Tue, Dec 25, 2001 page19

• De la Rua erred when he chose economy minister

  Domingo Cavallo had been the hero of the previous Argentine government for his economic reforms. But the president has now learned the hard way that no one is superhuman

  • By David Derosa / BLOOMBERG
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  Argentine President Fernando de la Rua got a lesson in life this week. He learned at the cost of his own presidency that there is no such thing as a superman economy minister who can heal a desperately ailing economy. Did I say superman? Let me change that to witchdoctor.

  De la Rua's resignation Thursday came after the departure of Argentine Economy Minister Domingo Cavallo. Cavallo's departure the previous night was a long time coming. You could probably date the demise of both as having commenced when Cavallo came back empty-handed from his last meeting with the International Monetary Fund.

  

  Torn posters in Buenos Aires in 1999 show then-presidential candidates Fernando de la Rua, left, and Domingo Cavallo. De la Rua resigned from the presidency on Thursday, less than 24 hours after Cavallo resigned as economy minister.

  PHOTO: AFP

  Cavallo had been the hero of the previous administration for introducing economic reforms that seemed to straighten out Argentina. Things were so bad for de la Rua that he resorted to bringing back Cavallo to run the economy.

  If de la Rua ever writes his memoirs he ought to do a lot of explaining about his decision to bring in Cavallo. That move shaped his administration more than anything.

  Why did he trust Cavallo with such powers? Like so many others in Argentina and Washington, he simply may have been seduced by Cavallo's personality. Or was de la Rua naive? Maybe he suffered from a sincere belief in the superman minister myth?

  My own theory is that de la Rua himself didn't have a clue what to do and so handed off his troubles to Cavallo. It doesn't work in life and it certainly doesn't work in politics. You can't outsource all your problems.

  It wasn't just hiring Cavallo that was the mistake. Far bigger was the error of giving Cavallo virtually unchecked powers to regulate and intervene in the economy. Cavallo operated more like a military general than an economy minister.

  His powers were taken to encompass such extraordinary things as forcing bondholders to surrender their bonds in exchange for others of inferior quality, making budget accords with the International Monetary Fund (and then breaking them), limiting withdrawals from bank accounts, putting the treasury in a virtual financial straightjacket, and raiding private pension plans to make government debt service payments.

  And every time he pulled one of his sleight-of-hands, he would strut out to announce he had defeated those who were pessimistic about Argentina. By just giving such a message, he was telling you worse was yet to come.

  Cavallo's financial parlor-room tricks worked for far longer than I thought they would. I figured he was out of options last summer. Somehow he squeezed out another six months.

  Cavallo has to be remembered as the man who was ready to resort to any trick or artifice to achieve his goal.

  What was that goal? Mission No. 1 was to prevent Argentina from defaulting on its debt. Mission No. 2 was the preservation of the currency-board regime that keeps the peso pegged one-to-one against the dollar.

  Yet even mission No. 2 could be sacrificed, at least in part, to the all-important goal of preventing default. Hence the move to devalue the commercial peso by making it convertible into equal parts dollars and euros.

  Once Cavallo was gone attention focused on President de la Rua, who had presided over the financial and economic destruction of his country. So there he sat, desperately clinging to his failed presidency, a massively unpopular leader.

  The people were rioting in the streets, which had led de la Rua to proclaim a 30-day state of emergency. A leader's greatest humiliation must be having to give the police extraordinary powers to restrain a population furious at the failure of your own economic policies.

  The only way out was to resign.

  David DeRosa is an adjunct finance professor at Yale School of Management. The opinions expressed are his own.
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