ARGENTINA: ECONOMY IN TROUBLE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83S00855R000100150001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 21, 2016
• Document Release Date: September 15, 2008
• Sequence Number: 1
• Publication Date: September 1, 1982
• Content Type: REPORT

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Directorate of Secret
Argentina:
Economy in Trouble
This assessment was prepared by
Office of African and Latin American
Analysis. Comments and queries are welcome and
may be directed to the Chief, South America Division,
This paper has been coordinated with the
Directorate of Operations and the National
Intelligence Council.
Secret
ALA 82-10123
September 1982
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Argentina:
Economy in Trouble
Key Judgments The failure of successive military governments to implement consistent
Information available stabilization policies has weakened the Argentine economy, thereby height-
as of17 August 1982 ening its vulnerability to unanticipated shocks. The reform program of
was used in this report.
former Economy Minister Alemann during the Galtieri regime proved too
short lived to restore economic order.
War-induced disruptions, as evidenced by government statistics, have
deepened Argentina's recession and pushed inflation higher, setting the
stage for a variety of new problems. Economy Minister Dagnino's series of
quick fixes in early July was aimed mainly at strengthening the govern-
ment's domestic political position, but it has adverse implications for the
economy. We project that:
? Any economic upturn resulting from the stimulative steps taken earlier
this summer will probably prove short lived, and inflation will accelerate
to the 200-percent level by the end of the year. 25X1
? Payments problems will persist, and some restructuring of Argentina's
$35 billion debt will be needed soon to avoid a foreign exchange crisis.
? Increased state intervention will exacerbate Argentina's deepset econom-
ic problems and cause increased inefficiency in the longer run.
We believe these economic pressures will make the planned transition to ci-
vilian rule increasingly difficult for President Bignone, who has lifted the
ban on political activity and promised elections for 1984. In the current po-
litical climate, accumulating economic frictions will likely spark renewed
political protests. The recently proposed wage increases, announced in late
August, suggest that the Bignone regime will resort to more populist
economic policies to assuage public discontent. Under these circumstances,
abrupt policy shifts and cabinet changes are likely to occur. Moreover,
military hardliners will exert growing pressure on Bignone to renege on
initial political promises and adopt repressive measures to avoid widespread
Policy miscalculations-increasingly likely in this turbulent atmosphere-
could cause Argentina's near-term economic performance to be worse than
we anticipated in our baseline scenario. We believe disruptions of exports, a
surge in imports, renewed capital flight, and a failure to restructure
Secret
ALA 82-10123
September 1982
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maturing debt would probably set theistage for a foreign exchange crisis
late this year. A formal debt rescheduling would likely follow, possibly
concurrent with a Mexican debt rescheduling. Moreover, failure to restore
fiscal discipline and a heavy dose of populist policies would exacerbate
We believe Argentina's current difficulties contain the seeds of serious
problems for its international economic relations. Argentine economic
setbacks have already spilled over to affect its Latin neighbors. Bilateral
trade and financial ties with Brazil, Bolivia, Paraguay, and Uruguay have
sis
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Outside South America, the ramifications of Argentine chaos could also be
serious. US commercial interests would be adversely affected by continued
Argentine exchange restrictions, the resort to more nationalistic policies, or
debt rescheduling. Major banks that have lent heavily to Argentina could
suffer serious profit declines, but we believe the international banking
system could manage with little damage if the problems of debt servicing
are addressed promptly. Even so, Argentina's external financial difficulties
could affect other LDCs borrowers' ability to arrange new credits. In turn,
its ability to resolve its own financial difficulties may be more difficult
Secret iv
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Contents
A Legacy of Economic Chaos
Galtieri's Team Brings Reforms
Policy Changes Now Under Way
Domestic Economy
Payments Accounts
5
Ramifications in Latin America
8
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Figure 1
Argentina: Economic Indicators
Real GDP Growth
Percent Change
Agricultural
Production
1970=100
Real Wages
1970=100
a Estimated.
b Projected.
