http://www.nytimes.com/2001/07/12/business/worldbusiness/12LATI.html July 12, 2001 Argentine Debt Creates Fallout That Is Wide By JONATHAN FUERBRINGER The fallout from the financial crisis in Argentina was felt outside Latin America yesterday as the dollar fell and the stocks of some American and Spanish banks with exposure there dropped. The Brazilian real also fell to its lowest level since it began trading freely in 1999, and some Latin American stock markets declined. "I would just say it is a function of contagion," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn. "Argentina is sending a shiver through investors' mindset." The fear among investors is that Argentina will actually default on its $130 billion of foreign debt or force investors into a restructuring that would reduce what Argentina owes. Argentina had to pay 14 percent interest rates to sell $828 million in three-month bills on Tuesday. And many analysts doubt that the government will be able to cut spending enough to offset the fall in tax revenues, after three years of recession, and leave enough to meet foreign debt payments. Domingo Cavallo, the economic minister of Argentina, said on Tuesday night that Argentina could not borrow any more and had to reduce its federal government and provincial deficits by $3 billion. Many analysts doubt that such cuts are possible given Argentina's complex politics and the approach of elections in October. "A lot of negative expectations are now in the air," said Armínio Fraga, the president of the central bank of Brazil, which has been hit the hardest by the fallout from Argentina. "We will see what the future brings." Referring to Argentina, he said, "They themselves have not given up. I understand it is not easy." Mr. Fraga was in New York to meet with investors in an effort to convince them that Brazil's financial problems are only temporary. In trading in New York, the dollar fell as the euro rose to 85.91 cents, up from 85.70 cents on Tuesday. The euro rose as high as 86.88 cents during the day. Against the Japanese yen, the dollar fell to 124.36, down from 125.37 yen on Tuesday. While it may seem odd for the dollar to fall when investors are nervous, it can happen. First, the dollar has been incredibly strong this year, especially given the slowdown in economic growth in the United States and the six cuts in short-term interest rates by the Federal Reserve. Secondly, a lot of this strength has come from foreigners, Europeans and Japanese, betting that both the euro and the yen would continue to decline against the dollar. But these bets on the dollar, Mr. Gilmore said, leave these investors in risky positions from their point of view. So when there is uncertainty in the outlook, reducing their risk a little means selling the dollar to buy back euros or yen. The Merval stock index in Argentina fell 2.2 percent after a late day rally reduced its loss for the day. It was down 6 percent Tuesday. The Bolsa index in Mexico dropped 2.2 percent. The Bovespa stock index in Brazil rallied enough to turn an early loss of 1.5 percent into a 1.8 percent gain. The Brazilian real plunged to 2.553 to the dollar, a new low. The Mexican and Chilean pesos also declined. Besides affecting the dollar, the fallout from Argentina is also reaching American banks that have exposure there and in other emerging markets. In just over two weeks the political and financial crisis in Argentina has worsened enough to send interest rates on three-month bills up to 14 percent from 9.1 percent. In that same two week period, two of the American banks that have big exposure there, Citibank and J. P. Morgan Chase & Company, have seen their stocks drop. Shares of Citibank's parent, Citigroup (news/quote), dropped 8.7 percent, and fell 3.1 percent yesterday, to $47.60. J. P. Morgan Chase is off 5.9 percent for the two weeks. The stock rose slightly yesterday, to $42.05.
