ARGENTINA: CHALLENGES FACING THE ALFONSIN ADMINISTRATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00217R000500060003-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 26
• Document Creation Date: December 22, 2016
• Document Release Date: June 12, 2009
• Sequence Number: 3
• Publication Date: November 1, 1984
• Content Type: SNIE

Director of
Central
Intelligence
ti Secret
nti a~ ialle Facing
Alfonsin Administration
National Intelligence Estimate
Secret
SNIE 91-2-83
November 1984
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Copy 464
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SECRET
The Director of Central Intelligence
Washington. D.C. 20505
National Intelligence Council
3 December 1984
MEMORAND9M FOR: Recipients of Memorandum to Holders of
Special National Intelligence Estimate 91-2-83:
CHALLENGES FACING THE ALFONSIN ADMINISTRATION
"Ou to i : I Argentina's Credit Position
1. S nce the NFIB approval of captioned estimate on
27 Novemb r 1984, there has been a significant new development
in Argentina's relations ,.,;+h i
_r_
i i
ts
i
2. A
advisory
much of tj
situation)
loan arrangement reached between Argentina and its bank
ommittee and other creditors on 2 December 1984 reduces
e short-term uncertaint regardin Ar entina's financial
Since adequate trade credit lines
seem assn ed, Argentina s ability to obtain needed imports during
early 1985 is no longer a question mark. However, the ability of
the Alfonsin government to maintain sufficient compliance with its
IMF progra to allow continued drawings of its IMF and bank loans in
1985 remai s uncertain.
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MEMORANDUM TO HOLDERS
S N I E 91-2-83
ARGENTINA: CHALLENGES FACING
THE ALFONSIN ADMINISTRATION
Information available as of 27 November 1984
was used in the preparation of this Memorandum
to Holders, which was approved by the National
Foreign Intelligence Board on that date.
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THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, and the intelligence organizations of the Departments of State and the
Treasury.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
The Director of Intelligence, Headquarters, Marine Corps
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CONTENTS
Page
iii
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......................................................................................
SCOPE NOTE v
KEY JUDGMENTS .............................................................................. 1
........................................................................................
DISCUSSION 5
The First Weeks-A Quick Start .................................................... 5
Administration Character and Style ................................................ 5
Challenged by the Economy ............................................................ 6
The Domestic Scene ..................................................................... 6
......................................................................
The External Sector 7
Current State of Play .................................................................... 7
Troubled Relations With Key Political Actors ............................... 7
Civil-Military Relations ................................................................ 8
Alfonsin and the Peronists ............................................................ 8
Meeting Foreign Policy Objectives .................................................. 10
...............................................................................
Limited Gains 10
Improving Relations With the United States .............................. 10
The Soviet Union and Cuba ......................................................... 11
..............................................................................................
Outlook 11
Tough Choices for Alfonsin ......................................................... 11
Economic Uncertainty .................................................................. 13
Strained Civil-Military Relations ................................................. 14
Continued Peronist Intransigence ................................................ 14
Frayed Radical Coalition ............................................................. 14
Implications for the United States ................................................... 15
Indicators of Projected Outcome ..................................................... 16
Alternative Indicators ....................................................................... 16
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SCOPE NOTE
President Alfonsin was elected to a six-year term by a large margin
in October 1983. His initial prospects were examined in December 1983
in SNIE 91-2-83, Argentina: Challenges Facing the Alfonsin Adminis-
tration. This Memorandum to Holders updates that Estimate and
assesses the political and economic outlook for his government over the
next year or so. It focuses on President Alfonsin's performance and
prospects on these critical issues:
- The need to stabilize the domestic economy and come to terms
with international creditors.
- The dismantling of the armed forces' political power base and
the potentially catalytic effects this has on antigovernment
elements in the military.
- Relations between the government and its political opponents,
especially the Peronists.
- The course of Argentine foreign policy, including relations with
the United States.
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KEY JUDGMENTS
While Argentine President Alfonsin faces some near-term risk in
pursuing his political and economic objectives, we believe he will
remain in office for. at least the next year or so. Institutional disarray
among his opponents-the armed forces and the Peronists-and his
energy and personal dynamism are his strongest assets. Moreover, his
unflagging advocacy of democratic government has helped him to
identify his own survival with the survival of Argentine democracy,
which we believe has largely insulated him from the negative effects of
his mounting difficulties. We believe, however, that, to do more than
simply survive in office, Alfonsin will have to build on these strengths,
exert more decisive leadership, and overcome administrative difficulties
that have stymied the formulation of coherent policies.
We believe that Alfonsin's economic performance will largely
determine whether he ends his next year in office in a strengthened or
weakened position. Thus far, he has often subordinated economic
necessities to his political objectives, arguing that an economic austerity
program would pose a threat to Argentina's nascent democracy. While
this posture helped to bolster his position in the early days of the
administration, accelerating inflation eroded some of his popularity and
Even though Buenos Aires signed an accord with the International
Monetary Fund (IMF) in September and has taken steps to curb wage
and price increases and monetary growth, we believe that an acceptable
level of compliance with Fund terms is unlikely beyond early 1985.
This is primarily because Alfonsin is reluctant to take harsh economic
measures that he believes may promote recessionary trends and popular
resistance. We also foresee difficult negotiations with commercial
lenders for debt rescheduling even after formal approval of the accord
is obtained. We judge that even a delay in formal approval-scheduled
for December-is possible, which would further impede domestic
recovery in 1985 by limiting the growth of necessary imports. Without
new money-and banks so far have balked at providing the major share
of the $5.5 billion Buenos Aires contends it needs through the end of
projected an image of a government adrift.