11
Consumer Prices
Percent Change
Monetary Expansion 300
Percent Change
Manufacturing
Output
1970= 100
External Debt 50
Billion US $
11
1976 77 78 79 80 81a 82b
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Argentina:
Economy in Trouble
A Legacy of Economic Chaos
After seizing. power in 1976, the Argentine military
moved to undo the economic chaos wrought by the
Perons. Juan and Isabella Peron's populist policies in
the early 1970s-large wage hikes, massive social
spending-caused Argentina to face an economic
crisis by mid-decade. By early 1976, economic activity
was grinding to a halt, while inflation raged at an 800
percent annual rate during the first quarter. Payments
problems intensified, foreign reserves were being rap-
idly depleted, and default on the foreign debt seemed
imminent (figure 1)
The succession of military governments after 1976
pursued various reform programs to revitalize the
economy. Between 1976 and 1982, three stabilization
programs were enacted, each emphasizing different
goals.
? Economy Minister Martinez de Hoz, who served
from 1976 through early 1981, implemented eco-
nomic austerity and reforms during his first two
years in office to wring out hyperinflation, restore
external solvency, and lay the foundation for long-
term growth.
? In 1979-80, de Hoz shifted priority to reducing
inflation below the 100-percent mark, mainly by
slowing the rate of devaluation and encouraging
foreign competition.
? Treasury Minister Lorenzo Sigaut by mid-1981
returned to greater government intervention in the
economy by resorting to government-financed bail-
out programs and instituting multiple exchange
rates and import controls.
Initially, Martinez de Hoz's thoroughgoing reforms
proved successful in sparking economic recovery, con-
trolling hyperinflation, and eliminating the enormous
current account deficits of the mid-1970s. The abrupt
shifts in policy since 1978, however, have proved
counterproductive (table 1).
In the light of longer term trends, we believe that
inconsistency in Argentine policies has weakened the
economy and heightened its susceptibility to internal
and external shocks. Production has characteristically
been stop-and-go. Investment plans have been disrupt-
ed by the uncertainty resulting from frequent policy
shifts. Erratic government efforts to soften the impact
of ever-changing policies have boosted the money 25X1
supply at inappropriate times, thereby leading to
persistent triple-digit inflation. 25X1
Although there have been some successes in boosting
international earnings, tied largely to favorable crop
conditions, the growing overvaluation of the Argen-
tine peso has caused the current account to swing
back into deficit. Moreover, the failure to maintain a
realistic exchange rate has spurred heavy foreign
borrowing and contributed to sharp declines in foreign
exchange reserves because of sporadic speculation. F__]
Galtieri's Team Brings More Reforms
25X1
In late 1981, recurrent economic chaos and the lack of
clearcut political and foreign policies convinced Chief
of the Army General Galtieri that it was necessary to
move against incumbent President Viola. After a few
months of political maneuvering, the military junta
installed Galtieri as President on 22 December. Lack-
ing a well-defined economic philosophy, Galtieri
quickly indicated that he would depend heavily on an
economic team headed by Roberto Alemann, a propo-
nent of the free market and advocate of the sale of
unprofitable state-run enterprises.
Alemann moved quickly to introduce a series of 25X1
stringent austerity policies to bring order back to the
economy:
25X1
? Exchange rate policies were revamped to include a
free float for the Argentine peso and a unification of
the financial and commercial exchange rates in
order to eliminate peso overvaluation and avoid
severe speculative outflows.
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Table 1
Argentina: Changing Leadership 1976-1982
Apr 1976-Mar 1981
Apr 1981-Nov 1981
21 Nov 1981-11 Dec 1981
12 Dec 1981-22 Dec 1981
22 Dec 1981-17 Jun 1982
17 Jun 1982-30 Jun 1982
1 Jul 1982
Maria Estela Martinez de Peron Antonio Francisco Cafiero
Emilio Mondelli
Lt. Gen. Jorge Rafael Videla Jose Alfredo Martinez de Hoz
Lt. Gen. Roberto Eduardo Viola Lorenzo Juan Sigaut a
General Tomas Liendo
Vice Adm. Carlos Alberto Lacoste
Lt. Gen. Leopoldo Fortunato Galtieri Roberto Alemann
Alfredo Saint Jean Roberto Alemann
General Reynaldo Bignone Jose Dagnino Pastore
,Jorge Wehbe
? To lessen inflation, fiscal discipline was imposed by
freezing public-sector salaries, increasing taxes,
raising prices of public services, and reducing the
government deficit.
? Interest rates were decontrolled to attract capital
back into the country and further weed out ineffi-
cient operations.
