International Suppliers Cut Shipments After Default

By Paul Blustein
Washington Post Staff Writer

BUENOS AIRES

How about some Heinz ketchup to slather on a hamburger, with a mug of Miller Lite to wash it down? Sorry, says the manager of a popular Buenos Aires restaurant,
but those items are no longer being served here. They're imported, and the supply of many foreign goods to Argentina is being choked off -- a problem that can be
much worse than an inconvenience.

Printer cartridges have disappeared from store shelves, forcing some offices to reduce printing to a minimum. Argentine wineries face such a critical shortage of cork
from Portugal that their trade associations warned this week of an "imminent danger" to the industry's exports of fine wine. Ford Motor Co.'s Argentine factory had
to suspend production for a few days because some of its suppliers couldn't get imported components for door locks, armrests and other parts.

In today's global economy, countries pay a steep price for breaking their promises. That lesson has been driven home in ways large and small in Argentina over the
past couple of months, as the government defaulted on its debt, blocked Argentines from paying obligations to foreigners and stopped pegging the peso to the U.S.
dollar. The import drought is just part of the punishment Argentina is undergoing.

The payment and pricing system is in chaos, with bank accounts partially frozen and companies scrambling to determine what to charge for their products as the
peso, which has fallen to about half its previous value against the dollar, swings unpredictably on foreign-exchange markets. For example, the Argentine operation of
Deere & Co., the agricultural equipment company, will sell farmers tractors or combines only if payment is in dollar bills (and that's a lot of greenbacks -- the
machines can cost tens of thousands of dollars). Those offering any other form of payment, including pesos, are turned away. The only exception is if the customer
has a legal bank account abroad, and so can send payment in dollars to Deere's headquarters in the United States.

The current rate of economic decline is shocking, even for a nation already suffering from a prolonged recession.

Data for the past two months show how rapidly the slump is deepening: Industrial production fell 18 percent in December from the same month in 2000.
Construction was down 36 percent and shopping-mall sales fell 35 percent. As for unemployment, which was 18.3 percent in October, the last time it was officially
tallied, nobody knows precisely how high it has risen. The economy minister, Jorge Remes Lenicov, recently estimated that the jobless rate now stands above 22
percent.

"We thought we were in bad shape before. Now we're almost nostalgic for October, when unemployment was only 18 percent," said Federico Thomsen, senior
economist at ING Barings in Buenos Aires. "Then your main concern was job uncertainty. Now you also have uncertainty about your savings . . . and the value of the
peso. This is why there is so much protest in the streets. It's really the floor moving under people's feet. You don't have anything that's solid or predictable."

The recession, of course, was the main reason Argentina went the default-and-devaluation route. For a decade, the government sought to banish the country's
inflationary demons by guaranteeing an exchange rate of one peso for one dollar. In December, the government finally buckled under the strain of paying high interest
rates on its $142 billion debt and the cost of propping up the peso, which made many Argentine products too expensive to compete with foreign-made goods.

Default and devaluation, however, are painful options. As events of the past few weeks have shown, the result is a destruction of economic arrangements that throws
all sorts of commerce into upheaval. Although the economic turmoil may abate before long, Argentina's prospects are clouded by myriad worries, including the
possibility of renewed social unrest of the sort that toppled two presidents in December.

One of the most immediate problems is the reluctance of foreign firms to ship goods here, which arose in early December when the previous government imposed
strict controls on payments abroad to keep money from fleeing the country. The controls have been eased recently, but even relatively large companies report
difficulties in getting what they need from overseas suppliers.

Delays in shipments of imported materials have nearly caused shutdowns at Mirgor, a maker of air-conditioning and heating systems for autos. "When our suppliers
were consulting banks in the U.S. or Europe, asking about giving credit to an Argentine company, they were told, 'Maybe the company could be all right, but the
country, since it declared a default, is a big risk,' " said Fabio Rozenblum, Mirgor's director of sales and marketing.