1985-it is likely that Argentina will face temporary cash flow short-
On balance, we believe the odds are slightly greater than even that
the current IMF program will unravel before much of the money-
either from the Fund or the banks-is disbursed. In that event, we ex-
falls, selective production bottlenecks, and further interest arrearages.
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pect that Alfonsin, the IMF, the banks, and the industrialized govern-
ments would try to renegotiate the agreement sometime next year.
Under such circumstances, Argentina is likely to continue to "muddle
along from crisis to crisis" for the next year or so.
If Alfonsin continues to temporize in economic policy and, conse-
quently, Argentina falls out of compliance with its IMF program, new
credits may become unavailable. This may result in a moratorium on
interest payments and eventually a declaration of default by creditors.
Nevertheless, we believe that such a breakdown with creditors is
unlikely. Both the Argentines and the banks very much want to avoid
such a crisis. Alfonsin would not want to take on the long-term risks en-
tailed in a financial break with the West. Furthermore, foreign banks
apparently have little leverage on Argentina because of its favorable
foreign trade position, and thus they would seek to avoid a permanent
rift with Buenos Aires.
Concerning the internal political situation, we expect Alfonsin's
relations with the military to remain strained, but we foresee little
likelihood of any serious armed forces challenge to his administration
during the next year. Alfonsin has tried to maintain a balanced
approach in dealing with the military, moving forward with structural
changes and budget cuts while working to limit human rights investiga-
tions and consulting the high command on sensitive issues. Most officers
still believe Alfonsin's administration is dominated by leftists, but they
seem resigned to civilian rule and are trying to cope with the changes.
Moreover, while we cannot rule out more organized opposition, and
perhaps a local garrison uprising, dissidents remain scattered and lack a
figure around whom to rally. In our view, only a dramatic departure
from administration policy, especially on the human rights issue, would
galvanize antigovernment sentiments enough for the armed forces to
reassert themselves.
We also see little likelihood that the main opposition party, the
Peronists, will reach any meaningful agreement with the government,
despite Alfonsin's continued efforts to negotiate a political-economic
accord. They appear intent on exploiting Alfonsin's indecisiveness,
political miscalculations, and poor economic performance to help unite
their fractured party, and they have used their plurality in the Senate to
stall or force compromises on key legislation. The Peronists will
probably continue a dialogue and may at least temporarily acquiesce in
a mild austerity program. Nevertheless, we foresee continued labor
strife and increasingly intense antigovernment rhetoric as union bosses
face internal elections and politicians gear up for congressional elections
beginning early next year.
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Alfonsin has adopted a pragmatic foreign policy intended to
refurbish Argentina's international image. To this end he has searched,
thus far with limited success, for initiatives that will enhance his image
in both the West and the Third World. For example, he has tried to pro-
mote regional solidarity, democratic government, superpower disarma-
ment, and debtor relief. He has reached an agreement with Chile on the
Beagle Channel dispute and undertaken new initiatives to bring the
United Kingdom to the negotiating table to reduce tensions over the
Alfonsin has maintained the good relations with Moscow and
Havana begun by the military after the Falklands war.
Falkland Islands.
The Argentines have shied away from projects
that would allow a large, permanent Soviet presence
Alfonsin has sought a close relationship with Washington, and we
expect him to continue efforts to strengthen ties, play down differences,
and emphasize areas of common concern. As a result, we believe the Ar-
gentines will be sensitive to rebuffs of their initiatives, as well as to ef-
forts to press them on nuclear policy differences. Bilateral relations,
however, will be most vulnerable to tensions introduced by Argentina's
economic difficulties. The Alfonsin government expects US help in
resolving its financial problems as proof of Washington's support for
democracy.
A collapse of debt negotiations would be likely to prompt intense
Argentine efforts to win regional support for a confrontation with the
banks-though with little chance of success, in our view-and Alfonsin
would probably use the United States as a scapegoat. In a worst case, Al-
fonsin could be tempted to retaliate against US commercial and
financial interests in Argentina. Moreover, the subsequent financial
crisis would probably lead to new opportunities for Cuba and the Soviet
Union to ingratiate themselves in Buenos Aires with offers of political
support.F_~
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DISCUSSION
The First Weeks-A Quick Start
1. President Raul Alfonsin moved swiftly to imple-
ment campaign promises in the weeks following his
December 1983 inauguration, both to demonstrate his
leadership and to exploit the momentum of his victory
and the disarray among his Peronist and military
opponents. To bring to Argentina what the President
called the "rule of law," for example, he forcibly
retired several dozen members of the military high
command, restructured the hierarchy to subordinate
clearly the services to civilian rule, and initiated
investigations into human rights violations committed
by security officials during the antiterrorist campaign
of the late 1970s. Politically, he took steps to institu-
tionalize his electoral coalition and to build bridges to
the defeated Peronists, calling for a national unity
government and offering them posts in his administra-
tion. On the economic front, Alfonsin implemented
measures he hoped would break the inflationary cycle
and made initial contacts with domestic business
groups and foreign creditors. At the same time, he
moved to end Argentina's diplomatic isolation, pledg-
ing support for regional democratic forces and seeking
a major role in the Contadora peace process in Central
America.
