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Enron Mail |
FYI.
---------------------- Forwarded by Jeffrey A Shankman/HOU/ECT on 11/17/200= 0=20 05:16 PM --------------------------- Robert Johnston 11/17/2000 09:15 AM To: Gary Hickerson/HOU/ECT@ECT, Max Yzaguirre/NA/Enron@ENRON, Jeffrey A=20 Shankman/HOU/ECT@ECT cc: William Stuart/HOU/ECT@ECT, Shane Dallmann/LON/ECT@ECT, Pushkar=20 Shahi/HOU/ECT@ECT, Ellen Su/Corp/Enron@Enron, Michelle D=20 Cisneros/HOU/ECT@ECT, Trena McFarland/NA/Enron@Enron, Eric Scott/HOU/ECT@EC= T,=20 Paul Pizzolato/HOU/ECT@ECT, Aaron Armstrong/LON/ECT@ECT, Jurgen=20 Hess/LON/ECT@ECT, Martina Angelova/LON/ECT@ECT, John Greene/LON/ECT@ECT,=20 Scott Tholan/Corp/Enron@Enron=20 Subject: Argentina and Emerging Markets The crisis in Argentina has a lot of people talking about another emerging= =20 market crisis. This source believes that such talk is overblown, at least= =20 for now. RJ ARGENTINA:THE UNPALATABLE CHOICE AMONG DEFLATING, DEFAULTING OR DEVALUING Executive Summary The recession in Argentina is deepening and the government faces painful=20 choices in addressing it While the current strategy of deflation is unpopular, default or devaluatio= n=20 could be even more painful Deflation will remain the strategy of choice so long as De la Rua survives;= =20 if his government falls, both default and devaluation become likely Mexico and Brazil are in a stronger position to face the fallout from a=20 devaluation than they were in 1998 November 16, 2000 1. Argentina Recession The question haunting observers of Argentina is whether the De la R?a=20 administration will succeed in stabilizing the country=01,s economy and pulling it out of its second=20 recession in five years. Indeed, the 11-month old administration has not lived up to expectations and is=20 quickly losing market confidence. Although the country has so far maintained the support of the I= MF=20 and Washington, the outcome of the unfolding crisis is by no means certain. Argentina is=20 trapped in a fixed exchange regime that succeeded in taming inflation but is now impairing its= =20 competitiveness and long-term prospects. 2. Deflate, Default, or Devalue? The administration faces a number of unenviable choices as it tries to redu= ce=20 the difference between internal and external prices. It can continue with its present cour= se=20 of action, attempting to cut its fiscal deficit amid a deepening recession and a growing debt=20 crisis. The adjustment of relative prices would thus be accomplished through continued deflation. A= =20 variant of this scenario would be to renegotiate part of its external debt, in order to reduce the= =20 increasingly onerous interest payments, or default on its sovereign bonds. This, however, would destroy t= he=20 last shred of confidence, jeopardize Argentina=01,s future access to international capita= l=20 markets, and ruin the country=01,s relations with major industrialized countries. Finally, the co= untry=20 could opt to devalue. Arguably, the financial and social cost of this action would be high, but t= he=20 country could recover relatively quickly, as the cases of Mexico and Brazil suggest. 3. Recession Threatens De la Rua Survival The outcome will depend on whether the De la R?a administration remains in= =20 power. The government is committed to pursuing a deflationary adjustment, hoping that = it=20 will pay off by next year, provided that the US dollar weakens and that its access to=20 international markets is maintained. However, if the deflation is more prolonged and the economic=20 recession becomes socially and politically untenable, the ruling coalition could disintegrate= =20 and the president could be forced to resign. In that case, the new government would probably decide to= =20 devalue immediately after taking power. 4. Brazil and Mexico Less Vulnerable to Contagion than in 1998 The Argentine crisis has raised the specter of emerging market financial=20 instability, notably in Brazil and Mexico. However, these fears may be unfounded given the progress= =20 made by the latter countries in improving their fundamentals. Indeed, both Brazil and Mexico n= ow=20 feature a floating exchange rate regime and have gone a long way in terms of balancing their= =20 fiscal accounts. Thus, in the event of an escalation of Argentina=01,s difficulties, both countrie= s are=20 well equipped to overcome temporary financial turmoil.
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