Drop in Tax Revenues Brings Fears of Devaluation

By Anthony Faiola
Washington Post Foreign Service

PUERTO IGUAZU, Argentina, Oct. 5 -- Six weeks after an $8 billion bailout to ease Argentina's roiling financial crisis, Latin America's third largest economy has
taken a sharp turn for the worse, renewing concerns about the government's ability to defend the currency and service its $132 billion debt.

New statistics show that Argentina fell deeper into its three-year recession last month. The lost ground produced investor panic that made this week one of the worst
in the history of the Buenos Aires stock exchange and sent the interest rates Argentina must pay to raise funds soaring to record levels. The recession worsened,
economists said, partly because of fallout from the Sept. 11 attacks in New York and Washington, but also because of a deepening political crisis in advance of
congressional elections scheduled for Oct. 14 that has undermined consumer confidence.

Fears that an economic collapse here could spread through Latin America and beyond led the International Monetary Fund to bolster its aid program to Argentina on
Aug. 21. Although that restored confidence temporarily, the fears sprang back to life this week as September tax revenues came in 14 percent below last year's
numbers. The result has rekindled concerns that Argentines might stage a new run on local banks.

A new spate of withdrawals at the banks in the coming weeks, economists said, is now the single largest danger to the Central Bank's liquidity and could yet force a
devaluation of the peso and trigger a default on debt repayments.

The turmoil is again buffeting other countries in Latin America, especially neighboring Brazil, which has seen its currency and stock markets dive and interest rates
soar.

The international effect has hit particularly hard in Puerto Iguazu, on Argentina's border with Brazil near Iguazu Falls, one of Latin America's most important tourist
attractions. As the Brazilian currency has fallen by 30 percent since the beginning of the year, tourists have moved to cheaper restaurants and hotels on the Brazilian
side of the border, forcing businesses in Puerto Iguazu to close. Even residents of this town of 18,000 drive to Brazil to shop for groceries and clothing.

The embattled government of President Fernando de la Rua tried today to reassure Argentines and foreign investors that neither a default nor a devaluation is in the
making. Economists said the IMF money has put Argentina on far better financial footing to withstand the crisis than it was before August. And de la Rua's cabinet
chief, Chrystian Colombo, added that in the event of a run on the banking system, the government would be willing to take the radical step of adopting the U.S. dollar
in a last-ditch effort to prevent a devaluation.

"Dollarizing would be the least costly move for the people," Colombo said. "Devaluation is the worst measure any government can take."

Dollarization, a route recently taken by Ecuador and other smaller nations in Latin America to help stabilize their economies, has long been debated in Argentina as an
alternative to its "convertibility plan." That system, in which the Central Bank keeps enough reserves in dollars to match every peso in circulation and maintain a
one-to-one exchange rate, was created 11 years ago to stabilize the currency and end hyperinflation.

The idea of going a step further and doing away with the peso has been dismissed in the past because of public opposition and a heated economic debate over
whether it might make things worse. But it is suddenly finding new support, experts say.

Under the current system, Argentines earn their salaries in pesos, but 85 percent of private and corporate debt -- from automobile to construction loans -- is
denominated in dollars. This means that a devaluation would likely lead to bankruptcies and spark an even deeper recession in the country that had long enjoyed the
highest standard of living in Latin America.

One thing not in debate, however, is that Argentina is in deep trouble again.

With the global economy slowing further after Sept. 11, chances of a quick recovery seem remote. In addition, new doubts have arisen about the government's ability
to stick to its zero deficit plan. Severe cuts in government salaries and retiree pensions last month to meet those targets caused a wave of protests and cost de la Rua
dearly in political support.

Now, with September tax revenues far lower than expected, even deeper cuts would have to be made. Not only could that provoke new waves of social unrest, but
many doubt de la Rua has the political strength to push through new austerity measures.

De la Rua, a lifelong politician elected president in 1999, has become isolated, and his center-left coalition is on the verge of collapse. That is largely because of the
looming figure of Economy Minister Domingo Cavallo, the capitalist firebrand who created Argentina's convertibility plan, and with whom de la Rua has cast his lot.
Cavallo's free market polices go against the beliefs of powerful, left-leaning politicians within de la Rua's party, who have been clamoring for Cavallo's resignation.

                                               © 2001