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Thursday, 12 July, 2001, 08:17 GMT 09:17 UK
Argentina debt sparks foreign fears
Argentina's economy minister, Domingo Cavallo
Domingo Cavallo promises to cut state spending
The fallout from Argentina's financial crisis has spread through the Americas and across the Atlantic, hitting the value of the dollar and sending Spanish shares to a three-year low.

Argentina's bonds and shares also plunged on Wednesday after borrowing rates soared during an auction to sell government debt.

Fears that Argentina will be unable to service its $128bn of debt sent the Brazilian real and Chilean peso both to record lows against the US dollar on Wednesday.

But the dollar itself slid in later trading against the euro and the Swiss franc, over concerns that the fallout from the crisis could spread throughout the Americas.

"Because [investors] are concerned about weakening in the US economy, and the weakening US equity market, people have moved to Europe as a safe haven this time," HSBC Markets currency strategist Mark Austen said.

In Uruguay, economy minister Alberto Bension warned that the turmoil could lead to the country losing its coveted "investment grade" status.

And in Madrid, the benchmark stock index fell to its lowest rate for three years over fears that, thanks to the country's close economic ties with Latin America, Spanish companies may be badly hit by the hangover from an Argentinean crisis.

Budget pledge

But Argentina's economy minister, Domingo Cavallo, was set on Wednesday to reveal a package of measures designed to bolster the country's economy, and which is likely to include cutbacks in state spending.

In an address on national television, Mr Cavallo said: "There is only one path to resolve our problems - spend only what we collect in taxes."

Argentina's economy, which has been in recession for three years, was in a "complicated" state but remained "solid", Mr Cavallo's deputy, Daniel Marx, said.

Mr Cavallo himself said: "We can reach a balanced budget and we will reach it with a fight against [tax] evasion, workers in the underground economy, political spending and inefficiency."

He added that the federal government would seek to eliminate a $1.5bn deficit planned for the rest of the year.

Restoring confidence

Mr Cavallo won the confidence of International Monetary Fund boss Claudio Loser, who forecast on Wednesday that Argentina's plight would improve.

"The situation in Argentina is going to improve in the next weeks, without a default, with fiscal discipline," said Mr Loser, chief at the IMF's Western Hemisphere Department.

Financial analysts restated the importance of Mr Cavallo's rescue package.

"This is really ugly... sentiment is definitely down the drain," said IDEAglobal Latin American market analyst Aryam Vazquez.

Cavallo needs to come to the market with something positive, be it spending cuts or a bailout package."

Investors worldwide, remembering how the so-called Asian crisis swept through markets in the late 1990s, have been monitoring the plight of emerging economies in the current period of global economic slowdown.

Fed intervenes?

Rumours spread on Wednesday that America's central bank, the Federal Reserve, had held an emergency meeting to discuss the situation in Argentina, whose currency is pegged to the American dollar.

The Fed has declined to comment on the claims.

Shares in US banks, however, were unable to shrug off Argentina angst, which raised fears of a bad loan scare.

JP Morgan Chase, Citigroup and FleetBoston Financial are among banks which have lent billions of dollars to Argentina.

"Here we go again," UBS Warburg analyst Diane Glossman said.

But David Berry, analysts at Keefe, Bruyette & Woods offered some consolation.

"There is some credit risk, but the numbers are not that large," he said.

War chest

In Brazil, the real hit a low of 2.570 to the dollar before recovering to a rate of 2.558 in afternoon trade on Wednesday.

Traders were uncertain whether Brazil's central bank, which has already intervened five times this month to support the currency, and unveiled a fighting fund of $6bn, had again sold dollars.

The Chilean peso closed at a rate of 664 to the dollar, a drop of almost 2% on the day, prompting the government to consider economic action.

"We say very clearly that in the event the price of the dollar gets out of hand and this has an impact on inflation, obviously we would not rule out any measure," finance minister Nicolas Eyzaguirre said.

Firms exposed

Spanish shares considered especially sensitive to the fallout of an Argentinean financial crisis include telecoms giant Telefonica, which receives about half its core revenues from the region, and oil group Repsol, which bought Argentina's YPF two years ago for $15bn.

Elsewhere, analysts saw Portugal Telecom exposed through its Brazilian cellphone operations, while Telecom Italia shares ownership of Telecom Argentina with France Telecom.

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