ARGENTINE DEFAULT A LESSON FOR BRAZIL
Domingo Cavallo is the controversial former finance minister of Argentina.
He was interviewed for Global Economic Viewpoint by Dan Biers of the Pacific
Council on International Policy.
GLOBAL ECONOMIC VIEWPOINT: Is the pervasive pessimism over the
direction of Latin American economies justified?
DOMINGO CAVALLO: A justification is the default on Argentine debt,
because that could inaugurate a period similar to the one that Latin America
suffered during the '80s after the default of Mexico on its own debt.
But I think this time there is a high probability that the Brazilian leaders
and also the U.S. Treasury, the G-7 governments and the multilaterals
will learn the lesson from the Argentine experience and will not let Brazil
go into default.
If Brazil succeeds in reversing its unsustainable debt dynamics through
additional fiscal adjustments, and the markets respond by lowering the
spreads, the risk of a generalized debt crisis all across South America
will disappear, and therefore all of Latin America could enjoy again a
period of stability and growth like that of the '90s.
GEV: How likely are the prospects that Brazil can accomplish such
CAVALLO: I think it is very likely because Brazilian political
leaders, including those of the left, should read from the Argentine experience
that to look for default-induced cuts in the public debt forces larger
fiscal adjustments than otherwise.
In addition, the multilateral agencies, particularly the International
Monetary Fund, will eventually come to the conclusion that it is much
better to work side by side with a country that needs to conduct a debt
restructuring and make it an orderly process rather than letting the domestic
political forces decide to default on the debt.
GEV: So you're fairly optimistic on the situation in Brazil?
CAVALLO: I would say rather optimistic.
GEV: How can Brazilian President Luiz Inacio ''Lula'' da Silva
pay off Brazil's debt without hampering his ability to carry through his
promise to reduce poverty?
CAVALLO: He has to tackle some structural problems that remain
unsolved in Brazil. In particular, he has to implement social security
reform, which means, in practice, to reduce the benefits for the retired
public employees, in order to make room for financing poverty-reduction
programs. A reform like that can only be done by a leftist government
in power, otherwise, they would block it in congress, as they did with
Fernando Henrique Cardoso's government.
GEV: Do you think Lula has the will to implement such social security
CAVALLO: After looking at what happened in Argentina for not implementing
fiscal adjustment in time, I think he will try to do it in Brazil.
You know, I insist a lot that what happened in Argentina is very instructive
for political leaders, because the leftist and populist politicians in
Argentina continuously opposed adjusting down public-sector salaries and
pensions. The adjustment that was necessary represented 15 percent of
those salaries and pensions above $500 per month. The adjustment that
came with default was more than 30 percent in real terms, and it applied
not only to the public-sector employees and pensioners, but to all the
workers and pensioners in the economy.
In addition to reforming the social security system, it is very important
that Lula gets enough fiscal discipline in the states. That was precisely
the big problem that generated the crisis in Argentina.
GEV: It seems the economy is stabilizing in Argentina. What will
it take to get Argentina's economy really growing again?
CAVALLO: The key for Argentina is to re-create a sense of respect
for property rights, savers and investors. That is, to re-create the conditions
for a normal functioning of the financial and capital markets. Unfortunately,
the decision to look for a default-induced cut in both domestic and foreign
debt completely destroyed the saving and investment mechanism that had
been created during the '90s.
GEV: In retrospect, are there things you should have done as minister
of economy in 2001 that you didn't, such as being more aggressive combating
CAVALLO: In retrospect, I should not have entered the (Fernando)
de la Rua government as minister. By entering it I gave (current President
Eduardo) Duhalde and (former President Raul) Alfonsin and others the possibility
of transforming me into the scapegoat of the Argentine crisis, when it
was precisely their reluctance to facilitate the necessary fiscal adjustments
-- expenditure reductions in the provinces, cuts in salaries and pensions
-- that generated the crisis.
GEV: What policies should the United States take to help Argentina
and the rest of Latin America overcome the current difficulties?
CAVALLO: Just to pay more attention. I think that after the Argentine
experience, the attitude of the Bush administration and the multilaterals
is starting to be different with Brazil. They are announcing they will
support Brazilian efforts to find a solution without defaulting on its
debt. And I think that eventually, if necessary, they will work side by
side with Brazil to conduct an orderly debt restructuring.
GEV: How important is reaching a free trade agreement for the Americas?
CAVALLO: I think it is very important, because Latin American economies
need institutional anchors -- to help establish stable macroeconomic policies
and orderly political processes -- to the world. A free trade agreement
with North America, and also a free trade agreement with Europe, will
provide part of that institutional anchor.
(c) 2003, Global Economic Viewpoint. Distributed by Tribune Media Services
For immediate release (Distributed 2/10/03)