2. In our view, however, Alfonsin's strategy, while
generating popular enthusiasm for his administration
and keeping his opponents off balance, fostered unre-
alistic expectations within both his coterie and the
electoral coalition. his
backers expected a quick turnaround in the economy,
without an austerity program; resolution of the foreign
debt problem; full investigations into human rights
abuses; and rapid moves to break the power of the
Peronist unions and the military. In our judgment, by
encouraging inflated expectations so early in his ten-
ure, Alfonsin left himself little maneuvering room to
alter his policies and increased his vulnerability to
of defending democratic government. Alfonsin contin-
ues to behave as though he is still running for office as
he endlessly stumps the country calling for national
unity and warning of the dangers of political particu-
larism. At the same time, he has dedicated consider-
able energy to further broadening his party's political
base, including efforts to win over the traditionally
Peronist working class. Key to his plans to build this
following
has been his effort to institutionalize his electoral
majority-including Radical and Peronist elements-
into what he has called the "third national move-
ment."I
4. Alfonsin's economic policy has also been shaped
by long and deeply held moderately left-of-center
Radical populist tenets. On the domestic side, the
President is morally and politically committed to
economic growth and real wage increases, especially
for those on the low end of the salary scale. Moreover,
most of his economic proposals have been aimed at
modestly redistributing income to the lower classes.
On the foreign debt issue, Alfonsin shares the Radical
belief that the current high rates of interest on loans
and commission fees to bankers are usurious.
5. Alfonsin's political and economic views have
struck a responsive chord with the electorate-recent
polls show he commands broad popular backing-but,
in our view, his single-minded focus on protecting
democratic government has also proved a liability.
While we had earlier estimated that Alfonsin would
effectively use his electoral mandate and the consider-
able powers of the presidency to follow up on his
initiatives, he has frequently
chosen to back off and search for compromise when
his measures have met resistance. This has been
especially true, for example, in dealing with the
Peronist-dominated labor unions. Moreover,
criticism from his opponents.
Administration Character and Style
3. Alfonsin has stayed close to the Radical Civic
Union Party's moderately left-of-center populist plat-
form, and we believe virtually all his policies and most
of the rhetoric have been driven by his overriding goal
putting the
protection of democracy above all other objectives has
encouraged Alfonsin to avoid making tough decisions,
especially on economic policy, that might alienate
elements of his constituency. At the same time, F
the President's
refusal to move decisively has reinforced the image of
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splits within his own Radical Party.
Challenged by the Economy
wage restraints. Moreover,
7. We believe that Alfonsin, largely because of
political and social concerns, has failed to develop any
consistent domestic stabilization program. He has re-
sisted implementing what he sees as potentially desta-
bilizing policies, such as large spending cuts and tough
he lacks the staff support necessary to
develop a realistic budget, and he has faced bureau-
cratic resistance to requests for detailed spending and
investment plans from bloated public-sector agencies.
As a result, his administration has developed little
more than a patchwork of inconsistent policies aimed
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at balancing competing interests. Further, while will-
ing to tackle the military budget, Alfonsin has tried to
head off labor unrest through large wage increases that
violated the government's original inflation fighting
plan. 0
8. These patchwork economic policies have pro-
duced some domestic recovery, but at the cost of
driving inflation higher. The Argentine Central Bank
reported a 3.3-percent gain in economic activity in the
first quarter, as real wage increases sparked an indus-
trial recuperation and strong foreign demand and
favorable weather led to another dynamic agricultural
performance. unemploy-
ment has eased, while heightened spending on social
welfare programs, according to the press, has also
contributed to improved living standards. Inflation,
however, has accelerated to over 600 percent in recent
months. Higher taxes, real wage increases, daily deval-
uations, import controls, and the government's failure
to restore fiscal and monetary discipline have com-
bined to. fuel an upward spiral. Although Argentines
have demonstrated the ability to cope with higher
living costs by resorting to moonlighting, the under-
ground economy, and financial speculation, inflation is
exacting a toll. According to press
reports, capital flight continues, spot shortages of goods
have emerged, and private investment is depressed.
Moreover, the Peronists have begun to make inflation
a domestic political issue.
9. An improved foreign trade position has been the
greatest economic bright spot, but the surplus is still
not large enough to meet the interest payments on the
debt. Booming agricultural exports and tough import
controls have resulted in a $3.5 billion trade surplus
for the first nine months of 1984, according to the
press. The administration has used increased foreign
exchange earnings to rebuild reserves to about $1
billion, to settle past-due trade payments, and, lastly,
to make enough interest payments to try to avoid a
downgrading by US regulators of loans to Buenos
Aires. In early November, however, the regulators did
downgrade private debt to the substandard level.'
These policies have now left the Alfonsin government
unable to reduce an estimated $2 billion in overdue
interest payments, inherited from the military. More-
over, Alfonsin has been unable to move forward in
rescheduling some $20 billion in debts and arranging
new lending to close a projected current account gap.
loans. We expect there will be problems in the debt
talks unless governments or international financial
institutions provide a large chunk of the $5.5 billion
needed. Moreover, we are not confident that Argenti-
na will be politically able to maintain acceptable
compliance with the terms of an IMF accord beyond
Current State of Play
12. Alfonsin is currently engaged in selling the IMF
accord to the Argentine electorate.
'"Substandard," according to the Department of the Treasury,
referred in this case to loans on which the interest was more than 90
days overdue.
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Troubled Relations With Key Political Actors
13. On the basis of Alfonsin's tough campaign
rhetoric, the strength of his electoral win, and the
disarray among traditional Argentine power brokers-
the military and the Peronists-we estimated that he
would move swiftly and decisively to curb the power
of the services and the Peronist-dominated unions. His
goal was to prevent a resurgence of historical ties
between military officers and the Peronists, groups he
holds responsible for Argentina's chronic economic
and political instability. Alfonsin has been less aggres-
sive in this regard than we estimated before, however,
because of difficulties in forming a coherent adminis-
tration, political miscalculations, and a hesitancy to
alienate key interest groups. The narrow defeat of his
critical labor reform bill in March was a further
setback
- The government's intention to reorient the mili-
tary away from its internal security role and
involvement in national politics.
