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Tuesday, 11 December, 2001, 15:32 GMT
Argentina's failed 'miracle worker'
Domingo Cavallo and President de la Rua
Cavallo and de la Rua eye each other cautiously
By BBC News Online's Stefan Armbruster

When Domingo Cavallo was appointed as Argentina's economy minister in March, he had a reputation in the international financial markets as a worker of economic miracles.

Ten months later, the illusion appears to be shattered as an Argentine default on its $132bn foreign debt, the largest in history, looks unavoidable.

The government needs to find $900m by Friday to service the debt and wants to cut $7.1bn from the current $49.6bn budget.

But unrest over the latest austerity measures and resistance from the opposition-controlled Congress have brought an end to Mr Cavallo's second term as economy minister.

More bumbling

President Fernando de la Rua's political bumbling after his election in 1999 is largely to blame for the economic troubles.

Interest rates have soared, making debt and interest repayments more expensive, exacerbating a four-year-long recession.

He appointed Mr Cavallo - a hot-tempered, Harvard-educated economist, who opposed him for the presidency in the 1999 elections - to sort out the mess.

For Mr Cavallo, who still harboured presidential ambitions, it represented the prefect platform for the 2003 election campaign - but those hopes are now dashed.

History repeats

Mr Cavallo has been here before.

In 1991, Argentina's President Carlos Menem charged Mr Cavallo with saving the country's troubled economy.

He tamed hyperinflation, which at one point had reached the catastrophic rate of 27% per month.

But Mr Cavallo also deserves much of the blame for Argentina's current predicament.

Ten years ago, he introduced the currency peg that backed every peso with an equivalent dollar in reserves.

Inflation fell, foreign investment poured in and the economy grew an average of 8.2% between 1991 and 1994 but it made exports more expensive than those of rivals such as Brazil.

He also privatised state-run industries which pushed unemployment up to 17%.

By 1996, Mr Cavallo had fallen out with President Menem and left office alleging executive corruption.

Cavallo's end?

Mr Cavallo's two predecessors under Mr de la Rua failed to get the economy going.

On his appointment, the Argentine Congress awarded him special executive powers to reform the tax system, lower the budget deficit and overhaul state agencies.

But despite severe austerity measures, which have caused mass protests across Argentina, he has failed to raise enough money to service the debt or rekindle foreign investor confidence.

The International Monetary Fund, which applauded is appointment, has just refused him a $1.3bn loan.

Default or devaluation

If Argentina fails to raise enough money by Friday, it faces two options, devalue the peso or default on the foreign debt.

Because most of Argentina's contracts are written in dollars, devaluation would be devastating, making a default the more likely option.

But even this would be calamitous for international lenders, as Argentina represents more than 20% of JP Morgan's emerging markets bond index.

See also:

10 Dec 01 | Business
Argentina in new bid to cut debts
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
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 | Business
Analysis: Argentina's woes explained
03 Dec 01 | Americas
Fear of ruin haunts Argentines
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