One thing emerging markets nations should learn from Argentina is don't make budget promises that can't be kept. That is doubly important when the IMF is listening.
The promise that Argentina may not be able to keep is Economy Minister Domingo Cavallo's decree to balance the federal budget immediately. Cavallo intends to run Argentina on a cash basis -- what taxes he takes in each month he can spend, but that is all.
To accomplish this, Cavallo says he has to cut government employees salaries and pensions by 13 percent.
Yet that doesn't fly with Judge Roberto Pompa, who on Friday blocked Cavallo's salary and pension reductions. Austerity, as always, is easier said than done.
Nonetheless, Cavallo expects the Senate to ratify his budget plan tomorrow. As always, he is optimistic, saying "We have plenty of political support."
Plenty of political support? Then how come it took so much arm-twisting to get it even this far? Moody's, for one, didn't buy it. It lowered Argentina's foreign and local debt rating to "Caa1" from "B3" Thursday.
For the record, Argentina is now seven levels below investment grade.
More importantly, not only are the rating agencies not buying Cavallo's line, the IMF may not be either. And this gets to the crux of the issue. Cavallo boldly announced his plan to put Argentina on cash basis before he sought out the help of the IMF.
Wouldn't it have been craftier to have gone to the IMF with the promise of zero budget deficits to obtain commitments for new money, and then, and only then, announce the deal to the people? As it now stands, the IMF has every right to wait and see whether the austerity plan has any chance of working before it gets further involved with Argentina.
As it is now apparent, not only is the federal state of Argentina on the ropes, financially speaking, but so are some of the provinces.
For a radically different financial solution, consider what Buenos Aires Governor Carlos Ruckauf is doing. Ruckauf appears to have invented his own currency, the patacon. The mint is printing up US$500 million worth.
Though it presumes a lot to say a pile of patacones, no matter how tall, could ever be worth US$500 million. Who is to say what the patacon is really worth? Ruckauf has ordered the provincial treasury to pay part of government workers' wages in patacones. Unlike the peso, the patacon bears a 7 percent yield. Rackauf plans to redeem all of the patacons with interest after a year.
RSS