The tough austerity measures contributed to a 6-
percent decline in real growth during the first quarter
of 1982. The severe industrial recession resulted in
increased unemployment and mounting bad debt. On
the positive side, however, the economic contraction
caused inflation to slow and resulted in balance-of-
payments improvements. After jumping 14 percent in
January, Argentine wholesale prices rose only 4.5
percent in March. Despite growing interest payments
on the foreign debt, Buenos Aires nearly eliminated
the current account deficit in the first quarter of 1982
because an export advance of nearly 10-percent and a
46-percent recession-induced plunge in imports.
Prior to the Falklands invasion, the Alemann reforms
had restored some stability to Argentine foreign ex-
change markets. The floating exchange rate helped to
avert repetitions of 198 l's monumental capital flights.
Although foreign bankers remained cautious, Argen-
tine borrowers were able to obtain foreign financing.
Most bankers; made routine disbursements on existing
lines of credit, extended new short-term loans, and
rolled over maturing debts. By early April, several
l
e medium-term credits were in the
new Argentin
process of being placed in the Euromarkets.
Falkland Conflict Intensifies Economic Woes
War disruptions, commencing in April, triggered new
difficulties on all fronts for the ailing economy.
According to government statistics, real growth de-
clined another 8 percent in the second quarter in the
face of a battery of mounting problems:
? Consumer demand, already squeezed by real wage
erosion, felll with the imposition of new taxes, sharp
increases in' the price of some staple products, and
declining confidence.
? New investment fell in the wake of cutbacks in
government-funded projects, the sharp rise in do-
mestic interest rates, and business uncertainty.
? Industrial production slowed because of the imposi-
tion of import controls and the loss of loanable funds
caused by withdrawals and capital flight.
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Abrupt shifts in policy undermined the government's
efforts to stabilize the economy last year. Efforts to
fight inflation by maintaining an overvalued
exchange rate deepened the recession begun in 1980
and caused payments problems. The fall in exports,
rising imports, and growing capital flight resulted in
a $2.0 billion current account deficit in the first
quarter of 1981 as well as a $3.0 billion loss of
foreign exchange reserves.
In April, the Viola government shifted gears. It
devalued the peso to encourage exports, restrain
imports, and stem capital flight. The large
devaluation and a large grain harvest resulted in a
65 percent reduction in the current account deficit in
the second quarter and stemmed its loss of
international reserves. Economic growth, however,
responded sluggishly because increased inflation
resulting from the devaluation contributed to a slide
in real wages.
Internal disagreements over the steps necessary to
revitalize the economy prevented the implementation
of an effective stabilization program during the
second half of 1981. Business confidence was
undermined by public ministerial disagreements on
the steps necessary to spur industrial recovery. In
response to sporadic currency speculation, the
government resorted to several uncoordinated
devaluations and exchange controls. Multiple
exchange rates were implemented last summer.
Interim President Liendo imposed interest rate
ceilings in December.
The consequences of these policy shifts were severe:
? Real GDP contracted 6 percent compared with a
drop of 1 percent in 1980.
? Inflation climbed to 120 percent from 88 percent in
1980, fueled by rising budget deficits and large
devaluations.
? International reserves plummeted by $3.8 billion
because of capital flight early in the year.
? Spreads on international loans to Argentina rose
from 0.75 percentage points to 1.25 percentage
points over the London Interbank Offered Rate
(LIBOR) as foreign lenders became increasingly
edgy.
? Inflation began to accelerate by June because in-
creased military payroll and supply spending under-
mined fiscal discipline, resulting in a rapid expan-
sion of the money supply.
Renewed payments pressures quickly materialized. In
the early days of the conflict, importers rushed to
build stockpiles, and capital flight became substantial.
To contain the immediate disruptions, Buenos Aires
implemented trade restrictions, thereby undermining
earlier foreign exchange reforms. The prolongation of
the conflict set back Argentine exports because of the
temporary cessation of Soviet grain purchases and
disruptions in normal export marketing patterns. Mil-
itary purchases also increased. Taken together, these
events caused a major loss in liquid foreign exchange
reserves, which US banking sources now estimate
stand at less than $500 million (figure 2).
