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IMF assistance for Paraguay; US Federal rates; US recommend “perseverance”; “Mercosur is ticking and alive”; Bus strike strangles Santiago; Repsol-YPF invests in Bolivia

IMF assistance for Paraguay

The International Monetary Fund, IMF, announced this Tuesday it will extend an 18 month 200 million US dollars stand by credit arrangement to Paraguay. However the credit is conditional to the authorities securing legislative approval of important fiscal measures and a law on bank resolution, as well as limits on the lending by the state owned Development Bank. The purpose of the assistance is to strengthen Paraguay's capacity to respond to the effects of economic turbulence that has surfaced, and extended, in the Mercosur region. Brazil last week was granted a 30 billion US dollars assistance by the IMF to support the country's bonds and sagging currency; Uruguay was literally bailed out with a multilateral package of 3,8 billion US dollars, including a 1,5 billion one week bridge loan from the US Treasury and the G 7 group of industrialized nations. This leaves Argentina as the only Mercosur member that so far has been unable to reach an agreement with the IMF in spite of the extended discussions. The emergency fiscal package should help reduce the 2002 budget deficit, eliminate it next year and set the stage for a sustainable fiscal stance over the medium term according to an official IMF release. A second pillar of the program is an emergency financial law designed to strengthen the government's capacity to deal with problems in the banking sector. The Paraguayan banking system almost collapsed as several institutions were forced to close with thousands of depositors loosing their savings. "The Paraguayan authorities have request IMF support for this program", said IMF Deputy Managing Director, Shigemitsu Sugisaki, adding that the planned measures are "an appropriate response to the key economic challenges facing the country". Paraguay has been undergoing political and financial turmoil for several years following mismanagement scandals under different administrations and an almost permanent populist temptation from political leaders of a still "green" democracy. Mercosur and US diplomatic intervention aborted a couple of authoritarian experiences.

US Federal rates remain unchanged at 1,75%

The US Federal Reserve decided this Tuesday to keep its target for the federal funds rate unchanged at 1,75%, the lowest since July 1961. However the good news is based on growing fears of economic weakness in the US economy. "The softening in the growth of aggregate demand that emerged this spring has been prolonged in large measure by weakness in financial markets and heightened uncertainty related to problems in corporate reporting and governance", reads the official release, adding that the current accommodative stance of monetary policy, "coupled with still robust underlying growth in productivity, should be sufficient to foster an improving business climate over time". The statement left the door open for future rate cuts in an effort to stimulate the economy. "The Open Committee recognizes that, for the foreseeable future, against the background of its long run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness". Markets reacted negatively following the Fed Reserve statement fearing a further deterioration of the US economy.

US recommend "perseverance"

"Argentines must help themselves and restructure and reform the financial system if they expect to receive foreign assistance, particularly if it is to be effective", said US Undersecretary of State for Hemispheric Affairs Otto Reich in direct reference to the recent assistance to the other Mercosur member countries, Brazil, Paraguay and Uruguay. In an interview with BBC Mr. Reich said that "the worst is over" in Argentina but a recovery period still is needed, adding that the difficulties in Brazil and Uruguay were mainly of liquidity. "Banks in Brazil and Uruguay are intact, but in Argentina the system is in very bad conditions and financial assistance in its present structure won't solve the problem as happened with these two countries", argued Mr. Reich. The US official insisted in Washington's willingness to help Argentina, "there are many things we can do, but Argentines must help themselves and must reform their financial system if they pretend foreign assistance". Mr. Reich in a recent meeting with president Eduardo Duhalde suggested Argentina apply for an extension of products to sell to the United States under the general preferences system, "now that the Trade Promotion Authority has been signed by president Bush". Talking about the region Mr. Reich remarked that "Brazil and Uruguay are friends of the United States that needed financial assistance and we believe this was the appropriate moment to help". "Argentina is the country of the region that has less recovered but it's on its way up. Tax revenue has been increasing for the last three months; however a strong recovery period is still needed, but the worst is over".

