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US Secretary Visits Three Troubled Nations

August 6, 2002

A Controversial U.S. Treasury Secretary Visits Three Troubled Nations

* Policy of benign neglect, which shifted to malign neglect under the State Department's Otto Reich, now lurches toward activism under a newly-energized Paul O'Neill.

* U.S. Treasury Secretary O'Neill visits Argentina, Brazil and Uruguay in a four-day trip aimed at halting economic crises and restoring his reputation.

* Uruguay bailout of US$1.5 billion in IMF, U.S. Treasury and foreign lenders assistance represents an abrupt departure from Bush administration's previous foreign economic policy of no direct loans. Explanation: reward for Uruguay's transmittance to the U.N. of Washington's condemnation of Cuba.

* Brazil remains hopeful for major aid, while upcoming presidential election continues to dictate the wild gyrations of the economy. Presidential candidates Lula and Gomes remain on the hidden agenda.

* Argentina, still struggling under the weight of political scandals and economic despair, weathers another economic brush-off by the IMF as Buenos Aires prepares to witness protests against O'Neill's visit.

While U.S. policy under the Bush administration has almost axiomatically shied away from large-scale bailouts, immediate economic aid packages top the agenda for Treasury Secretary Paul O'Neill's four-day visit to three deeply troubled South American countries this week: Argentina, Brazil, and Uruguay. In meeting the countries' three presidents, he will stress that it is U.S. policy to see their early return to economic stability and prosperity. O'Neill previously suggested during a national TV interview last week that corruption in the Latin American nations was at the heart of their woes and even raised concerns regarding help to Brazil by prophesizing that U.S. taxpayers' dollars might be "wasted on Swiss bank accounts." But in light of a fierce reaction from his trip's hosts, he swiftly changed his views just hours before his departure-a change of heart which was obviously prompted by the White House.

Definite agreements are being negotiated for Brazil, and a rescue loan of US$1.5 billion has been set for Uruguay, which is being immediately transferred to Montevideo by means of a U.S. Treasury bridge loan. Meanwhile, little has been said about Argentina, the nation that has followed most IMF procedures yet was the first to be slammed by an economic crisis of unprecedented magnitude. While Buenos Aires is pushing to restart its IMF aid program, crowds of jobless Argentines and human rights activists plan to march in protest against O'Neill's visit, saying they will erect roadblocks in the capital and mount protests outside the presidential palace.

Aid to Uruguay: Policy Deviation Given its increasingly weak performance over the past several years, it has long been expected that Uruguay's economy would follow Argentina's into a state of catastrophe. The unstable political atmosphere in Uruguay has done nothing to bolster its financial situation. Many wonder if Uruguay's economy would still be as heavily reliant on Argentina's as it is today, had President Jorge Batlle carried through on his campaign promise of broadening Uruguay's trade arrangements beyond just Mercosur. However, the failure to diversify trade is among the least of the Uruguayan president's sins.

Working for the Yankee dollar During last April's meeting of the UN Human Rights Commission, Uruguay agreed to do Washington's bidding after the White House failed to obtain Peru or several other Latin American countries' backing for a motion condemning Cuba's human rights record. Key to this initiative was U.S. Assistant Secretary of State for the Western Hemisphere, Otto Reich. The result of this action was the severing of all diplomatic ties between Cuba and Uruguay much to the chagrin of many Uruguayans. Specialists awaited Batlle to be rewarded, and apparently the bridge loan was the Uruguayan president's crown of thorns. However, in June this incident was trumped by another, even more exotic example of Batlle's controversial presidential style. Feeling particularly exuberant, Batlle labeled Argentines as "a pack of thieves" and raised questions concerning President Duhalde's political prowess. Although Batlle later made sobbing apologies to both the Argentine president and nation, the sincerity of that gesture continues to be questioned. If Batlle now thinks that he has won because Uruguay had been promised the first IMF loan, he may be sorely mistaken.

The economic situation in Uruguay is grave, due to the country's heavy dependency on Argentina for tourism and trade as well as for banking clients, and their shared membership in Mercosur. Because of their reputation for possessing a solid credit rating, Uruguayan banks have long attracted funds from around the region. But its economy has now been jolted, prompting the possibility of an Uruguayan default that could have a powerful psychological impact on investors. However modest the sum may be, an urgent US$1.5 billion loan from Washington, the IMF and the IDB could send an important message about Uruguay's credit-worthiness.

