagion through the region.

A:

It's clear there will not be a ripple effect as happened in Mexico in 1982 or 1995, or Russia in 1998, or even Brazil in 1999. There won't be that effect, because...everyone knew that Argentina finally was going to throw in the towel and was prepared.

But I think what hasn't been measured is the political backlash this may have. I think the [Bush] Administration and the IMF are trying to put forward what is very grandiosely called the New Financial Architecture, trying to bring creditors into the picture and not having the IMF as a lender of last resort, bailing out everybody else. But clearly there is no textbook on the steps that need to be taken [on the social and political side].

Q: For 10 years, Argentina offered very attractive investment conditions. Now, that has changed completely. Your job is to calm down investors. What are you going to tell them?

A:

We need to show fiscal solvency first, to give predictability to investors. We need to have a balanced budget, not for one month, not for two months, but for the foreseeable future. Second, [we need] a debt-restructuring plan that makes repayment manageable. It will take time to have that in place. Credibility is lost immediately, and regaining it is a day-after-day process, so it's not going to happen overnight.

Q: Has this crisis pushed you out of the U.S. arms and into Brazil's arms? Argentina had been talking about negotiating a trade agreement directly with the U.S., bypassing [regional trading bloc] Mercosur.

A:

That was an idea in the imagination of some people in Argentina who believe that our country is the center of the universe. You need two to tango, and the U.S. never made the pledge of direct negotiations. Some people think simplistically that with a trade agreement with the U.S., Argentina would be immediately rich.

What's important for the U.S. in Latin America is Mexico and Brazil. People who think that the U.S. turned its back on us are miscalculating the weight we had in the region -- we're not Brazil or Mexico. If people are disappointed, it's because they don't have their feet on the ground. For Argentina, there was never a signal from the U.S. that there would be backing for dollarizing our economy. It was all more a case of wishful thinking [on the part of some Argentine think tanks].

Q: Argentina earned Washington's thanks when it sent troops to help in the 1991 Gulf War. But why, in the midst of this financial crisis, is Argentina sending peacekeeping troops to Afghanistan?

A:

It is a signal and a gesture that Argentina is not isolated from the rest of the world, that despite our problems we continue to be involved. It will probably be mostly health-related aid.

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