Nestor says:
> > NY Times, November 24, 2000
> > With No Hope for Economy, Many Argentines Are Leaving
> > By CLIFFORD KRAUSS
>[...]
> > Government officials and some business executives are beginning to say this
>> funk is self-fulfilling, and they blame it for the country's inability to
>> recover from its deep two-year- old recession. With foreign trade a mere 9
>> percent of the economy, these experts note, Argentina depends on the
>> spending of its own consumers to grow.
>
>This is the standard explanation by the worshippers of God Market
>(that is, of the
>imperialist order). We are doing everything OK, but these stupid
>Argentinians, so
>gloomy, don't simply realize that they have all the opportunities
>open before them.
[snip]
It might please Nestor to see Paul Krugman becoming anxious:
***** The New York Times
November 22, 2000, Wednesday, Late Edition - Final
SECTION: Section A; Page 27; Column 6; Editorial Desk
HEADLINE: Reckonings; The Shadow Of Debt
BYLINE: By PAUL KRUGMAN
If Argentina were a first-world country, its debt wouldn't be a
problem. Both its budget deficit and its national debt are about the
same fraction of G.D.P. as those of the U.S. eight years ago, and
compared with Japan the country is a paragon of fiscal prudence. But
global bond markets aren't equal-opportunity lenders, and third-world
countries don't get the benefit of the doubt. In a recent debt
refinancing Argentina had to pay an interest rate of 16 percent -- 10
percentage points more than the U.S. Treasury pays.
Some of this premium reflects the country's unique problems. Not
long ago Argentina's "currency board" monetary system, which fixes
the value of the peso permanently at one dollar, was lauded as a
model for other countries. Now that monetary system has become a
trap; tied rigidly to a strong dollar while neighboring Brazil has
devalued and the euro has slumped, Argentine producers find
themselves priced out of world markets. The country has gone into a
slow but dangerous tailspin. A depressed economy has led to budget
deficits; the need to reassure skittish investors has forced the
government to cut spending and raise taxes, further depressing the
economy; and rising unemployment has led to growing social unrest,
making investors even more nervous.
For now, a deal with the International Monetary Fund has staved off
the imminent risk of default. There is considerable irony here: the
loudest praise for Argentina's currency board came from the Wall
Street Journal / Forbes / Cato Institute crowd, who saw it as the
next best thing to a revived gold standard. Those are the same
people who have been howling for the abolition of the I.M.F. and
other international financial institutions. The irony gets deeper
when you notice that Malaysia, which was supposed to have been cast
into the outer darkness after it imposed controls on foreign
investors two years ago, has had no trouble selling its bonds on
world markets.
In any case, the situation is far from resolved. While the I.M.F.
loan buys time, it is not at all clear how time will improve the
situation.
Still, if this were a story only about Argentina, it would be an
object lesson but not an omen. What makes the story ominous is that
Argentina isn't the only debtor finding that markets are demanding
much higher interest rates. In fact, around the world bond investors
have been fleeing from anything that looks even vaguely risky.
Interest rates on the debt of emerging-market nations like Argentina
have risen by 1.5 percentage points just since September. And
interest rates on high-yield corporate debt -- what we used to call
junk bonds -- are at their highest levels in nearly a decade.
These soaring interest rates on risky debt are, in effect, a prophecy
of future troubles for the world economy. All the official forecasts
for the next couple of years are cheerful; budgeters and
international organizations are increasing, not reducing, their
estimates of future growth. But bond investors seem to think it
likely that many overextended borrowers, countries and corporations
alike, will not have enough revenue to meet their obligations.
As the financial crises of the 1990's taught us, such pessimistic
prophecies can be self-fulfilling. A scenario for the next world
financial crisis is already obvious: a default by a big debtor --
maybe a country, maybe a big corporation (say an overambitious
telecom company) creates a bond market panic. And the unwillingness
of investors to buy risky bonds forces countries into drastic
austerity programs, forces companies to cancel investment plans and
leads to a slump that validates investors' fears.
Of course, it doesn't have to happen. We could be lucky; or we could
act quickly to limit the damage when financial disruptions appear. A
couple of weeks ago it seemed that an Argentine default might trigger
a crisis; for the time being, at least, the I.M.F.'s loan package has
averted that danger.
What worries me is this: The bond market is warning us of turbulence
ahead. That would be O.K. if the world's largest economy were being
run by experienced, open-minded officials like the ones who got us
through the last crisis. But who will actually be in charge? If it
turns out to be knee-jerk conservatives who are opposed to any
government intervention in markets, you'll be amazed at how badly
things can go wrong. *****
Yoshie
P.S. What happened to the Krugman Watch, Jim D.?