- Their perception of the general leftist tone of the
administration and the influence of those they
regard as leftists.
Preoccupation with these issues and discontent at all
levels have increased steadily since mid-March. Finan-
cial stringencies and uncertainty have profoundly
affected morale, induced thousands of badly needed
noncommissioned officers to leave the military, and
deflected attention away from the task of rebuilding
the services.
Public manifestations by rightwing military
dissidents have also occurred in recent weeks.
16. We also believe that the disarray and budget
cutbacks in the services are adversely affecting mili-
Civil-Military Relations
14. We judge that Alfonsin has had some success in
bringing the military under civilian control by taking a
balanced approach on key issues, although relations
remain strained. In general,
he recognizes that the services are too weak
to resist strong reforms, but he also understands the
military's long-term threat to civilian rule and has
tried hard to avoid the appearance of routinely inter-
fering in military affairs. For example, the President
forced several dozen members of the military high
command into retirement, but left the lower ranks
alone and allowed the services to determine how to
implement budget cuts and changes in the command
structure. On the human rights front-the most sensi-
tive area in civil-military relations-Alfonsin has
sought to control the scope of the investigations and
trials, as well as public criticism of the armed forces.
At the same time, he and his Defense Minister main-
tain a steady schedule of garrison visits to hear griev-
ances and bolster morale.
15. Alfonsin's efforts have done little to assuage
military concerns, however, and most officers, while
acquiescing in civilian government, oppose most gov-
ernment policies. Armed forces grievances include:
- Insufficient pay compared to the private sector.
- Severe budget cuts that have forced cutbacks in
conscription and training and threaten vital mili-
tary-owned industries.
- Human rights investigations that could go be-
yond the senior ranks.
tary capabilities and readiness. For example,
flying time for combat pilots has been
reduced, naval maneuvers have been cut back, and
reductions in conscription have hampered all three
services. Moreover, in order to reduce operating ex-
penses and raise funds, the Navy has been forced to
consider selling several modern ships and submarines,
which military planners view as key in rebuilding the
post-Falklands Navy.
the government has shaved
un ing for ongoing military research and develop-
ment efforts and for investment in military owned
industries. The press reports that the administration
has, however, decided to allow continued military
control of key defense plants and, indeed, the adminis-
tration is supporting efforts to increase weapons ex-
ports as a way of moving these facilities toward self-
sufficiency.
Alfonsin and the Peronists
17. The Peronists apparently have not evolved into
the loyal opposition movement that many Peronist and
Radical leaders, including Alfonsin, envisioned in the
weeks following the election. Most Peronist political
and labor leaders have ignored the President's initial
calls for bipartisan government and sought to exploit
Alfonsin's vacillating policies and poor economic per-
formance. As a result, rather than folding under the
weight of deep and longstanding Peronist disunity and
administration pressures, the Party has used its plurali-
ty in the Senate and the threat of strikes to win
concessions on union reform and other key proposals,
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The Military Under Alfonsin
President Alfonsin has made considerable efforts to
curb the military's political power. At the same time, he
remains committed to the creation of a strong national
defense establishment.
Alfonsin has altered the military high-command
structure in order to subordinate the services more
clearly to civilian authority. In addition, he has under-
taken a restructuring of forces, sharply cut back opera-
tional funds, and initiated a reorientation of military
doctrine to deemphasize its internal security role and
stress defense against external aggression. His long-term
goal is to transform the armed services into a democrati-
cally oriented, highly professional military force capa-
ble of countering outside threats to Argentine sovereign-
ty.
For their part, service commanders, despite the
political and economic pressures wrought by the transi-
tion to civilian government, have in varying degrees
begun to implement lessons learned from Argentina's
defeat in the Falklands conflict in 1982. Leaders of
Argentina's Navy, which numbers about 36,000 person-
nel, shocked by the British sinking of the Argentine
cruiser Belgrano and also troubled by the Navy's inabil-
ity to counter the British "exclusion zone" around the
Falklands, have worked the hardest to address deficien-
cies. The addition over the next several years of eight
previously ordered ships and two modern submarines-
if not sold-will greatly enhance Argentina's deepwater
capability. The delivery since the war of the last nine of
14 Exocet-capable French Super Etendard aircraft pre-
viously purchased from France will further bolster the
Navy's ability to challenge hostile ships.
Argentina will soon have the best
equipped Navy in South America. Nevertheless, man-
power and financial constraints may limit its effective-
ness.
such as nuclear policy. Moreover, the constant work
stoppages, sometimes affecting millions of workers,
have forced the government to make wage and other
economic concessions that have further complicated
economic stabilization plans
18. We believe that Alfonsin's wavering on tough
policy decisions has cost him his postelection psycho-
logical edge and forced him into a conciliatory, if not
defensive, posture. This has been especially apparent
since mid-March, when his labor reform bill was
defeated and efforts to cut inflation began to flag. He
granted large wage increases to public-sector workers
Commanders of the 18,000-man Air Force have
continued, o upgrade the capa-
bilities of aircraft already in t eir inventories F_
Although the performance of the 85,000-man Army
in the Falklands war was the worst of the three services,
Army commanders thus far have taken only limited
steps to address shortcomings.
We expect the Argentines, despite sharp financial
constraints to pursue their cost-efficient reequipment
program.
