Institutions are discredited and there is a total lack of credibility in politicians. On the economic front, the structural depression resulted from a 4-year recession causes a GDP slump between 14 and 17% in said period and a 38% of the population in poverty. A government that cannot afford to render the basic services and the widespread collapse of companies that cannot produce goods and services has caused a public sector debacle hindering it from collecting taxes.

These has given rise to an extremely complex scenario. The December 20 social unrest took a toll of around 20 deaths, lootings to supermarkets and riots countrywide. Against this background, President Eduardo Duhalde assumes the responsibility to rule with three major goals: rebuild the political authority, ensure social peace and create the conditions for an economic and social model that allow Argentina to recover its economic and attract investors.

The first goal –rebuilding political authority- is initially achieved when the Legislative Assembly by overwhelming majority appointed President Duhalde on January 2. We are working on many fronts to attain social peace: food emergency, professional formation and unemployment grants, a health care system and social basic infrastructure scheme for which we will receive support from the World Bank and other international organizations. Lastly, our economic plan aims to recover economic competitiveness, foster exports increase, restore the conditions for productive investments, defend national production and give back to Argentines the hopes to find jobs.

The Argentine debt default has been the largest of history. How would you explain this decision to the world?

I would say Argentina has failed to serve its external obligations due to its impossibility to pay derived from long-running errors of economic policy. In our recent history, every ten years Argentina has been trapped in a debt crisis: in the ’81-’83 period, ’90-’92 and now 2001-2002.

The country’s central problem is that in the ’80s we incurred in public overspending causing the need to finance it by uncontrollably issuing money prompting hyperinflation. The stabilizing scheme of the ‘90s through currency board entailed as a necessary condition a limited public spending and staying away from growing indebtedness. However, Argentina had a inordinate public spending hike and excessive indebtedness that plunged the country into default.

Of course, Argentina’s fiscal behavior deserves reprimand. Two points should be underscored: for one, Argentina’s fiscal non-compliance and misbehavior and for another, a moral hazard problem derived from foreign creditors who have excessively loaned Argentina failing to consider its actual payment capacity. So this is a mutual problem.

The solution?

The solution to the country lies on unveiling a sustainable economic plan that spurs steady growth, fiscal, monetary and exchange rate order. As to the fiscal order, we should not only aim at achieving budget balance but surplus as well. Of course, we need a well-managed monetary scheme and exchange rate which is now free floating in order to properly fix sustainable prices.

Clear export incentives, a favorable investment environment and tie debt payment to GDP growth. The only way for Argentina to have a clear and sustainable solution is through a sound, disciplined, rule-enforcing program. We also need sound negotiations with multilateral credit organizations and establish a public debt restructuring scheme for Argentina to inspire credibility and be able to assume its obligations. Because this is the problem of credibility: otherwise, the country pays interest surcharges that have consequences of wealth transfers.

Historically, the countries that defaulted on their debts have always apologized. The Argentine political class instead gave a standing ovation to the announcement that it would suspend payments on the external debt. In order to regain credibility, should Duhalde’s administration make some sort of clarification with regard to such a welcome to debt default?

The most important action this government should take is to make and enforce rules. When a government sets and enforces rules, it gathers credibility.

By restoring public order as son as possible. The widespread breach of contracts that took place in Argentina is due to the abandonment of currency board and the halt in the chain of payments. That is to say, debtors cannot pay creditors and generate a cascade effect. From now on, once devaluation is contained in transactions and prices, Argentina will head for greater freedom.

Is Argentina heading for greater protectionism?

No. We will have a real exchange rate and clearly respect agreements. We intend to defend national interests –as all the countries in the world- encouraging production and exports, attracting investments and fostering savings. But we are not on the way towards greater protectionism.

Moving on to the ‘contagion effect’ of the crisis. Uruguay has just lost investment grade and President Batlle placed the blame on Argentina; the Madrid stock exchange slumped, Brazil and Chile fear something similar may happen and Bolivia and Paraguay are experiencing a foreign trade decrease, among others. Do you think Argentina will continue affecting Ibero-American countries?