As a result, debt service became more difficult to
manage. Buenos Aires' restrictions on debt repay-
ments limited access to new loans and caused difficul-
ty in arranging necessary rollovers. Argentina's exter-
nal financial position came under growing strain:
? A reluctance by some banks to roll over maturing
loans and the falloff in exports intensified immedi-
ate cash flow problems.
? A shorter term structure of the debt resulted be-
cause maturing longer term credits were replaced
with short-term instruments.
? The costs of servicing the foreign debt escalated
because of higher interest rate spreads and heavy
use of expensive short-term credits.
? The country's international creditworthiness was
seriously tarnished by delays in meeting interest and
principal payments.
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Figure 2
Argentina: Peso/Dollar Exchange Rates
and Dollar Reserves
1-10% devaluation, 3 February.
2-Viola assumes presidency, 30 March.
3-30% devaluation, 1 April.
4-30% devaluation, 1 June.
5-Peso set free to float-immediate
33% depreciation, 22 June.
6-Galtieri assumes presidency,
22 December.
7-Falklands invasion.
8-May devaluation.
9-Dagnino devalues commercial peso
and implements multiple exchange rates.
Policy Changes Now Under Way
Argentina's sinking economy made policy adjust-
ments inevitable after the Falklands fiasco and the
demise of the Galtieri regime at the end of June. New
President Bignone and Economy Minister Dagnino
found negligible political support for a return to the
tough stabilization measures of the immediate prewar
period. In fact, Dagnino radically reoriented
Alemann's economic strategy, and greater state inter-
vention will now replace the free-market policies. The
export promotion policies and import controls of
President Bignone's government also spell a shift
toward mercantilism, a single-minded trade-surplus
goal in international financial dealings.
On 5 July, Dagnino announced policies that aim at
reactivating the economy. To spur growth, he deval-
ued the commercial peso as a boost to exports,
granted wage hikes to the public sector, and increased
pensions. In the regulated credit markets, Dagnino
Exchange Rate
Thousand Pesos per Dollar
announced lower interest rates. Savers will receive a
1I I I[ III I I I I I I I I I I I I I I I I I II
0 1980 1981 1982
Foreign Reserves, Excluding Golda
Billion US $
I"
1980
a Data for May-Jul 1982 are estimated.
b Data for Jul 1982 includes $1.4 billion
in reserves frozen in U.K.
587498 8-82
Secret
maximum of, 5 percent per month on deposits. At the
same time, the government will also bail out Argenti-
na's heavily indebted businesses. The central bank
began offering eligible borrowers a fixed rate of
6 percent a month-well below prevailing inflation-
on all new loans as well as to refinance existing peso
debt.
Despite these stimulative policies, Buenos Aires still
maintains that it will control inflation. At this junc-
ture, the government is working to design agreements
with the private sector to hold down price increases.
Borrowers who agree to pass through only higher
material and labor costs increases for the next four to
six months will be treated to preferential credit on
existing peso loans. Beyond this, President Bignone
has ordered 10-percent cutbacks in the budget alloca-
tions for statIe corporations and has raised export
taxes. Moreover, the government believes that the
reduction in interest rates will reduce the need of state
corporationslfor funds-contrary to normal economic
laws- and the pressure to expand the money supply.
Major financial reforms have been initiated to insure
more efficient banking. Dagnino has created a paral-
lel credit market that he claims will supersede the
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regulated system by 1984. In this market, interest
rates will be freely negotiated, and deposits will not be
subject to reserve requirements. For the moment,
state banks have been cautioned to limit their partici-
pation in this market to 3 percent of their portfolios.
To improve the country's sagging payments position,
the government will control foreign exchange transac-
tions. Dagnino announced in early July that exchange
controls will remain in place to curb foreign competi-
tion and stop capital flight. He also returned to a
multiple exchange-rate system to promote exports,
restrain imports of goods and services, and prevent
renewed flight of capital. An initial 27-percent deval-
uation brought the commercial exchange rate to
20,000 pesos to the dollar. Henceforth, the commer-
cial rate will be set daily by the Central Bank while
changes in the financial rate will reflect a controlled
float. Because of the large premium in favor of the
financial rate, Argentine traders quickly became dis-
enchanted with the two-tier system. To smooth these
discontents, Dagnino has subsequently announced the
creation of a series of preferential exchange rates
mainly aimed at bolstering export incentives. Taken
together, Buenos Aires must now administer some 15
different exchange rates for meeting international
payments.