At the same time, Argentina's difficulties in obtaining
materiel during the Falklands war and in its aftermath
have reinforced the military's determination to produce
essential equipment domestically. Senior officers are
hoping to expand the country's already-considerable
arms-manufacturing capabilities and to move forward
with existing and new coproduction agreements with
foreign firms-primarily in Western Europe. President
Alfonsin, concerned about military backlash against his
civilian regime, has supported these efforts. He has also
backed away from his earlier plans to turn military
industries over to the private sector. Finally, he has
supported an intensified arms export drive, which he
sees as a key way of providing additional sources of
revenue for the military as well as acquiring needed
foreign exchange for his government.
and concluded a short-lived political accord with the
Peronists. New discussions-ambitiously aimed at
forging a social pact with labor and business on
economic issues-began in July, but have made little
headway. The Peronists, themselves deeply concerned
about inflation and potentially increasing unemploy-
ment, may acquiesce in a mild austerity program, but
any long-term support for government economic poli-
cies is unlikely in our view.
19. Peronist politicians are preparing for the 1985
congressional elections-occurring in some provinces
as early as next March-and they probably will have
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to temper their antigovernment rhetoric to avoid
potential voter backlash. Earlier this year, one Peronist
admitted that the movement had actually lost popular-
ity since last December, underscoring its alienation
from the electorate and the difficulty inherent in
challenging Alfonsin's popularity. Moreover, recently
conducted polls of union and nonunion workers
showed little sentiment for the use of strikes to win
concessions. Furthermore, the partial failure of a
general strike in September, which surprised some
union leaders, clearly demonstrated their lack of ap-
peal
Meeting Foreign Policy Objectives
Limited Gains
20. Alfonsin has adopted a pragmatic foreign poli-
cy, and his goal has been to make Argentina and
himself key actors on the international stage. To this
end he has sought to:
- Break what he believed was Argentina's diplo-
matic isolation following seven years of military
rule and the Falklands war.
- Promote Latin American solidarity, human
rights, and democratic government in neighbor-
ing countries.
- End Argentina's military presence in Central
America and assume a role in the Contadora
peace process.
- Reach an accord with the Chileans on the Beagle
Channel dispute and reduce tensions with the
United Kingdom over the Falkland Islands.
21. By moving on so many fronts, Alfonsin was
probably searching for an initiative that would en-
hance his political stature at home and abroad, but
results have been mixed. For example:
- His leadership of the Cartagena Latin American
debtors group has probably heightened his pres-
tige in the Third World, but has hurt him in the
West.
- In the Southern Cone, Alfonsin has backed away
from openly supporting democratic opposition
groups, fearing that such support would damage
bilateral relations and provide the military in
those countries with an excuse to slow their own
transitions to civilian rule.
- In Central America, he continues to view
strengthened ties with Nicaragua as a key to
promoting regional peace, but he has become
disillusioned with the Sandinistas' domestic poli-
cies, and he has moved toward a more balanced
posture in the region.
- Domestic opposition has slowed his efforts to
reopen negotiations with the United Kingdom on
the Falklands, although he is likely to continue
his endeavors.
Improving Relations With the United States
22. In relations with Washington, we believe Alfon-
sin has sustained his initial efforts to strengthen ties,
avoid confrontations, and gain a close relationship.
e administration has also Publicly emphasized Ar-
Further, at times when
Washington would have een a us,
Alfonsin, especially on the debt issue
would not allow the debt issue to interfere in bilateral
relations.
23. Nevertheless, we believe potentially serious bi-
lateral irritants remain. Most important is the percep-
tion of the Argentine public that the United States can
influence the IMF and private bankers and can control
interest rates. Thus far, Alfonsin has avoided this tack,
and he responded positively to Washington's assistance
in arranging the interest payment rescue packages in
March and June. The President, however, initially
tried to internationalize the debt issue in order to
pressure the IMF and private lenders to show more
flexibility on loan criteria. The Argentines have also
sought to institutionalize their dialogue with the Unit-
ed States in an informal high-level hemispheric study
group, and they expect a positive response from
Washington. Buenos Aires's decision to deemphasize
Central America as a contentious point with Washing-
ton could be quickly reversed by any indication of an
expanded US military role. The Argentines have also
deliberately played down differences over nuclear pol-
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icy, but persistent US pressure, especially as Argentina
seeks to export its nuclear technology, could also
increase tensions.
The Soviet Union and Cuba
24. Alfonsin has maintained good relations with
Moscow and Havana. This trend was begun by the
military government after the Falklands war in 1982
to protect its grain market-Argentina sold over 40
percent of its 1983 grain exports to Moscow-and to
demonstrate independence from the United States.
Buenos Aires has had difficulty identifying Soviet
finished goods it could import to redress a growing
trade imbalance, but it has signed some contracts-
most initiated before the election-for Soviet partici-
pation in hydroelectric and port modernization proj-
ects.
Buenos Aires has also signed a new
trade agreement with Havana, which significantly
increased the credits available for Cuban purchases
over the next several years.
25. While the Soviets and the Cubans have reaped
commercial gains, in our view they have been unable
to parlay their relationship into greater political influ-
ence in Buenos Aires.
Outlook
Tough Choices for Alfonsin
26. In our view, Alfonsin has made considerable
gains during his first 10 months in office. We believe
the uncertainties and problems of his administration
primarily reflect his inexperience and the immaturity
of civilian political institutions. His charisma, constant
campaigning, and search for consensus have helped
sustain public support for civilian government and
have prevented the early coalescing of traditionally
antidemocratic forces. Moreover, while he has fallen
short of popular, as well as his own, expectations,
Alfonsin has taken important steps to redress the worst
abuses of his military predecessors and to subordinate
the services to civilian authority. At the same time, his
determination to continue a dialogue with the opposi-
tion, to move toward an IMF agreement, and to
maintain a tough stance against military dissidents
suggest that he is becoming sensitive to the limitations
of his electoral mandate. We believe he has demon-
strated willingness to accommodate domestic interest
groups and political rivals as well as to assert his
presidential authority on occasion.
lems.
