Thursday, June 27th 2002 - 21:00 UTC

Mexico - US - Argentina

Headlines
Mexico willing to help;
US interest rates remain unchanged;
IMF “discouraged” by Argentina

Mexico willing to help

Mexican president Vicente Fox admitted that the country was experimenting the impact of the explosive financial situation in Argentina that has spread to Uruguay, and triggered uncertainty in Brazil pressured by the coming October presidential election. "Somehow the situation in Argentina and Brazil, in Mercosur, is beginning to have an effect in spite of the stable situation in Mexico", said President Fox in an interview with the Argentine press. However, Mr. Fox was quick to point out that it was really the global uncertainty and world market volatility that are having an effect in Mexico, "although not significant". President Fox is expected in Buenos Aires next week to participate in a Mercosur and associate members presidential summit (Argentina, Brazil, Paraguay, Uruguay, plus Chile and Bolivia). This week the International Monetary Fund confirmed a massive aid to Uruguay, that could reach 3 billion US dollars (the largest operation ever measured as a percentage of a country's GDP); just a few days ago the IMF extended a 10 billion US dollars credit to prop the Brazilian currency; Argentina is desperately trying to avert a default on multilateral organizations debt, and in Chile, although the soundest economy in the region, the US dollar shot past the benchmark of 700 pesos. "We are willing to see what Mexico can do in support of Argentina and Brazil, and if they ask us to talk with US President Bush, so we will", indicated Mr. Fox.

US interest rates remain unchanged

In the midst of the latest Wall Street scandal and with ongoing concerns about falling consumer confidence, the United States Federal Reserve left interest rates unchanged at 1,75%, the lowest in 40 years. "The Open Market Committee expects the rate of increase of final demand to pick up over coming quarters, partly supported by the robust increase in productivity, but the degree of the strengthening remains uncertain", said the Federal Reserve in a release following two days of deliberations. During 2001, and particularly after the September 11th., the Federal Reserve slashed interest rates eleven times in an attempt to stave off the global economic slowdown and boost US consumer spending that makes up two thirds of the country's GDP. However the Federal Reserve still considers the US economy recovery fragile after consumer confidence during May dropped at its fastest rate since the September terrorist attacks. The overall situation worsened this week with another corporate scandal in Wall Street. World Com, the second largest US telecommunications company, apparently is involved in a 4 billon US dollars boosting profits accounting scam, with the auditing of Arthur Anderson that was also declared responsible in the multibillion collapse of Enron. The scandals are scaring investors away from Wall Street and debilitating the US dollar, also confronted to an unexpected budget deficit as a consequence of the massive defence spending in the war on terrorism. The Dow-Jones index already has dropped 10% during May and the US dollar has fallen to almost parity with the Euro. Although the decision to keep interest rates unchanged was expected and analysts anticipated a possible credit tightening for the OMC next meeting in November, latest events and plunging share prices forecast no change in the current policy for the near term. With low mortgage rates, real estate and the construction industry seem to be one of the few sectors of the US economy that remain bullish with an 8,1% increase in new home sales last May, an unprecedented twelve month projection of 1,03 million units.

IMF "discouraged" by Argentina

International Monetary Fund Director General, Horst Koehler said he felt discouraged by Argentina's lack of resolution in restructuring the country's banking system. "Argentines obviously are in no rush to talk with us about restructuring the banking sector", said Mr. Kohler in an interview published in a German newspaper almost in coincidence with the arrival of Argentine Economy Minister Roberto Lavagna to Washington to meet with IMF and World Bank officials, plus representatives from the US Treasury. "This attitude has surprised me and discouraged me", underlined Mr. Koehler in direct reference to the recent ten days visit to Argentina of an IMF mission that collected financial and economic information for a possible aid package to the beleaguered country that defaulted on its foreign debt last December, and has since then been cut off from all international credit. Before leaving for United States Mr. Lavagna revealed during the annual meeting of the Argentine-US Chamber of Commerce that his aim was not to obtain fresh funds, but 18 billion US dollars from international institutions so Argentina could honor maturing debts until December 2003. Beginning July Argentina must repay the IMF, World Bank and the Interamerican Development Bank 9 billion US dollars and another 8,6 billion in 2003. "We're in no condition to request fresh funds, we have pending economic reforms and our priority is to get the Argentine economy rolling again", indicated Mr. Lavagna. "We must not forget that the Duhalde administration is a transition government, --elections are scheduled for October 2003--, and the main objective is to build solid foundations from where to grow", added the Argentine Economy Minister. IMF and Argentine Economy officials are at odds regarding the restructuring of the banking system that has been paralyzed since the government froze all deposits and savings. IMF favor a floating exchange rate and not committing the country's international reserves that in six months have dropped from 16 to less than 10 billion US dollars. The Argentine peso until last December was pegged one to one with the US dollar but now stands at 4 pesos to the greenback. Argentine officials unable to adequately contain budget deficits, at federal and provincial level, fear hyperinflation and a further collapse of the local currency that in six months has lost over 70% of its purchasing power. Argentina is in its fourth year of recession, with unemployment reaching 25% and almost half the population living in poverty conditions. Furthermore the pending reforms are conditioned to a politically weak government, eroded by lack of support from the ruling coalition in Congress, and with several regional leaders more absorbed with their potential presidential ambitions. On more than an occasion President Eduardo Duhalde to push legislation through Congress has been forced to threaten with his resignation.

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