Argentina's government hoped yesterday that broader support from the ruling coalition for sweeping spending cuts would ease investors' fears that its recession-plagued economy could collapse into a debt default.
After President Fernando de la Rua locked up stronger backing for the austerity plan from his center-left Alliance coalition on Sunday, the government prepared for meetings yesterday to try to convince the opposition Peronist Party to hop on board with their political endorsement as well.
De la Rua has said the steep cuts are necessary to reassure worried investors that Argentina will have enough funds to pay its US$128 billion public debt despite a three-year bout of economic recession and stagnation.
Investors have generally welcomed the measures, but markets tumbled last week on fears that De la Rua would not be able to rally Argentina's divided politicians behind the unpopular cuts in public-sector salaries and pension benefits.
A key pillar of political support fell into place on Sunday when all eight Alliance provincial governors committed themselves to join the federal government in spending only what they earned in tax revenues, easing doubts that De la Rua lacked backing from within his own center-left coalition.
Economy Minister Domingo Cavallo said he was confident the Peronist governors, who control 13 of Argentina's 23 provinces, would add further to a consensus behind the tough measures by signing a similar budget-balancing agreement.
"We have a copy of the agreement that has already been signed by the Alliance, and surely the Peronists will sign it as well," Cavallo said on Sunday.
Many within the government had hoped De la Rua would be able to secure political backing from the Peronists before financial markets opened on yesterday, but meetings over the weekend produced no clear result.
Markets from the US to Asia trembled last week on concern that a potential debt default in Argentina, Latin America's third-largest economy, could spark a global financial crisis.
Argentina's benchmark MerVal stock index fell 11 percent during the week on fears that the country, whose public debt is equal to nearly half its total annual economic output, would not be able to control its spending.
Argentina's country risk indicator, which measures the premium that nervous investors demand to compensate for the risk of lending to Argentina compared with the relative safety of buying US Treasuries, widened last week to over 1,600 basis points.
At those levels of country risk, investors saw Argentina's debt as riskier than that of Ecuador, Russia or Turkey.
But the Argentine government hoped the stronger political backing obtained on Sunday would ease investors' fears of a repeat of March, when De la Rua was forced to backtrack on a proposed US$4.45 billion public spending cut in the face of mass Cabinet resignations and widespread social protests.
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