27. We believe that, unless he more consistently
exercises presidential authority, however, he will have
major difficulties in overcoming the still-serious eco-
nomic problems Argentina faces. While his determina-
tion to subordinate economic policy imperatives to
political objectives has helped to build a prodemocra-
tic consensus and contain his opposition, it has hin-
dered implementation of sound measures and generat-
ed the impression of a government adrift. Overcoming
this image will require Alfonsin to use more consistent-
ly the powers of his office to contain divisions within
his administration and to overcome opponents in
Congress, the Peronist party, and the military. It may
also require a dramatic change in his closed leadership
style. Alfonsin's hesitancy to delegate authority and
inclination to focus on details have distracted him
from major issues, and his reliance on a small coterie
of advisers has shielded him from alternative views.
Moreover, we believe that he must make steady
progress in reorienting Argentine political institutions
toward accepting compromise rather than deferring to
the military for solutions to pressing national prob-
28. Despite these formidable political and econom-
ic challenges, we expect Alfonsin to remain in office
for at least the period of this Estimate. He has
generated considerable support for democratic govern-
ment, which many Argentines now believe is tied to
his survival. The perception that his removal would
mean a return to the chaos and repression of the 1970s
helps account for Alfonsin's ability to insulate himself
from the negative effects of his mounting difficulties.
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Economic Uncertainty
29. In our view, whether Alfonsin ends his next
year in office in a strengthened or weakened position
will depend primarily on his economic performance.
the President and his close advisers understand the
domestic and international implications of failing to
stabilize the economy. We believe that Alfonsin will
try to implement an adjustment program under IMF
auspices.
Maintaining compliance with a Fund accord
will be difficult, particularly when it becomes neces-
sary to enact budget, taxation, and other austerity
33. We believe that if bank negotiations for new
money begin to drag this will undercut prospects for
the economic recovery now under way. Without new
loans the country may experience temporary cash flow
difficulties. Further, we expect continued problems in
obtaining trade financing for imports and attracting
foreign investment, both necessary for industrial reac-
tivation and increased employment. As a result, we
anticipate that the Argentines will face selective pro-
duction bottlenecks and will again resort to temporary
suspension of payments to ease financial strains. =
34. The period through December 1984 will be
particularly difficult for Alfonsin because Argentina
will have to adhere to IMF conditionality without
receiving any funding until the program is formally
approved. Moreover, creditor banks will have to prom-
ise enough money to fund the program before the IMF
board of directors will pass on it. Further delays in
negotiations with private lenders could hold up initial
disbursals of IMF funds until early 1985.
35. We believe that the odds are slightly greater
than even that the current program will unravel
before much of the money-either from the Fund or
the banks-is disbursed. We believe that Alfonsin
wants the program to be successful, but pressure from
labor unions may convince him to relent on wage
constraints, a move that would jeopardize budget
deficit targets. Still, we do not believe that Alfonsin
would scuttle the Fund accord-repudiation would
remain the last of his options-and he would probably
seek a renegotiation of the agreement sometime next
year. Indeed, many banks also probably expect Alfon-
sin to ask for new terms. As long as he continues to
show his intentions to stabilize the economy, both the
Fund and the lenders-who recognize that Argentina's
strong trade position gives it some chance of repudiat-
ing its debt and surviving the financial community's
reprisals-are unlikely to abandon him. Thus, while
measures.
30. Meanwhile, high inflation is likely to continue
despite the IMF agreement, discouraging new invest-
ment and eroding purchasing power. Since over the
years the Argentines have become psychologically
adjusted to living with triple-digit inflation, it is
difficult to estimate the public's threshold for endur-
ing high rates of inflation over an extended period. At
a minimum, we believe inflation will continue to take
a toll on Alfonsin's popularity and may limit his
maneuvering room on a range of noneconomic issues.
Further, labor and the media would probably begin to
question the purpose of continuing economic sacri-
fices, and members of his own party probably would
urge Alfonsin to abandon the IMF track to preserve
social peace and avoid election year losses. His sup-
porters would also probably argue that squandering his
limited political capital on the debt issue would pre-
vent him from gaining congressional agreement to his
military reforms and foreign policy. Military restive-
ness would also be likely to increase as deteriorating
economic conditions intensified social unrest and de-
graded operational readiness and morale.
31. Even with a Fund agreement, we anticipate
slow and uneven progress in debt talks with foreign
banks and little likelihood of rescheduling some $20
billion in loans before yearend. Argentina will proba-
bly demand concessions similar to those granted re-
cently to Mexico and Venezuela, delaying a settle-
ment. In the meantime, Argentina will struggle to
keep its payments on trade credits current in order to
maintain access to such financing.
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debt talks probably will suffer temporary halts and
setbacks, we see only a 20-percent chance that they
would collapse altogether.
36. Despite good intentions on both sides, however,
we still see at least a slight chance that Argentina will
fall so far out of compliance that new foreign credits
would be withheld well into 1985. If this occurs,
Alfonsin would probably cease servicing interest pay-
ments, thus entering into a de facto moratorium. Since
this would reflect his failure to control the economy,
we would expect inflation to increase even further,
followed by severe import restrictions to preserve
foreign exchange. Subsequently, labor unrest would
escalate sharply as workers pressed for higher wages to
keep pace with rising costs.
Strained Civil-Military Relations
37. We expect disgruntlement within the military
to persist, and probably increase, in coming months.