It is true that trade and exchange with many countries have changed, especially the cases of Brazil, Uruguay, Paraguay and Bolivia because now our local production is much more competitive.

As to Spain, it has many direct investments in our country and some sectors have been affected. The problem begins with the recession of the past years. Spanish companies that participated in Argentine privatizations were subject to the US inflation rate despite the local deflation. So the problem is not only a matter of assuming the devaluatory impact. We must also assume that this sort of problems may rise in long-term licensing agreements like this. Economic cycles do not only occur in Argentina but in the whole world. Of course, in countries like ours economic cycle are harsher and create stronger impacts but this does not mean that in the period of a licensing agreement there should be no times of greater expansion or difficulties.

Based on Bush’s suggestion, President Lagos invited Duhalde to implement the economic strategy adopted in Mexico after the Tequila effect. Besides, the government of Chile and Mexico spoke about the possibility of sending specialists to cooperate in the crisis.

Yes, we have received the technical assistance from multilateral credit entities and were able to meet with some experts from all countries that have experienced similar crises in Argentina. The relationship with the rest of the countries in the world is excellent and we are always seeking to strengthen communication and integration ties with Mercosur countries, Chile and Mexico. We are definitely doing so.

Many economists predict the risk of hyperinflation in Argentina. What would you tell them?

Economic analysts make many forecasts and lucky for them they are not sued for bad practices…We have planned a value of 1.75 pesos per dollar on average in the 2002 budget and we intend that to be its value. We must achieve exchange rate and price stability: if we attain the first –meeting the fiscal, monetary and exchange rate rules- we will achieve the second. We estimate an annual 15% inflation with a combined price index, reaching in the first month after devaluation only 2.3%. If we stick to the rules we have created there is no risk of hyperinflation.

‘If we stick to the rules we fixed, there are no risks if hyperinflation’

It is also true that he banking ‘corralito’ has contributed because Argentines do not have money on their pockets to buy dollars…

Part of the Argentine people think the dollar is a shelter. But as I was just saying if we attain an exchange rate stability followed by price stability this will change. If the Argentine people regain trust in the economic institutions, then transactions will be in pesos and there will be no bullish pressures on the dollar.

Assuming this won’t happen and figuring out the worst-case scenario where the economic plan may fail and hyperinflation hit Argentina, are there any possibilities for dollarization to materialize?

Dollarization would not necessarily happen. There are other alternatives such as a monetary basket regime. The idea should be to regain the economic policy tools. The floating exchange rate tempers the external shocks in respect to the domestic behavior.

What would be the advantages and disadvantages of dollarization?

Dollarization has counterproductive effects: implementing unilateral dollarization without a monetary union deal with the United States is highly dangerous. For another thing, Argentina would have no lender of last resort, a mechanism that should be replaced with a safe international process. The whole banking would be foreign, the lender of last resort would be from the country of origin and the bank of origin and the financial entities would be taken as branches.

The possibility to introduce a safe mechanism of internationally placed deposits entailing a high fiscal cost that would be hard to finance in this situation. Besides, relative prices would freeze at their current value making it difficult to recover the wage purchasing power and a marginal adjustment of it. This would mean assuming the productivity gap between Argentina and the United States which should be replaced with a huge increase in our productivity requiring investments, technological transfer, more efficient organizational models, etc. Only by means of a monetary union treaty, a bilateral free trade agreement, the possibility of having a lender of last resort at international level and bridging the productivity gap, could dollarization be feasible.

Strengthened Mercosur, united South America or FTAA?

These are not incompatible at all, they are 3 stages: a strengthened Mercosur and a united South America reach an FTAA with high economic transaction capacity.

President Duhalde spoke about the possibility for a ‘civil war’ to occur in Argentina. Under what extreme conditions could this happen?

The loss of political authority causes chaos and anarchy. Anarchy results from the prelude of a national dismantling process and this of course may trigger fratricide fights deriving in a civil war. This is illustrated by the experience of many countries. But today, Argentina is heading for a strong recovery of political power, a new organization of the economy, institutions and society. I think that ghost will disappear.

Interview by Norma Domínguez