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Rescue on the Pampas
Subject Argentina's debt crisis
Topic International Finance
Key Words Economic Growth, Debt, Default, Devaluation
News Story

There are widespread fears that Argentina, faced with $132 billion in debt, an economy in recession, high unemployment and rising poverty, will default on its debt repayment. In an effort to avert this economic crisis, President Fernando de la Rúa announced a partial restructuring of the country's debt along with subsidies for the poor and tax breaks for business firms. The proposed debt swap would trade bonds held by banks and pension funds for securities with lower interest rates but guaranteed with tax receipts. The value of the peso will continue to be pegged to the dollar rather than devalued as many investors had feared.

The recovery package includes a debt swap, cash payments to five million children and a half-million older Argentinians, a reduction in sales taxes if consumers use credit cards instead of cash, lowered income and payroll taxes for manufacturers and transportation firms, and tax incentives to oil companies for continued exploration.

The recovery package includes a debt swap, cash payments to five million children and a half-million older Argentinians, a reduction in sales taxes if consumers use credit cards instead of cash, lowered income and payroll taxes for manufacturers and transportation firms, and tax incentives to oil companies for continued exploration.

Argentina is in its 41st month of recession and there are signs of increasing unrest. The unemployed are constructing roadblocks across the country and the president of the leading trucker's union, Hugo Moyano, is planning to have his members block major border crossings in an effort to keep out foreign goods.

(Updated December 1, 2001)

Questions
1. Argentina's financial problems have caused President de la Rúa to proclaim that his country is one without credit. Why would potential creditors be reluctant to lend to the government? What are the consequences to Argentina of not being able to borrow additional funds from either the banks or from foreign lenders?
2. In light of the revenue shortfall, what measures could the government adopt to achieve its goal of a government deficit equal to zero? What is the likely impact of these policies on unemployment?
3. What does the head of the truckers' union hope to accomplish by blocking the import of foreign goods? How is this blockade supposed to aid Argentina? How will it hurt the Argentinians?
Source Clifford Krauss, Argentine Leader Announces Debt Revision and Subsidies, The New York Times, November 2, 2001.

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