Tensions probably will grow as human rights investiga-
tions and budget cuts proceed and general public
antipathy toward the military continues to erode
morale and discipline. This discontent may stir more
organized opposition, and perhaps a local garrison
uprising, especially in outlying areas. In our view, the
likelihood of more widespread and concerted resist-
ance will be mitigated, however, by:
- The lack of civilian support, a prerequisite for
coups in the past.
- The continued support of
senior commanders for civilian government and
their determination to professionalize the serv-
ices and implement lessons learned from the
Falklands defeat.
- Undiminished rivalries between the services and
within the Army that would be likely to preclude
a united front against the government.
- The lack of a leader around whom lower ranking
dissidents could rally.
- Alfonsin's sensitivity to military concerns and his
demonstrated willingness to make accommoda-
tions when possible and to remove officers who
challenge his policies.
38. We believe that only a radical shift in Alfonsin's
current posture toward the military-especially on the
human rights issue-could galvanize antigovernment
sentiments and move the services to attempt to reassert
themselves within the next 12 months. Nevertheless,
deeper budget cuts that threatened military capabili-
ties, the appearance of caving in on pending territorial
disputes, or social unrest sparked by deteriorating
economic conditions would also dramatically heighten
armed forces concerns. F__1
Continued Peronist Intransigence
39. We believe that the Peronists will continue to
exploit Alfonsin's vulnerability on economic and other
issues, which, along with internal Peronist party dy-
namics, will continue to block any meaningful political
accord. The Peronists will almost certainly persist in
opposing wage restraint, other austerity measures, and
debt negotiations. They are also likely to continue
their public criticism of Alfonsin's other policies,C
We expect opposition
from both labor and political leaders to intensify as
various congressional election dates approach in com-
ing months
40. In our view, however, the Peronists face consid-
erable risks in maintaining their intransigence. The
party remains deeply divided and fragmented, held
together only by constant opposition to the govern-
ment, and is losing popularity. Thus, we believe
Peronist union bosses will be forced to reevaluate their
strategy of staging strikes to force government conces-
sions. For his part, Alfonsin has been quick to turn the
Peronists' poor showing to his political advantage,
publicly accusing them of irresponsibility. Some Ar-
gentine and US observers have suggested that Peronist
failures will diminish Alfonsin's drive to accommodate
them. We believe that, at the Peronist convention
scheduled for later this year, party leaders must
achieve significant progress in purging extremists and
evolving into a responsible opposition or risk further
fracturing in the movement.
Frayed Radical Coalition
41. We also expect Radical divisions to worsen as
political and economic pressures continue to mount
and party extremists challenge administration posi-
tions. On the left, Alfonsin will continue to face
pressure from Radical youths-who have done consid-
erable damage to efforts to reach an accord with the
Peronists-and from human rights advocates demand-
ing more extensive investigations. The right wing will
continue to dispute the growing influence of the left
within the party, any of Alfonsin's initiatives in Cen-
tral America, and the ideological adjustments implicit
in Alfonsin's efforts to usurp the Peronists' political
base. We believe the President will continue to try to
balance the views from both camps, but he will ignore
for as long as possible entreaties from party leaders to
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call a party convention to elect a new leadership for
fear of bringing differences to a head. In our view,
internal rifts will continue to hamper the administra-
tion's ability to govern, and they could adversely
affect Radical efforts to exploit Peronist divisions in
the coming elections.F__1
Implications for the United States
42. We expect the trend of positive US-Argentine
relations to continue, principally because Alfonsin sees
Washington's good will as vital in overcoming his
economic difficulties and bolstering democratic gov-
ernment in Argentina. Opportunities for cooperation
will be greatest on international political issues. For
example, we expect Alfonsin to downplay differences
over Central America so long as the Contadora peace
initiative remains alive and, to continue, at some
political risk, to project a more balanced policy in the
region. The President's desire to resolve territorial
disputes with Chile and the United Kingdom also
coincides with US interests, and we believe he will
continue to reject renewed military harassment of the
British garrison on the Falklands. His decision not to
bolster opposition groups in neighboring countries
openly should also help US efforts to promote demo-
cratic government in the Southern Cone. =
43. On security issues involving the USSR and
Cuba, Washington's interests and those of the Radicals
will also coincide, but we see little likelihood that
Buenos Aires will back away from commercial ties
with Moscow or Havana. Alfonsin will continue to
search for alternative markets for grain sales, but the
Soviets probably will remain the major buyers for
some time. Alfonsin will continue, therefore, to pro-
vide Moscow with commercial opportunities to redress
the trade imbalance, including construction projects,
which will considerably diminish prospects for US
sales. We expect, however, that the Argentines will
also continue to resist an arms relationship with Mos-
cow. We foresee no change in Alfonsin's view that
trade with Havana is useful in demonstrating
independence from the United States and in discour-
aging the Cubans from backing renewed terrorist
activity in Argentina
44. Alfonsin's overriding goal of consolidating dem-
ocratic government in Argentina poses both problems
and opportunities for bilateral relations. His constant
campaigning and search for consensus has deflected
his attention from what many US bankers and officials
see as more pressing economic problems. His failure to
develop coherent economic policies, combined with
his human rights policy and military reforms, has
considerably heightened concerns within the armed
forces. Thus, Alfonsin will seek Washington's continu-
ing open support for his democratic government to
help keep would-be conspirators in check. He would
also probably welcome US military training slots for
his officers and increased service-to-service relations,
if it would help professionalize the services and steer
them away from antigovernment activities.
