Rebound Tougher for Argentina

MEXICO CITY —  Mexico and its then-President Ernesto Zedillo engineered a painful recovery from a devastating 1994 peso devaluation and financial crisis. Nearly seven years later, Mexico has emerged as a shining light of Latin American economies.

With Argentina facing imminent default, economists believe it could do well to emulate Mexico but are doubtful it can, saying Argentina’s road back from the economic wilderness may be much rockier.

Argentina’s fragmented politics, its insistence on maintaining a monetary link to the dollar and its geographic distance from the United States all work against its quick recovery.

“In Mexico there was the political ability to introduce the necessary changes, the necessary economic adjustments,” said Javier Murcio, economist at Credit Suisse First Boston, in referring to the authority Zedillo enjoyed as head of Mexico’s then-dominant Institutional Revolutionary Party.

Austerity measures imposed by Zedillo caused the loss of 1 million jobs, double-digit inflation, a paralysis among consumers and an incredibly shrinking economy. But the measures earned the confidence of the United States and multilateral lending agencies and led to a $50-billion bailout in March 1995.

The bailout helped Mexico avert a default on about $30 billion in foreign debt, much of it dollar-denominated notes, or tesobonos, owned by major New York and London banks. No such bailout is expected for Argentina, which has said it will default on its $132 billion in public debt over the next month.

In the Mexican case, consumers felt the most pain. The devaluation cut their purchasing power by more than two-thirds in 1995, a heavy hit in an economy that depended on imports for a quarter of all consumer goods. Zedillo also raised interest rates, which sparked inflation, hurt corporate profits and caused layoffs.

But Zedillo was able to quickly convince the United States and the multilateral banks of his commitment to draconian cost-cutting measures to eliminate red ink from the federal budget. He also was willing to mortgage Mexico’s national patrimony--oil revenues of Petroleos Mexicanos, or Pemex--to secure the bailout.

But wealthier Argentina, where no such party discipline exists, is at a severe policy disadvantage compared with Mexico’s situation in 1994, said Sidney Weintraub, head of the Americas program at the Center for Strategic and International Studies in Washington.

Argentina’s political factions, the caretaker president’s populist intentions to print more money to create jobs and a population that, after four years of austerity, is in no mood for even higher dosages of stiff medicine, all darken Argentina’s prospects.

“Party politics are at play and there is every indication that Argentina is not willing to undertake all the hardships and strictness that Mexican president was willing to impose,” Weintraub said.

Now, Mexico is nearly all the way back from the wilderness, having earned top marks from two bond-rating agencies, and is awaiting similar upgrades from Standard & Poor’s. Argentina is entering an economic twilight zone from which it may take a decade or more to return, economists have said.

In its recovery, Mexico also benefited from geographic proximity to the United States. The Clinton administration could not ignore the possibility of social and political unrest on the nation’s southern border that might have resulted from a Mexican meltdown.

Argentina lacks the geographic advantage of being a U.S. neighbor. Moreover, the Argentine default has been unwinding for a year, time enough for U.S. banks and other investors to unload the country’s bonds.

Banks and investors had no such luxury with Mexican investments in 1994 and 1995, when the crisis caught banks and investors by surprise.

The pressure on the U.S. government to intervene in Wall Street’s favor was much greater than is the case now.

“It was the direct exposure of the U.S. banking system to the tesobonos and to the possible contagion effect that persuaded the U.S. Treasury Department to intervene” in the Mexican crisis, said Siobhan Manning Morden, a debt specialist with investment bank Caboto USA in New York.

In the aftermath of the Mexican bailout, Mexico also had the advantage of membership in the North American Free Trade Agreement, which made it a much more attractive destination for foreign investment and all the productivity and economic growth gains that those investments have since generated.

By contrast Argentina, with its fixed exchange rate and lack of productivity growth, has become “expensive to produce in” and unattractive to outside investors, Murcio said, meaning there is unlikely to be any near-term flood of foreign investment

A devaluation is one way Argentina could “re-price its assets” and make its goods more competitive in foreign and domestic markets, meanwhile attracting more outside investment and allowing it to trade its way out of its 31/2-year recession.

But a devaluation will cause widespread pain in Argentina since most loan and contractual obligations are payable in dollars, though Argentines are paid in pesos. The inevitable defaults and bankruptcies are a real threat to the banking system.

The hole Argentina finds itself is deeper than Mexico’s, with $132 billion in debt compared with Mexico’s $30 billion, even though Argentina’s economy is half the size of Mexico’s.

Over the next year, Argentina’s creditors, which include many European institutions, will get together to hammer out some kind of restructuring plan to decide how many cents on the dollar of money owed them they will accept. Such a deal will take months to finalize and is the first step in Argentina regaining legitimacy in global markets.

“Argentina will recover painfully and slowly,” said Weintraub of CSIS. “It’s a much rougher case than Mexico.”