February 11, 1999
Brazil, Argentina to discuss ties amid crisis
                  SAO PAULO (Reuters) -- Brazil and Argentina will try to smooth over
                  tensions on Friday as the two largest South American economies grapple
                  with the fallout from Brazil's abrupt devaluation.

                  President Fernando Henrique Cardoso was due to meet with Argentina's
                  Carlos Menem in the mountain resort of Campos de Jordao to discuss the
                  impact of Brazil's crisis on the young Mercosur trade bloc which also
                  includes Paraguay and Uruguay.

                  Diplomats say the presidents would not dwell on harsh words traded last
                  month, at the height of Brazil's currency crisis.

                  Menem, who has ushered in unprecedented stability in his country,
                  suggested Brazil do as he did in Argentina -- set up a dollar peg through a
                  currency board foreign exchange system and confiscate savings to finance a
                  future debt restructuring.

                  Brazil's Central Bank quickly shot down the idea, saying a currency board
                  would be not be suitable for Brazil.

                  But the talk of seizing bank accounts snowballed into panic that prompted
                  some Brazilians to pull their savings out of bank accounts on a frantic day in
                  late January.

                  Argentina dragged itself out of hyperinflation with its painful economic plan
                  launched in 1990. But a 35 percent drop in the value of its neighbour's
                  currency means Argentina will have its own year of suffering in 1999,
                  economists say.

                  Argentina sends more than 30 percent of its exports to Brazil and Argentine
                  businessmen, fearing a wave of cut-price Brazilian goods, have called for
                  protection through tariffs.

                  Figures released on Wednesday showed Brazilian exports to Argentina
                  actually fell in January but analysts said the real impact of the devaluation
                  would only be felt in February.

                  "Brazilian products have become extremely competitive so it is normal that
                  our neighbours would fear an avalanche," said Roberto Giannetti da
                  Fonseca, president of trade consultants Silex Trading in Sao Paulo and a
                  leading supporter of Mercosur.

                  Giannetti da Fonseca said Cardoso would be sympathetic to Menem,
                  knowing that their understanding is the key to the future of the five-year-old
                  Mercosur customs union.

                  Brazil's head export official Jose Botafogo Goncalves has suggested the
                  government will scrap cheap financing for Brazilian consumer goods exports
                  to Argentina, maybe at Friday's meeting.

                  More radical concessions, experts say, such as export quotas and special
                  tariffs, could undermine the basis of Mercosur -- free trade.

                  Mercosur, which counts Bolivia and Chile as associate members, has grown
                  into the world's third largest trade bloc, behind the European Union and the
                  North American Free Trade Agreement. Trade in the region has grown
                  five-fold since 1991 to about $20 billion.

                  The bloc has also helped diminish centuries-old tensions between Brazil and
                  Argentina which as recently as the 1970s considered one another as
                  potential military enemies.

                  Friday's meeting precedes a summit of Mercosur heads of state on Feb. 22
                  in Rio de Janeiro.

                  After the friction of the last month and the terrible outlook for 1999, the two
                  presidents will also be discussing a single currency, up to now only a vague
                  long-term concept for Mercosur.

                  "Maybe Campos de Jordao will become the Maastricht of Mercosur," said
                  Giannetti da Fonseca, referring to the Dutch spa city where European
                  countries agreed to work toward a single currency in 1992.

                     Copyright 1999 Reuters.