45. Bilateral relations are probably most vulnerable
to tensions introduced by Argentina's economic diffi-
culties. We believe that Buenos Aires expects Wash-
ington to help bolster Argentine democracy primarily
by taking extraordinary steps to help resolve its finan-
cial problems. Moreover, Alfonsin, the Argentine pub-
lic, and many in the Argentine Congress continue to
believe that Washington has the power to elicit coop-
eration from the IMF and US commercial banks and
to dictate interest rates. This makes the United States
an easy scapegoat for Alfonsin if negotiations with
creditors collapse, particularly if the breakdown was in
response to large hikes in the US prime lending rate or
to austerity "imposed" by the IMF and the banks.
46. The Argentines are likely to call, although
probably unsuccessfully, on other Latin American
debtors through the Cartagena group to act in concert
against lenders in the event of a breakdown on debt
negotiations. If the situation worsened-particularly if
banks or industrialized countries threatened sanc-
tions-Alfonsin might be tempted or forced by inter-
nal political pressures to retaliate against US interests.
For example, he may block remittance of profits of US
subsidiaries or freeze US assets in Argentina. In the
unlikely event of a debt repudiation, Washington
would have little leverage to bring Buenos Aires back
to the bargaining table, and it would open new
opportunities for the Soviet Union, Eastern Europe,
and Cuba to ingratiate themselves as they proferred
political-but no economic-support to help the Ar-
gentines weather the confrontation.
47. Beyond economics, other potential flashpoints
exist. Alfonsin will probably pursue the idea of a
formal hemispheric forum proposed earlier this year,
and indications that the United States may be unwill-
ing to participate in or support Buenos Aires's initia-
tive would bruise Argentine sensitivities. In addition,
while the President is trying to bring the nuclear
program under close civilian control, he remains alert
to outside pressure over Argentina's reluctance to
accept full-scope international safeguards. Buenos
Aires also expects continuing support in the United
Nations on the Falklands issue. Argentina's efforts to
export weapons to sensitive areas, such as the Middle
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We believe there is still some chance that, even with
an IMF agreement, the Argentines will not maintain
compliance with Fund terms and debt talks with
foreign banks will collapse.
Real or perceived
pressure from the industrialized countries, the Fund, or
lenders; a sharp, unexpected rise in prime interest rates;
or domestic political pressures, especially from labor,
could all scuttle compliance with an IMF adjustment
program. Such a breakdown-probably accompanied
by a temporary moratorium-would entail major dan-
gers, in our judgment.
We
judge that he would also become more assertive in
trying to coordinate joint action by Latin American
debtors, further increasing tensions with bankers. These
developments probably would cause banks to resist new
lending at a time when Argentina's cash strains would
be mounting.
We believe that, at this juncture, the likelihood that
Buenos Aires would halt payments of its debt would
increase,' although Alfonsin would carefully gauge the
domestic and international implications before making
such a move. The Argentines might first publicly
threaten such an action in an effort to convince banks to
extend new credit needed to cover interest payments. If
the banks held firm and retaliated by declaring Argenti-
na in default, Alfonsin might calculate-similar to the
military's decision to invade the Falklands in April
1982-that he could appeal to Argentine nationalism to
support the government's decision to confront foreign
Buenos
Aires would have adequate cash reserves to purchase
critical imports, and bankers would be hard pressed to
organize a supplier embargo effective enough to seri-
ously disrupt the economy. In addition, because 80
percent of Argentina's exports are agricultural products
and half the manufactured exports go to LDCs, they are
largely invulnerable to boycott. Moreover, depending
on the circumstances, Argentina would probably be
able to count on the support of many Third World
countries, as well as the Soviet Union, for moral, if not
financial, support.
Our projections show that the Argentine economy
could weather even a 50-percent reduction in imports
and continue to function. The greater danger is that an
inflationary psychology would emerge that would force
political changes. After an initial period of cooperation
induced by nationalistic fervor, Alfonsin's rivals would
probably soon distance themselves from the administra-
tion, and social unrest would probably increase. Offi-
cers would also become increasingly concerned about
intensifying civil disorders. As a result, Alfonsin's hold
on office could become more tenuous over time.)
East, could become a contentious issue. Further, a US
decision to expand its military presence in Central Amer-
ica would almost certainly provoke a sharp response.n
Indicators of Projected Outcome
48. The following are signs we believe would con-
firm our analysis that Alfonsin is likely to remain in
office over the period of this Estimate, but with only
moderate success in resolving Argentina's economic
problems:
- Talks with Peronists continue, but do not achieve
sufficient progress to curb opposition activity.
- Strike activity persists at about current levels,
with sporadic calls for large-scale stoppages.
- Military unrest continues at low levels, with some
efforts to organize a united front against Alfonsin
and with the potential for limited open hostility
toward the government.
- Despite the IMF accord, negotiations with pri-
vate lenders are slow and the administration has
difficulty implementing tougher policies.
- Rifts persist in the Radical Party with increasing
prospects for some losses in upcoming elections.
- Overall popularity of government slips, but Al-
fonsin shows demonstrably stronger leadership
and manages to sustain strong support for demo-
cratic government.
Alternative Indicators
49. The following are developments we would ex-
pect to see if Alfonsin's position were to erode more
significantly than we project:
- Negotiations with Peronists collapse, and they
consistently block legislation on a range of key
issues.
- Strike activity increases, with growing support
for general strikes aimed at undermining the
government.
- Alfonsin becomes increasingly indecisive and
vacillates on responding to unrest.
- Alfonsin clearly backs away from austerity meas-
ures, jeopardizing IMF and lending agreements.
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- Inflation stays well above an annual rate of 1,000 - Military discontent increases and coalesces across
percent for three months in a row and appears service lines.
likely to accelerate.
- Significant rightwing and leftwing terrorism
- Contacts between military and civilian groups
increase.
reemerges. - Active coup plotting begins.
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