The resignation yesterday of Argentina's highly respected vice-economy minister, Mr Daniel Marx, has dealt a blow to the credibility of the government of President Fernando de la Rua and raised new fears that the country may be not be able to avoid the world's biggest sovereign debt default.
His resignation comes after a paralysing nationwide general strike on Thursday to protest against soaring unemployment and a bank freeze imposed by economy minister Mr Domingo Cavallo on November 30th.
Mr Marx said he would still head the country's debt restructuring effort, a last-ditch measure to avoid a default which would reverberate dangerously through global financial markets.
The Argentine economy has been weighed down by $132 billion (€146 billion) in public debt, much of it held by institutional investors abroad. European institutions hold an estimated $11 billion of debt, and a further $12 billion is believed to be held in private European accounts.
Wall Street analysts say the increasingly unpopular Buenos Aires government will not be able to raise enough cash through taxes and domestic savings to avoid a default or a devaluation of the dollar-pegged peso early in the new year.
Mr Marx was extremely well-connected in the banking world and was engaged in the delicate work of trying to coax investors to exchange Argentine bonds for a new issue with lower interest rates, through which it hoped to save $5.5 billion next year. Argentina was due to make $700 million in domestic debt repayments yesterday, which Mr Marx said would be met "at the last minute". But he reportedly disagreed with Mr Cavallo over how to raise the money. The economy minister planned to pressurise pension funds to buy $1 billion in bonds to fund the debt service.
Mr Marx is the third government official to resign recently as the economic crisis deepened. Argentina has been in recession since 1998 and unemployment has risen to 18.3 per cent. Further turmoil is likely as Mr Cavallo tries to cut spending in the 2002 budget by $7 billion from this year's $49.6 billion to satisfy the International Monetary Fund.
The government is relying on a cost-cutting budget to persuade the IMF to release $1.3 billion to meet debt repayments. The IMF refused a request for this amount last week, saying not enough was being done to control spending.
The opposition-controlled Congress has said it will not tolerate any more spending cuts in the face of public anger over already-reduced wages and pensions. Mr Cavallo has proposed retracting $4 billion in tax cuts to businesses to mollify unions, but this has upset industry leaders, who say the effect will be to slow down the economy further.
Mr Marx reportedly disagreed with Mr Cavallo's bank freeze, imposed to halt a run on banks amid fears of a currency devaluation. The cash withdrawal limits of $1,000 a month have stifled consumer spending, but can be evaded by use of credit cards. The limits have also sparked fears among savers that the government plans to use their deposits to pay creditors.
Few US economists now believe the Argentine government can keep its pledge not to devalue the peso, which has been pegged to the dollar for 10 years. Argentinians have drawn similar conclusions: yesterday, domestic savers poured cash into safer equities.
A devaluation would hit consumers paying off mortgages and other debts, 80 per cent of which are denominated in dollars. The government may have to adopt the dollar fully, or float its currency. The latter would force a devaluation that could lead to bankruptcies - but help create renewed growth.