Dagnino has reiterated Argentine intentions to meet
external debt servicing obligations, but he failed to
spell out specific policies. Argentina owes an estimat-
ed $15 billion in debt service in the second half of
1982. The government's initial moves-inviting a
technical mission from the International Monetary
Fund and ending prior approval requirements for
private debt repayments-were apparently designed
to cultivate the goodwill of foreign bankers. Buenos
Aires has also initiated efforts at debt restructuring
by offering Argentine borrowers exchange rate guar-
antees if they extend the terms of forei n currency
loans. Argen-
tina might seek to refinance maturing credits by
arranging a series of medium-term jumbo loans. F_
Additional policy changes are likely. In late August,
Economy Minister Dagnino and Central Bank Presi-
dent Cavallo resigned to protest Bignone's proposed
wage increases and the refusal of the country's three
armed service commanders to lift financial sanctions
against the United Kingdom. President Bignone
named Jorge Wehbe, an attorney who lacks a well-
defined economic philosophy, as Dagnino's replace-
ment. At this juncture, we can only speculate that the
resignations probably foreshadow a shift toward more
populist and nationalistic economic policies.
Near-Term Outlook
The recent ministerial shifts will have little immediate
impact. Although Dagnino has lost power, he has set
in motion the forces which will influence Argentina's
economic performance over the near term. Any new
moves by Wehbe will take time to formulate, imple-
ment, and take effect.
Domestic Economy. Because there is substantial idle
capacity, we believe that Dagnino's new economic
moves will spark a brief economic upturn. The recent
wage hikes are stimulating consumer demand, while
savings rates set below inflation are already encourag-
ing speculative purchases. Argentine industrialists
will also benefit from export promotion policies, low--
interest
interest rates on new loans, and curbs on foreign
competition. Even with a strong rebound in the second
half of the year, however, real growth is likely to show
another contraction for the year as a whole.
25X1
Past Argentine experience-as well as sound econom-
ics-indicates that the collapse of fiscal discipline will
cause inflation to accelerate. According to the Argen-
tine statistics, consumer prices jumped 16.3 percent in
July, the largest monthly increase since early 1976.
Compared with the year before, consumer prices were
137.2 percent higher. Even if Buenos Aires can
successfully implement price controls, we believe that
consumer price increases are likely to approach a 200
percent annual rate by the end of the year. In the
worst case, however, the failure to implement effec-
tive pricing agreements and control the rapid expan-
sion of the money supply could cause Argentina's
25X1
price increases to
head toward rate
s substantially
higher than that.
25X1
Payments Accounts. Argentina's payments problems
abated temporarily because of the cessation of the
war. The large devaluation in early July and the
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Table 2
Argentina: Current Account Trends
Trade balance
-70
3,000
Exports
9,130
10,000
Imports
9,200
7,000
Net services and transfers
-3,835
-5,700
-2,600
- 4, 500
resumption of Soviet grain purchases caused an im-
mediate rebound in exports, while exchange restric-
tions tended to check import growth. Argentine bor-
rowers, encountered some
early successes in getting US banks to roll over
maturing principal and interest payments into new
short-term debt (table 2).
Despite these temporary improvements, payments
strains will grow. According to press reports, Argen-
tine farmers are now withholding grain for export
because of their dissatisfaction over the commercial
exchange rate and higher export taxes. As the recov-
ery gathers momentum, imports will also increase
because of the need to secure foreign producers' goods
and raw materials. Lacking reliable inventory data,
however, we cannot now anticipate the pace or
strength of the rebound in imports.
We can stipulate that the usual seasonal decline in
exports toward the end of the year, in combination
with large debt repayments, will add to foreign ex-
change stringencies. Even with exchange controls in
place, we believe the current account is now headed
toward a $2.7 billion deficit in 1982, compared to the
$1.0 billion earlier estimated. In addition, Buenos
Aires must guard against any resurgence in capital
flight which could quickly exhaust foreign exchange
reserves.
