Chance of New Bailout Considered Slim

By Anthony Faiola and Paul Blustein
Washington Post Staff Writers

BUENOS AIRES, Nov. 2 -- One day after the Argentine government announced plans to restructure its crushing debt, bank lending rates and government bond
yields soared, reflecting a growing belief that the country is headed for default with little chance of another international bailout.

The International Monetary Fund and finance ministers of the Group of Seven leading industrial countries issued statements that, while praising Buenos Aires for
seeking a debt restructuring, offered no hint they are willing to provide new loans -- a deliberate omission, according to officials in Washington.

"We are pleased that Argentina is taking the initiative," the G-7 statement said, referring to the government's plan, unveiled Thursday, to induce its creditors to swap
about $100 billion in high-yielding bonds for securities paying much lower interest rates. "It is important for Argentina to return to an economically sustainable path,"
the statement said.

That wording, analysts said, strongly indicated that this time, Latin America's third-largest economy will not be rescued from the prospect of default. If so, it would
mark the first case in which the Bush administration had acted in accord with its vows to limit international bailouts; earlier this year, the administration bowed to
pressure to rescue Turkey and go along with a $5 billion increase in Argentina's $14 billion IMF loan.

"I would interpret what is happening as the Bush administration finally letting a country solve its problems with its creditors without the benefit of a large international
financing package," said Michael Mussa, a fellow at the Institute for International Economics who recently retired as the IMF's chief economist.

Although many economists agree that Argentina has run out of alternatives to default, the consequences are likely to be painful for a country that has suffered through
a brutal 40-month recession that has sent unemployment and poverty soaring, dramatically lowering the standard of living for millions of people. A default would
likely deepen the recession and prompt lenders to shy away from the country for years, putting pressure on Argentine companies that need foreign financing.

Concerned Argentines have been pulling cash for several days from banks, which stand to suffer major losses in a default. If a full-blown bank run materializes, with
people dumping pesos for U.S. dollars, the government could be forced to abandon its system of pegging the peso to the dollar at a one-for-one rate. Argentina
created the fixed-rate currency in 1991 in an action crucial to ending runaway hyperinflation.

Under the currency system, the debts of most Argentines, from car loans to home mortgages, are denominated in dollars. Accordingly, a devaluation would lead to a
devastating number of personal and corporate bankruptcies.

Argentine government officials had hinted in recent days that they were hoping for additional financial aid from the IMF or other international lenders that could be
used to make it attractive for bondholders to swap their securities -- by offering, for example, a guarantee of payments. But President Fernando De la Rua said today
that Argentina would not seek it.

As a result, analysts voiced skepticism that the government could fulfill its pledge to conduct the debt restructuring in a "voluntary" fashion. Moody's Investors Service
and Standard & Poor's Corp. have said they will cut Argentina's credit ratings to default levels if the restructuring results in losses for bondholders, and rating agency
Fitch today cut its rating to only two notches above default status.

"We still need to thoroughly review the details, but there is nothing in [Thursday's] decree that indicates there will be any compensation for the lost interest to
investors," said Jane Eddy, Standard & Poor's managing director for sovereign ratings. "The question remains whether or not there will be any kind of valuable
compensation, but at this moment, it certainly doesn't jump out at you."

One reason Washington could allow an Argentine default is that the effect on other countries may well be limited, even though it would come at a time when the
world economy is slowing, and even though Argentine bonds account for a sizable chunk of the emerging-market bonds held abroad.

Sure enough, although Argentine bonds fell today, there was only a slight effect in other emerging markets. That was true even in neighboring Brazil, where the prices
of benchmark bonds edged higher. In part, the muted reaction stemmed from the fact that, amid political bedlam in Argentina, economists have been predicting a
crisis for months.

But the risks of "contagion," which was so severe after Russia's default in 1998, are by no means absent in a region with bad memories of domino-effect debt crises
dating back to the early 1980s. In Brazil, which is Latin America's largest nation and Argentina's leading trading partner, the currency, the real, has plunged 40
percent in recent months as Argentina's financial crisis has simmered, and foreign investment has dropped as well.

A default in Argentina, combined with the intensified threat of a devaluation of the peso, would presumably force Brazil to defend its currency by hiking interest rates
and using precious reserves of dollars to buy reais. The Brazilian government could also be forced to adopt unpopular austerity measures, putting the brakes on the
already slowing economy.

But many economists believe that Brazil is far better prepared to withstand an Argentina default now than it was three years ago, when the fallout of the Asian and
Russian financial crises led to a forced devaluation of the real.

In the past three years, the administration of Brazil's President Fernando Henrique Cardoso has reined in runaway government spending, generating a primary budget
surplus of roughly 3 percent. Confidence in Brazil's fiscal policy was key in winning $15 billion in loan guarantees from the IMF in August, money Brazil can now
draw on in a cash crunch.

Also, Brazil is expected to post its first trade surplus in seven years during 2001, and its lower cost structure has helped lure hundreds of manufacturers from across
the Argentine border.

"We've taken the necessary precautions to insulate ourselves" from an Argentine default, Sergio Amaral, Brazil's minister for trade and industry, said in a telephone
interview from Brasilia. " . . . I have no doubt that investors will recognize that."

                                               © 2001