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Thursday, 20 June, 2002, 10:19 GMT 11:19 UK
Argentina's economy slumps
Argentine construction workers are demonstrating in Buenos Aires
Argentine construction workers demonstrate in Buenos Aires
Argentina's economy shrank 16% during the first three months of this year, plunging the country ever deeper into a recession that has now lasted for three-and-a-half years.

According to government figures this is the highest drop since statistics began.

There was a 6% fall in economic activity in this quarter, compared with the last three months of 2001.

These figures are part of the worst possible scenario

Santiago Gallichio, economist
On the financial markets, the government got into yet more trouble, failing to make interest payments worth just under $27m (18m) on so-called Samurai bonds - loans denominated in yen and issued in Japan, although the money is usually provided by lenders from outside Japan.

The decline of Latin America's third-largest economy has triggered a massive devaluation of its currency, the peso, and caused a social crisis that has engulfed the country and brought down successive governments.

Investment and consumption plummet

The drop in Argentina's gross domestic product (GDP - the most common measure for the size of a country's economy) was much worse than expected, analysts said.

Construction workers demonstrating in Buenos Aires
'We want work, not subsidies', say Argentine workers.

"These figures are part of the worst possible scenario", said Santiago Gallichio of economic consultancy Exante.

"The drop in GDP this year could reach 20%", he added.

And there are no signs for an upturn. Domestic investment in the first quarter of the 2002 plummeted 46.1% year-on-year, and private consumption slumped 20.9%.

The fall in economic activity was accelerated by long periods of bank closures during the first three months of the year.

They were imposed by the government during its failed attempts to keep the one-to-one peg with the US dollar and stop a run on the peso.

But the closures did not prevent the peso's sharp devaluation and paralysed economic activity instead.

Savings accounts are still frozen, and savers have now been given one month to decide if they want to swap their deposits for government bonds.

Alternatively, they can opt for bank certificates that can be used to buy big ticket items such as properties and cars, or be used for paying off tax debts.

Hopes for IMF deal

The government is currently negotiating with the International Monetary Fund (IMF) for billions of dollars in loans to jump-start the economy and reschedule its $140bn huge debt burden.

The prospect of fresh cash is the reason why the Japanese administrators of the three Samurai bonds have not declared an official payment default yet.

In a letter to creditors, published in a Japanese newspaper, Argentina's economy minister apologised for the delay in payments and said he hoped to provide more information on "the situation in foreign debt" soon.

An IMF team is currently in Argentina and negotiating terms for fresh loans.

IMF officials have made it clear that the money will only be forthcoming if Argentina implements drastic economic reforms.

The talks were "going reasonably well", IMF officials said, but that did not stop one of the fund's spokesman, Thomas Dawson, from accusing Argentina of squandering its hard currency reserves.

The government in Buenos Aires currently spends $60m a day to support the peso, arguing that this is needed to prevent hyperinflation.

As a result, dollar reserves have dropped by nearly one third this year, to just $10bn.

But Mr Dawson said that Argentina should stop propping up the peso and focus on coming up with economic policies to rebuild the peso's strength instead.

The BBC's Jose Baig in Buenos Aires
"Argentina needs to clarify what is going to happen with it's financial system"
BBC News Online explains how Argentina suffered the near-collapse of its economy


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