Conscious about the small South American nation's emergency, the loan is being formulated with an extraordinary tempo. The U.S. has already advanced the funds in the form of a bridge loan with hopes that Uruguay would open its banks today and rejuvenate their payment system. Last Tuesday, to ease economic pressures, the Uruguayan government was forced to close banks for the first time in 20 years. The closure led to riots in Montevideo.

Brazil: Politics Dictate Loan Package For the past three months, investors' fear of a leftwing victory in October's presidential election has caused the Brazilian stock market to plummet by more than four percent, which in turn has been accompanied by a fall in the value of the real. The problems began to mount after President Fernando Henrique Cardoso's chosen successor, José Serra-who Wall Street expects to preserve the current government's market oriented policies-had fallen early last month to third place in opinion polls, far behind the leftist Workers' Party candidate Luis Inácio "Lula" da Silva and the Labor Front coalition's Ciro Gomes.

The country's mounting economic-political crisis turned increasingly more critical after O'Neill uttered his explosive remarks over national TV that the U.S. would not be offering immediate additional aid during his visit. He added that these countries' leaders should convince lenders that financial assistance would not be transferred to private Swiss bank accounts. As a result, last week, the Brazilian real touched its lowest point since it was created several years ago, losing a percentage of its value against the dollar by 25 percent and further contributing to the economic slow-down that the country has been experiencing throughout July.

However, due to the political controversy of the last few days, O'Neill dramatically changed his message: "I continue to favor support for Brazil and other nations that take appropriate policy steps."

In Brazil's eight-year period of relative stability, President Cardoso was highly respected for his strong management skills; now this is no longer the case as he prepares to leave office. Despite the president's struggle to maintain stability during the transition period, a crisis of confidence has ensued as analysts fret over how Cardoso's successor will manage the country's massive US$250 billion debt. Cardoso has promised to discuss the ongoing IMF negotiations with Brazil's presidential candidates, in the hopes of signing an accord of transition.

After a three-hour long dinner with O'Neill at Central Bank President Arminio Fraga's home, Treasury Minister Pedro Parente and Financial Minister Pedro Malan were more hopeful than ever. A smiling Malan said, "It was an excellent talk." Parente indicated that O'Neill seemed favorable to negotiations between Brazil and the IMF. O'Neill, however, left without speaking to the press.

After today's meeting with Cardoso, O'Neill was described as "very cordial" with the president. O'Neill also repeated that Washington "has strong support for Brazil's economic policies" and that the negotiations with the IMF would give positive results. But will he change his current policies regarding tariffs on Brazilian steel shipments exported to the U.S. or the US$180 billion in subsidies for U.S. agricultural products that compete with Brazilian farm exports?

Argentina: Desperate and Deserted Treasury Secretary Paul O'Neill's statement of his initial unwillingness to authorize more monetary aid to Latin American countries no doubt was a sly insult to Argentina's increasingly discredited ex-president, Carlos Menem. Menem was plagued during his ten-year presidency (1989-1999) by scandals and corruption, most notably his 1989 pardon of members of the "Dirty War's" military junta. Public anger arose over his release after only a six-month house arrest for arms smuggling. Recently, rumors that Menem accepted US$10 million from Iran as a bribe to cover up that country's involvement in the bombing of the Argentine-Jewish Mutual Aid Association has further undermined his and Argentina's standing with American officials. Questions were raised about a Swiss bank account bearing Menem's name, prompting O'Neill's insult.

As a further jibe to Argentina, both Uruguay and Brazil have been promised economic help, while Washington has been unclear regarding Argentina's aid prospects. One can only hope that when O'Neill visits the increasingly impoverished and struggling Southern Cone nation, he will begin to understand the full ramifications of the despair which he will encounter there. Argentina is in need of billions of dollars of international assistance. Unemployment rates continue to soar, now climbing to more than 30 percent, while the stock market is systematically descending into stygian lows. After abandoning the pegged exchange rate, Argentines are strapped for cash-Buenos Aires newspaper Clarín reported on August 4 that only three percent of the people have the ability to put aside any savings.