Debt Situation. The debt-servicing burden is becom-
ing unmanageable. The;; Central Bank reports that
Argentine borrowers must repay some $2.3 billion in
debt-servicing arrears, roll over about
$10 billion in maturing,loans, and meet $2.5 billion in
interest payments in the second half of 1982. Without
new credits and rollovers, Argentina will be hard
pressed to avoid a foreign financing crisis. Its avail-
able international reserves, the US Embassy believes,
are now less than $500'million, while some
$1.5 billion remain blocked in London by British
sanctions. To supplement these funds, gold holdings in
Switzerland could be sold for an estimated $1.6
billion. Argentina also has relatively free access to its 25X1
m the IMF (table 3).
assistance fr
International Monetary Fund quota, although the
government has publicly stated that it will seek no
o
We believe that Argentina still seeks to restructure its
external debt during 1982. According to the Argen-
tine financial press, Buenos Aires will try to enter the
Euromarkets! for three jumbo loans this year to
refinance maturing obligations. Two officials of the
Central Bank visited major world financial centers in
early August, to discuss;; the feasibility of such debt
restructuring.
The US Embassy now fears
that the resolution of the Argentine-UK sanctions
dispute-key to any effort to begin debt restructur-
ing-has been set back for months with the resigna-
tion of the financial team.
Unless Buenos Aires moves quickly to put its external
finances in order by refinancing, we expect that
Argentina will be forced formally to reschedule its
external debt. The recent resignations, shifts in eco-
nomic policy, large debt-servicing obligations, and
dwindling reserves have caused creditor confidence to
fall precipitously. Moreover, the IMF technical team
that recently left Argentina added to banker nervous-
ness by voicing public concern about the country's
25X1
25X1
25X1
25X1
25X1
25X1'
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Table 3
Argentina: External Debt and Servicing Burden, July-December 1982
External debt a
Debt servicing a
Of which:
a As of June 1982.
b Excluding commercial arrears.
ability to repay its foreign debt.
2,530 1,392 1,138
2,310 677 1,633
12,760 8,255 4,505
2,429 1,542 887
2,471 2,199 272
25X1
25X1
25X1
uncertainty that has resulted from the incredibly
complex series of new policies and the use of price
controls will undermine private investment incentives.
Moreover, credit availability will tighten in the face of
a new loss in bank deposits triggered by the interest
rate reductions. Failure to eliminate the large differ-
ential in favor of the financial peso will encourage
exporters to continue to withhold corn and sorghum
shipments.
The Risks
Dagnino's new economic moves were initially popular,
but have laid the foundations for longer term prob-
lems. Any economic recovery probably will be, as we
note, short lived. Accelerating inflation will quickly
erode consumer purchasing power. Rationing of nec-
essary imports will probably cause some spot short-
ages of raw materials and spare parts. The business
25X1
We believe that Argentina's deepset economic prob-
lems-domestic mismanagement, large public defi-
cits, price distortions-will be exacerbated by the new
policies. Financial bailouts, for example, will provide
immediate relief to the business sector, but over the
longer term will lock in industrial inefficiencies and
prevent consolidation of the fragmented banking sec-
tor. Even if Buenos Aires restores fiscal discipline
soon, government financial assistance to industry will
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enlarge the public deficit, thereby precluding a slow-
down in the money supply necessary to prevent infla-
tion from reaching the record levels of the mid-1970s.
Negative real interest rates will lead to a loss of bank
deposits and undermine future capital formation.C
Based on past experience, we believe that increased
government intervention will trigger growing distor-
tions and increased economic inefficiency. Heavy-
handed use of price controls is likely to undermine the
investment incentives necessary to develop Argenti-
na's rich resource base. Government-mandated wage
hikes in excess of productivity gains will increase unit
costs for domestic manufactures and erode the com-
petitiveness of Argentine exports. Financial bailouts
will prevent the wringing out necessary to revitalize
the industrial sector.
By resorting to populist policies the Bignone govern-
ment will also become vulnerable to demands for
additional economic concessions. Erosion of real
wages in the face of accelerating inflation has already
generated labor demands for new wage hikes and
sparked some strikes. Political parties are pressing for
increased public assistance to blunt losses in income.
The Radical Civic Union, for example, has publicly
called for subsidies for the unemployed. Businessmen
are lobbying for more state intervention and national-
istic economic policies.
