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Duhalde Struggles with Delicate Economic Balancing Act - 2002-01-23

Argentine President Eduardo Duhalde is walking a delicate tightrope as he struggles to balance the conflicting demands by different sectors of society suffering from the impact of the country's financial crisis. Mr. Duhalde, who has been in office less than a month after two of his predecessors were ousted by protests and rioting in December, faces a potentially volatile situation in which missteps could lead to another government collapse.

The protests have been relatively small so far but fiercely angry as marchers beat pots and pans in what is known in Spanish as a "cacerolazo". The demonstrators are angry with politicians, with the banks, and with anyone else they believe responsible for Argentina's dire situation.

It was the surge of huge "cacerolazos" made up largely by members of Argentina's middle class in late December that led to the downfall of two governments. These street protests in Buenos Aires and other cities were born from the frustration over government policies that failed to pull the country out of its deep financial crisis.

Mr. Duhalde, who took office on January 1, inherited a bankrupt and indebted nation that is mired in a nearly four-year recession. One of the first steps by the former governor and senator from the dominant Peronist party was to devalue the currency by almost 30 percent, after it had been pegged by law at a one-to-one rate to the U.S. dollar since 1991.

The peso-to-dollar peg originally provided financial stability to Argentina, but was increasingly viewed by many economists as a hindrance to efforts to end the crippling recession. A dual exchange rate mechanism is now in force.

But the devaluation, and continuing restrictions on bank withdrawals, have hit Argentines hard. Even though Argentines were paid in pesos, they saved in dollars and their debts also were in dollars. Almost two-thirds of the country's bank deposits, or some $46 billion, were in dollar-denominated bank accounts.

Mr. Duhalde pledged upon taking office that those who had dollar deposits would get their money back in dollars, despite a devaluation. His government also promised that debts up to $100,000 would be repaid in pesos at a one-to-one rate.

But this past weekend, Mr. Duhalde said there are not enough dollars in the banking system to honor his pledge, and that the dollar-denominated bank accounts will probably be changed to pesos. The Duhalde government is also considering measures to soften the blow against creditors, by making dollar debts convertible at a higher peso exchange rate. At the same time, the government has loosened certain restrictions on bank withdrawals imposed in early December but is keeping others in place to avoid a run on the banks and a collapse of the financial system.

Political analyst Paula Montoya says the frustration over these changes could spark bigger protests, though she notes so far the demonstrations this month have been relatively small. At the same time, Ms. Montoya, who works for the Buenos Aires political consulting firm, Ipsos-Mora y Araujo, tells VOA popular anger is deep. "People are very angry, yes, with the measures Duhalde took, with the measures people before [him] took," he said. "People are very, very angry, in general, with all the politicians. They are today the despised people of society, and protests will continue if we don't have we need some results. And we have to re-establish confidence, and that's difficult it's not impossible, but it's difficult. When we [will] start to see some results, maybe the temperature will go down. But we're still in a very delicate equilibrium."

Mr. Duhalde's latest measures, while angering many Argentines, have been welcomed by the banks. According to one estimate, they will save $16 billion by not having to repay the dollar-denominated deposits with pesos at a one-to-one rate. They also stand to reduce their losses if outstanding loans are repaid at a higher peso exchange rate.

But some economists are pessimistic any of these measures will work. Economist Aldo Abram of the Buenos Aires consulting firm Exante warns the economic situation will deteriorate even further.

"The two most important things that you must have to construct an economy, to build an economy are: one, monetary and exchange stability and two, a financial system in which the people have confidence and we have destroyed both," he said.

Mr. Abram believes the only way out of the crisis is for the government to dollarize the economy.

But President Duhalde is heading in the opposite direction, and is turning the dollar-denominated economy into pesos, a process known here as "pesification". This appears to be a policy favored by the International Monetary Fund, which is studying Argentina's request for a large emergency loan to help the country get through its present difficulties. The IMF also has been pressing Argentina to move away from its dual exchange rate system and the goverment has said it is willing to do so.

International Relations professor Carlos Escude believes all this indicates that the Duhalde government is shifting away from its original populist promises to get the support of the IMF and the international community. Mr. Escude, who teaches at Di Tella University in Buenos Aires, believes the Argentine leader may be willing to sacrifice some demands of his populist party, to meet others he considers more important.

"I understand Duhalde is basically a pragmatist, and if he perceives that the costs of letting down some sectors of the Peronist party is less dangerous than the costs of confronting these external forces, he will let these people down," he said. "If, however, the message is not clear enough from the outside world then he might be tempted to make further concessions to domestic sectors."

But it is a dangerous balancing act, and it is not clear if the IMF will ultimately come to Argentina's rescue. The Fund had extended more than $20 billion in loans to Argentina over the past two years only to see the economy deteriorate even further. IMF officials are saying Argentina needs to come up with a credible and sustainable economic rescue plan, while at the same warning Argentines that they may experience further hardship. For his part, Mr. Duhalde warns that if his government fails and is ousted by street protests, the country could plunge into blood-soaked anarchy.