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Thursday, 7 December, 2000, 12:42 GMT
Argentina closer to IMF deal
Presidient Fernando de la Rua is facing testing times
Presidient Fernando de la Rua is facing testing times
Argentina's Senate has passed a budget bill designed to pave the way for a loan package from the International Monetary Fund.

The lower house, the Chamber of Deputies, has already passed its own version of the bill, aimed at cutting the country's budget to $7bn, or 2.4% of GDP next year.

The IMF has demanded that the government reach agreement on strict budget discipline before it will release up to $30bn to help the ailing economy.

Trade unions in Argentina have already staged a 36 hour general strike against the proposed deal, which they believe will exacerbate the country's high unemployment, which already stands at 15%.

President Fernando de la Rua disagrees. He has defended the possible IMF agreement, declaring that it would allow the government "to lower taxes, deal with servicing the debt and stimulate growth."

Global worries

The US government has sent a senior official, Undersecretary of the Treasury Timothy Geithner, to Argentina to help broker a deal.

It is a sign of the increasing concern that a new crisis could be beginning in another country classified as an emerging market, following the emergency $10bn loan to Turkey earlier in the week.

In particular, they are concerned to prevent the crisis spreading to Asia, where in 1997 a series of currency devaluations precipitated a global financial crisis.

That crisis, which also spread to Russia and Brazil, was averted partly by a strong US economy and worldwide interest rate cuts.

But now the US economy is slowing, reducing its ability to absorb more exports from developing countries, and higher oil prices are also hitting many developing countries hard.

Argentine troubles

Argentina's economy has proved particularly vulnerable.

Argentina has adopted the US dollar as its currency in an attempt to beat inflation, but that has made its exports more expensive as the dollar has soared in international currency markets - especially after rival Brazil devalued its currency.

The subsequent recession reduced the government's income and increased the budget deficit.

And fears about emerging countries among international investors have pushed up the interest rates they have to pay to service their loans - which are now more than 6% higher than the interest rate on US government Treasury bonds, the international benchmark.

Fears of default

That has made Argentina's international debt more expensive, and led to fears of default.

The IMF wants Argentina to proceed quickly with restructuring the economy, privatising more companies and agreeing more reforms.

The hope is that economic growth, which is likely to be only 0.7% this year, will revive to around 2% by 2001.

That would restore the confidence of international investors and ease the lending squeeze that is hurting the economy.

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See also:

23 Nov 00 | Americas
Argentina grinds to a halt
23 Nov 00 | Business
Argentina's economic tightrope
24 Nov 00 | Business
How Argentina's revival went wrong
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