Economic pressures will make the transition to civil-
ian rule increasingly difficult. Bignone, leading a
nation disillusioned and divided over the loss of the
Falklands, has promised to schedule elections for 1984
and has lifted the ban on political activity. In this
liberalizing political climate, accumulating economic
frictions-growing unemployment, strikes, and raging
inflation-will spark renewed demonstrations. Ac-
cording to the Argentine press, a group of housewives
recently demonstrated at the Presidential Palace to
protest the high cost of living. To assuage discontent,
the Bignone regime will probably resort to more
populist economic policies, but any political gains are
likely to be short lived.
In this turbulent climate, we doubt the Bignone
government will be able to formulate and to imple-
ment coherent economic policies. The lack of strong
presidential leadership, strife within the military, and
the clash of rested interests augur a period of weak
government. Abrupt and frequent shifts in ministers
and policies are likely. In the worst case, excessive
policy zigzags could lay the foundation for economic
crisis by paralyzing industrial activity, spurring infla- 25X1
tion, and causing the collapse of foreign investor
confidence.
If the economy slips out of control, Argentines are
likely to turn to large-scale political protests. Military
hardliners, fearing widespread violence, will pressure
Bignone to renege on initial promises and adopt
repressive measures.
Ramifications in Latin America
Argentina's economic difficulties are already causing
problems for its neighbors; bilateral trade and finan-
cial ties have) been particularly disrupted in the wake
of the Falklands crisis.
? Brazilian Government statistics indicate that its
exports to Argentina, its major Latin American
market, had fallen byl $120 million through May.
? The US Embassy in Montevideo reports that Uru-
guay's sagging economy has been buffeted by the
loss of Argentine tourist revenues and the inflow of
c
apital.
Argentine
Beyond this, !Argentina's external financial difficulties
are indirectly affecting?other Latin borrowers. Even
before the Falklands conflict, Western bankers were
becoming increasingly wary of Latin American bor-
rowers. The Bank for International Settlements re-
ports that about half of;new lending to Latin America
in the second half of 1981 consisted of short-term
credits. The war heightened bankers' anxieties and
has led to a closer examination of each country's
credit operations. Banks are continuing to curtail new
longer term syndicated'; loans and demanding higher
risk premiums for the region. Brazil, Mexico, Venezu-
ela, and Chile are vulnerable to any tightening of
Western credit.
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25X1
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Implications for the United States
The United States has a large commercial stake in the
Argentine economy. We estimate that:
? US banks and corporations hold $13 billion of
Argentina's external debt.
? US multinational corporations have $2 billion in
direct investment in plant and equipment.
? US businesses exported $2.2 billion in 1981 against
some $700 million in import purchases.
Debt servicing will pose the major near-term risks.
With limited reserves, Argentina remains vulnerable
to serious payments difficulties because of export
shortfalls, import surges, or renewed capital flight.
The failure to implement necessary stabilization poli-
cies is increasing tension between Argentina and its
external creditors, making debt relief more difficult to
obtain. The ultimate resolution of these financial
difficulties is now unclear, but several scenarios are
possible:
? The US Embassy's preliminary assessment in early
July indicated that Argentina would probably mud-
dle through its financial difficulties, moving from
minor crisis to minor crisis. In a recent update,
however, the Embassy projected that Argentina
would now do well just to meet interest payments.
? We believe that Buenos Aires will try to restructure
its external debt, but the prospects for success are
dim. If this effort fails, Argentina will attempt
formally to reschedule its external obligations, prob-
ably by the end of the year. The primary risk in this
scenario is that it would entail difficult policy
concessions to lenders, thereby heightening social
and political pressures.
? Under the worst scenario, Argentina would declare
a debt moratorium for several months in order to
work out a rescheduling or, failing that, be declared
in default by its creditors.
During the height of US support for the British
Falklands policy, there was a serious risk of direct
reprisals against US businesses. This remains a lin-
gering threat, the Embassy believes, particularly if
US banks force the country into default. Otherwise,
the prospect that Buenos Aires will take reprisals is
rapidly diminishing, because the government is inter-
ested in normalizing relations with the United States.
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More worrisome now is the prospect of resort to 25X1
nationalistic economic policies to prevent a severe
deterioration in the country's balance of payments.
Increased tariffs, import quotas, restrictions on divi-
dend payments or capital repatriation, and deliberate
slowdowns in interest and principal repayments would
adversely affect US commercial interests. Moreover,
the US Embassy reports that deep Argentine resent-
ment could increasingly weigh against US companies
in the award of major government contracts.
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Secret
Secret
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