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Monday, 10 December, 2001, 05:33 GMT
Argentina in new bid to cut debts
Domingo Cavallo
Some opposition politicans want Cavallo to resign
Argentina's beleaguered Economy Minister, Domingo Cavallo, is preparing to announce measures to try to prevent the country defaulting on its massive debts.

He needs to cut the government's budget deficit in order to persuade the International Monetary Fund to unblock a vital loan.

The main measure will be the ending of tax breaks to private sector companies, likely to raise about $4bn extra for the government.

Mr Cavallo, who is facing calls from opposition politicians for his resignation, continues to insist that the Argentine peso's peg to the US dollar was not under review.

Argentina shop in liquidation
The country has been hit by recession and social unrest
He said that "in the next 60 to 90 days" Argentina would overcome all the doubts about its foreign debts, now running at $132bn.

"By March we'll almost be able to leave this chapter behind us," he said.

The new measures are needed to persuade the IMF that the government of President Fernando de la Rua is serious about balancing next year's budget.

Last week, the IMF blocked a $1.3bn loan to Argentina because of growing concerns over its financial health.

Mr Cavallo spent the weekend in Washington discussing with the IMF what was needed to get the money disbursed.

But ending tax breaks or making further budget cuts, seen as necessary to gain Argentina financial credibility, will be highly unpopular in a country hit by recession and social unrest.

US dollars
Argentina's peso has one-to-one parity with the dollar
The IMF loan, part of a $40bn dollar rescue package agreed last December, was frozen on Wednesday due to Argentina's repeated failure to meet deficit targets.

Argentina wants the IMF to unblock the loan because it desperately needs extra money to avoid defaulting. The country needs to make $900m in debt payments this month.

Mr Cavallo hoped to persuade the IMF to unblock the loan to free up other sources of funding too.

Last Thursday, the World Bank and the Inter American Development Bank said they had frozen about $1.1bn in loans to Argentina until the outcome of the IMF talks was known.

The blocking of the loan by the IMF dealt a huge blow to confidence in Argentina.

Mr Cavallo said his talks with the IMF did not cover Argentina's currency regime.

The Argentine peso has been pegged to the US dollar for the past decade, and Mr Cavallo has repeatedly insisted that fears the government is planning to devalue the currency are unfounded.

The Argentine Government has been forced to introduce drastic measures to stave off default.

On Thursday, it said it planned to use money held in private pension funds to help pay its bills.

And last weekend the government banned Argentines from withdrawing more than $250 per week from their private bank accounts, to prevent economic fears triggering a run on the banks.

Fear also exists that an Argentine crisis could affect other countries.

"Emerging markets in Asia and elsewhere have not suffered too much from this crisis in Argentina. That is because people in have regarded Argentina as isolated and not affecting the debt positions," Independent Strategies' Bob McKee told the BBC's World Business Report.

However, he believes that not only could Brazil and Chile be hit by a devaluation, but Asian countries with huge public sector debts - such as Indonesia and the Philippines - could also be vulnerable.

Independent Strategies' Bob McKee
"Emerging markets in Asia and elsewhere have not suffered too much from this crisis in Argentina"
Financial Times' Thomas Catan
"Cavallo is really playing a very high risk game here"
Old Mutual's Suresh Sadesivan
"This is the endgame"
See also:

06 Dec 01 | Business
IMF blocks loan to Argentina
03 Dec 01 | Business
Argentina curbs cash withdrawals
25 Nov 01 | Business
IMF spotlight on Argentina
21 Aug 01 | Americas
Argentine salaries paid in bonds
20 Jul 01 | Business
General strike paralyses Argentina
22 Aug 01 | Business
IMF agrees extra cash for Argentina
26 Nov 01 | Business
Slowdown spells debt fears
03 Dec 01 | Americas
Fear of ruin haunts Argentines
03 Dec 01 | Business
Analysis: Argentina's woes explained
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