"Every day we have people calling desperately abroad, telling suppliers we are finding ways to sort out the [payment] problems," Rozenblum said. "You can't work
like that every day. We've solved most of the problems because we're bigger than other companies in the market. But most of the suppliers who have been patient
with us are now asking for letters of credit, which are not available. This is going to be a big problem in coming weeks and months."

The worst mess is in the banking system, where credit has dried up for the loans needed to grease the economy's wheels and enable businesses to expand.

Argentine business loans, home mortgages and deposits have long been routinely denominated in dollars. But under the "pesofication" program adopted by the
government of President Eduardo Duhalde, most businesses and workers who borrowed dollars from banks, and whose income is in pesos, are getting a break by
being allowed to repay their loans in the same amount of pesos as they owed before. Most dollar depositors, whose savings have been locked up in the banks to
prevent a disastrous run, are slated to get their money back in pesos at a rate that partially compensates them for the impact of the currency's depreciation.

The upshot is that depositors are outraged, and many of the nation's banks appear headed for insolvency, a huge problem not only for bankers but also for
businesses that depend on a well-functioning credit system.

"Assume you are Argentine, with some pesos or dollars. Would you ever deposit them again in any Argentine bank?" said Miguel Di Stefano, general manager of
Deere's Argentine subsidiary. "No, you will keep your money, or send it abroad to a bank outside Argentina. Now, if banks here don't get deposits, I wonder how
they will get money to lend."

After a disastrous 2001, the worst for agricultural equipment sales in Argentina in decades, Deere's Argentine unit, which makes engines and sells finished equipment,
hoped this year would be a lot better. Some factors are operating in the company's favor: Argentine grain farmers are enjoying one of their most bountiful harvests
ever, and their exports will get a major boost from the cheaper peso.

"But the lack of credit is going to be a big problem for the future," Di Stefano said. "If there are no financing sources, the equipment that is sold will be low, despite
the good crops."

Other forces, such as the decline in the peso, are pushing prices upward, threatening to rekindle inflation.

Grimoldi SA, an old-line Argentine shoe company, uses imported polyurethane to make soles. Although it can still get the supplies it needs, its suppliers haven't
settled on the price yet and this much is clear: In peso terms, the cost will be much greater, which will force Grimoldi to raise the price of the shoes it sells to
Argentine consumers.

"The guys who sell it, Dow Chemical and others, still don't know if they should charge at 1.4 or two [pesos] to the dollar or what," said Alberto Grimoldi Jr., the
company's manager in charge of finance and administration. "Then there are the guys who sell us leather, which is an exportable good. They prefer to sell outside of
Argentina, where they can get dollars and a better price in peso terms. If they sell in Argentina, they want to charge 30 percent or 40 percent more than what the
price used to be.

"In January, we couldn't increase prices because people would have burnt our stores," Grimoldi continued. "But by the middle of March, there will be increases. It
will be a mess. I don't know if people are going to understand it."

If all goes according to the government's plan, Argentina will follow a path akin to that of Brazil in 1999. Like the Argentines, the Brazilians were forced to devalue
their currency amid widespread predictions that the economy would crash and inflation would soar. But with the help of a loan from the International Monetary Fund,
and Brazil's central bank, which kept a tight lid on the money supply to hold prices in check, the country staged a recovery. Argentina is likewise negotiating a new
IMF loan.

"Brazil had a very shaky start in the first two months after its devaluation in January and February 1999," observed Martin Redrado, a top economic official in
Argentina's foreign ministry. "But once they had a good fiscal program in place, with solid budget and tax-collection estimates, they got the approval of the fund and
stabilized the economy. That is what Argentina is trying to do."

But although an IMF loan might help enormously in shoring up the banking system and giving the government the resources to defend the peso, the fund has so far
insisted that the Duhalde government must take a number of politically painful steps to put economic policy on a surer footing. The question looming over all of this is
whether the country's protesters, who were emboldened by their success last December, will lose patience and rise up to force yet another change in regimes.

"I don't expect it to happen, but we are risking a social explosion," said Arnaldo Musich, a director at Argentina's biggest steel company. "That is my first worry. It is
the first worry of every businessman in Argentina."

Special correspondent Brian Byrnes contributed to this report.