Telling the Truth on Argentina Regional troubles are linked in part to a delayed contagion effect from the meltdown in Argentina, which staged the largest debt default in history last January. Since Argentine President Eduardo Duhalde took office that same month, he has pursued one concrete goal: to restore good relations with the IMF. Duhalde understands that without the IMF's validation, Argentina will be unable to seek alternate international lenders. Lately, the country's Central Bank president, Aldo Pignanelli, casually affirmed the IMF's refusal to aid Argentina because the country has not presented any sustainable economic recovery plan. Thomas Dawson, the IMF's chief spokesman, was also reserved about the prospects of new aid coming for Argentina, despite its crippled economy. However, Duhalde seems to ignore such comments, expecting to sign a definitive accord with the IMF based more on O'Neill's assessment over the course of his tries than Argentina's presentation of a coherent plan to the IMF. As a result, the Argentine government has balked at some of the conditions the IMF has set. However, according to O'Neill, the Bush administration is "very, very anxious" for Buenos Aires to embrace policies that will enable it to reach an IMF accord.

Pignanelli's insistence that the Duhalde administration has not yet defined the country's economic program, particularly pertaining to its over US$120 billion foreign debt as well as guidelines concerning its domestic banking system, has stung the Casa Rosada. In response, Duhalde berated the Central Bank head as one of "those pessimists who is content when everything goes wrong for us." Additionally the president, popularly known as "El Cabezon" (The Big Head), defended his administration's policies by stating that the country is overcoming the current collapse through internal efforts.

U.S. Policy Comes Back to Haunt Latin America Beginning with the post-Cold War era, U.S. policy strongly encouraged Latin American governments to abandon economic protectionism in favor of free-market liberalism. As a result, an income gap steadily widened between the few who prospered under principles of privatization and structural reforms, and the bulk of the populace who have seriously suffered at the hands of such policies. Now, as the economies of the three countries falter and they face severe financial crises, one must question the success of this U.S. strategy of demanding drastic economic reforms while withholding the details.

The Bush administration, which repeatedly has denounced major bailouts, has just assisted in the direct delivery of US$1.5 billion to Uruguay, a move Treasury officials torturously claim is not a deviation from the president's stance. The intimate involvement of the U.S. with Uruguay's speedy aid package will guarantee O'Neill a more congenial welcome in a region that normally features skeptics. Despite the temporary relief this multilateral aid package provides, Uruguayan authorities will be left scrambling to find funds to repay the supposed short-term loan in a timely manner.

In reference to Brazil, the eighth largest recipient of U.S. direct investment, Federal Reserve Chairman Alan Greenspan said the problems are "100 percent political." Shortly thereafter, Secretary O'Neill sent Latin American currency and financial markets into a swoon when he said that, "Throwing the U.S. taxpayers' money [at Brazil] doesn't seem brilliant to me."

What the U.S. Really Fears Fears of a leftist victory in Brazil's October presidential election have had a chilling effect on increasingly anxious overseas investors who want to avoid possible debt default in the near future. A leftist Lula or even a Gomes administration would largely influence the economic conditions of the country. Yet, just as Assistant Secretary of State Otto Reich threatened to cut off U.S. aid if a leftist were elected in Nicaragua and Bolivia, any similar attempt to stir the outcome of Brazil's election in October could greatly disrupt U.S.-Brazilian relations.

In Argentina, the country that most faithfully followed procedures of the U.S.-dominated IMF and the only one not mentioned on O'Neill's list of promising aid candidates, the national income has shrunk by nearly two-thirds. Fifty percent of the population now lives below the poverty line. The only way out for the country, according to Argentine leaders, is for Buenos Aires to lobby the IMF's principal contributor, the U.S., for a badly needed jump-start.

Although all Latin American nations, save Cuba, now have open markets and democratic leaders, the overall effect of U.S. economic policy has devastated those it attempted to help-the people. A region that Washington once viewed as a post-Cold War success story now struggles with dire poverty and financial ruin, both self-inflicted and imported from the U.S. This tragic situation will greet Treasury Secretary O'Neill when he arrives in Argentina tomorrow.

This analysis was prepared by Christina M. Fetterhoff, Kyung Yun Lee and Shruti Mathur, COHA research group. The Council on Hemispheric Affairs, founded in 1975, is an independent, non-profit, non-partisan, tax-exempt research and information organization. It has been described on the Senate floor as being "one of the nation's most respected bodies of scholars and policymakers." For more information, please see our web page at www.coha.org

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