Argentina Invests Its Hopes In Economic 'Super-Minister'
By Anthony Faiola
Washington Post Foreign Service
Friday, April 20, 2001; Page A14
BUENOS AIRES
"Mr. President, you can do it!" well-wishers occasionally shout when Domingo Cavallo
takes his brisk morning jog with bodyguards through a woodsy Buenos Aires park. It
would seem quite normal, but for the fact that this bald, stocky economist with
deep-set baby blue eyes is not Argentina's elected leader.
Yet, the man nicknamed "Mingo" might as well be. One part Alan Greenspan, one part
Gen. George Patton, Cavallo is Argentina's freshly appointed economic
"super-minister." He has been asked to avert a financial collapse in Latin America's
wealthiest nation that could drag the region down with it, and has been granted
special powers by President Fernando de la Rua and Congress. This has effectively
transformed the quick-tempered, Harvard-trained economist into the first chief
executive officer of a Latin American government.
A champion of the free market sought out by Russia and other nations in the 1990s,
Cavallo first became known for steadying the inflation-wracked Argentine economy
under then-President Carlos Menem in 1991. A month ago, he was tapped again by a
desperate de la Rua, and Congress grudgingly agreed to grant Cavallo restricted but
still significant powers to raise taxes, cut the budget and modify thousands of laws.
Cavallo's return underscored an almost mystical faith in his reputation as a
financial miracle worker and represented a last-ditch effort to end a 34-month
recession and head off a debt default in this country of 36 million. Argentina's
foreign debt today hovers around $150 billion, accounting for about 25 percent of the
world's emerging market debt and making it one of the most indebted nations. About
$20 billion is due to be repaid this year, and Cavallo insists Argentina will meet
that burden.
But if Cavallo does not move swiftly to cut the deficit and find a way to jump-start
the economy, Wall Street fears that plummeting investor confidence could propel
inter-bank interest rates, and the country's risk rating, to the unsustainable levels
seen just before Cavallo took over. That, analysts say, could jeopardize Argentina's
solvency, as well as pressure other heavily indebted Latin American nations,
including neighboring Brazil, Argentina's largest trading partner and the region's
largest economy.
Moreover, Argentina's debt is widely held by U.S. financial institutions and pension
funds, meaning a default here would have serious repercussions for American
investors.
Characteristically, no one seems more confident in his abilities than Cavallo
himself.
"I think about problems, I observe, and then I act," Cavallo said in an interview.
"Obviously, I have a lot of experience. I have had to deal with many crises in
Argentina and now, in 2001, it is up to me to get this nation out of [economic]
depression. I am the person with the most experience in managing crises here. . . .
And I will do it."
Cavallo, 54, the son of a middle-class broom factory owner, was nicknamed "Lightning"
by his mother because of his hectic life, though it could also be applied to his
often-rash nature. After he lost his bid for the Buenos Aires mayor's job last year,
Cavallo claimed in a fiery speech that his rival had stolen the election and, on top
of that, was impotent. Cavallo reportedly almost came to blows with Uruguay's foreign
minister during a heated trade dispute last week. But his knack for an uncommon
mixture of politics, economics and celebrity has given him a superstar aura usually
reserved here for supermodels and soccer stars.
In Latin America, Cavallo has come to symbolize the face of globalization and the
free market; even candidates in the upcoming presidential elections in Peru debated
his economic theories. In addition to reviving the Argentine economy, Cavallo faces
the difficult task of convincing a jaded electorate that free market reforms can, in
fact, work.
Market reforms swept over much of Latin America in the 1990s. But as in many other
nations, Argentina's transition was poisoned by massive government corruption and led
to soaring unemployment and higher poverty rates. Although Cavallo left the
government in 1996 disgusted by the corruption, his current crusade is still hard to
swallow for many here.
"Cavallo has become our virtual ruler, and it is nothing short of a political coup by
big business and foreign investors," said Raul Castells, a Buenos Aires leader of
retirees, who headed a large protest outside Cavallo's posh home last week. "He sold
our companies, now he's going to sell our soul."
But one recent poll, by Gallup Argentina, gave Cavallo a 50 percent approval rating,
compared with 24 percent for the president. Also, the markets have taken notice.
Argentina's risk rating has improved, and exorbitant interest rates between banks
have dropped. Cavallo appears to have calmed investors by his mere presence beside de
la Rua, an unpopular, aristocratic centrist who met with President Bush in Washington
yesterday for talks on the fragile state of the Argentine economy.
Cavallo is scheduled to arrive in Washington April 28 to hold talks with the
International Monetary Fund. "But," he said, "we do not need any more money, and we
will not be asking for any more. We will be the makers of our own rebirth."
Economists say Cavallo is facing a far tougher task now than he did a decade ago,
when Menem embraced Cavallo's "convertibility" law, which pegged the Argentine peso
to the U.S. dollar at a rate of 1 to 1, which halted runaway inflation. Then, Cavallo
engineered one of the world's fastest-developing privatization programs. Argentina
had long been hemmed in by the nationalistic policies of former president Juan Peron,
who saw foreign investors as carpetbaggers and promoted the rise of massive state-run
companies mired in inefficiency, cronyism and corruption. But suddenly, with Cavallo,
the doors to Argentina sprang open, and he orchestrated the sell-off of almost every
state-run industry, from the phone company to the airports and postal service.
Now Cavallo must slash a $6.5 billion deficit while hauling the country out of
recession. To do it, he needs foreign investment, but Argentina has virtually nothing
left to sell off. At the same time, economists say the nation faces stiffer
competition for less and less foreign capital because of economic slowdowns in the
United States and Europe. Leading Argentine exports such as beef and grains have been
cut off from many markets because of an outbreak of bovine foot-and-mouth disease.
Most important, Argentina's relatively high average wage and standard of living --
per capita income is more than twice that of Mexico -- have led many companies to
flee to cheaper Brazil or Chile for manufacturing.
"Cavallo's reputation has become that of a miracle worker," said Guillermo Calvo,
incoming chief economist at the Inter-American Development Bank in Washington. "But
Argentina doesn't need a miracle, it needs a good manager. . . . The strength of
Cavallo, however, is that he is not just a great economist, but a skilled politician.
In Argentina, you need to be both."
Cavallo unified the warring political factions here that left de la Rua paralyzed. He
won praise for proposing a $300 million budget cut, big enough to help meet targets
set by the IMF, but potentially small enough to head off national strikes and a
political backlash. Additionally, Cavallo imposed a new financial transactions tax,
generating $15 million in revenue a day in a nation where an estimated 40 percent of
the rich don't pay their taxes.
Cavallo insists he will pull Argentina out of recession "by making it more
competitive." To do that, he is pushing a radical change to his own convertibility
law, linking the Argentine peso not only to the dollar but also to the weaker euro,
the currency of the European Union -- at 50 percent each.
The net effect, Cavallo insists, "will be the production of a new, more stable peso,
one that would allow us more flexibility when trading with the United States as well
as Europe." But critics say his plan is effectively a minor devaluation. And it has
made Argentines uneasy.
Also, given the fragile economy, foreign financial analysts say Cavallo is being
reckless, and worry that a break in the Argentine peg to the dollar could pressure
similar monetary systems, including Hong Kong's.