"Mercosur is ticking and alive"

Brazilian Foreign Secretary Celso Lafer stressed that "Mercosur is ticking and alive", however he also admitted that "a maintenance job and review" will be needed in the coming next six months. "We need to review the first 10,000 kilometres of Mercosur, so the block will be in condition and in a stronger position to define future objectives", said Mr. Lafer in an interview with the Sunday edition of the influential "O Estado do Sao Paulo". Brazil that will be holding the Mercosur temporary chair until next January has outlined the group's priorities, the Common External Tariff; macroeconomic coordination and a definitive mechanism for the regional competitiveness forums, beginning with forestry. Mr. Lafer also included the approval of the Government Purchases Agreement and the Services Protocol, plus the finalization of a "strong legal framework cooperation agreement on regional security". Brazil's Foreign Secretary indicated that in spite of the absence of an overall regional recovery, "we need to effectively prepare for the coming trade rounds", that include the US sponsored Free Trade Association of the Americas, the Andean Community, the advancement of talks with South Africa plus the World Trade Organization and the European Union for which a timetable of discussions already exists. Regarding the administrative operation of Mercosur, Mr. Lafer wants a "technical" reinforcement of the Secretariat, "so it can provide us with a regional overview for future assessments of the trade block". Mr. Lafer stressed the success of the last June joint trade delegation to South Africa and announced a coming similar business trip to Germany to establish a permanent Mercosur Commerce Promotion Office. "Mercosur is not an option, it's our destiny, although it's not mere chance, it's something we must progress to achieve", remarked Mr. Lafer.

Bus strike strangles Santiago

A two day chaotic strike of 6,000 local buses servicing Santiago caused havoc and losses estimated in over 150 million US dollars according to the Chilean Industry Federation and the Retail Trade Association. Independent bus owners of the five million metropolis of Santiago went on strike early dawn Monday leaving thousands stranded, forcing schools to close and a labour absenteeism estimated in 40/45%. "Santiago represents 40/45% of the national GDP, so one or two days of inactivity cause a tremendous damage to the whole economy", said Economy Minister Jorge Rodríguez Grossi. The strike was in reaction to government's plans to contract Spanish consultants to assess on the overhauling of the whole Santiago urban transport system, particularly to combat contamination, order the city's chaotic traffic, plus more security, safety and "better manners" in urban surface transport. Santiago bus drivers don't have a fixed income and are paid on a commission basis. Foreign companies will be allowed to participate in the bidding of bus lines under the new system to be implemented. "Wherever the Spaniards are involved it means loss of jobs, redundancy and foreigners taking over local companies; besides the government never consulted us or asked us to participate in the Metropolitan Santiago transport restructuring plan, so that's why we are protesting ", said Manuel Navarrete, one of the strikers' leaders. And protest they did. In spite of appealing to National Security legislation, arresting over 650 drivers, strikers managed to block with buses 55 of the city's main routes of access, virtually paralysing Chile's capital for over 48 hours. One of the few positive sides was that the emission index in terribly contaminated Santiago dropped dramatically 25%. Besides for once, air travellers were generously contemplated if they missed their local or international flights. On the second day of strike no blockades took place, the underground service was reinforced, Army trucks and buses were available and those wanting to work had police custody. Forces were ready to intervene if necessary. However late Tuesday evening when the government reiterated it will not yield to "blackmail" and announced it will begin considering the expiration of bus licences under the National Security legislation, the situation started to revert and is expected to normalize by early Wednesday. "This is a dreadful week for business, sales have dropped 50% and since next Thursday is a national holiday, and many people will be turning it into a long week end, losses will be enormous", emphasized Rafael Cumsille, president of the Retail Trade Association. Mr. Navarrete and other strike leaders are under judicial custody.

Repsol-YPF invests in Bolivia

The Spanish oil consortium Repsol-YPF will be investing a billion US dollars in the coming four years in hydrocarbons exploration and exploitation in Bolivia. Repsol-YPF is the company with largest oil and natural gas reserves in Bolivia, but given the growing competition, "the company is determined to keep the leading position", according to Bolivian Mining and Energy Offices. Respsol-YPF currently operates in 32 exploration and exploitation blocks, and with subsidiaries Andina and Maxus controls Bolivia's main natural gas reserves. Together with British Petroleum and British Gas the Spanish consortium is involved in the Pacific LNG, a company that is planning to export Bolivian gas to California and Mexico from the Pacific beginning 2006. The operation, landlocked Bolivia's main development project, involves 6 billion US dollars and a 1,500 kilometres pipeline that the incoming Bolivian president must decide whether it will cross Chilean or Peruvian territory. Either option, of the most extreme political sensitivity for a country that still claims a sea outlet it lost to Chile in 1879 after a disastrous war in alliance with Peru.