The crisis in Argentina deepened in March after three ministers, including the Education and Economy Ministers, resigned after the government agreed a new austerity programme with the IMF. It involves $8 billion in spending cuts over three years with cuts in education of as much as $2 billion. The cuts are necessary if the government is to keep on track with its $40 billion IMF programme, which requires a reduction of annual budget deficit to 2.4 per cent of the gross domestic product. The new Economy Minister, Domingo Cavallo has stated that he will not devalue the currency.
If Cavallo is unable to get the proposed spending cuts agreed by parliament, other options are dollarisation or default. Devaluation would make the economy more competitive but it will increase the country’s debt burden as the economy is already partly dollarised. It would also dent Cavallo’s credibility.
Default may be preferable to a prolonged economic slump, but it will cost the country’s credit rating and scare off foreign investors. Default by Argentina is likely to hit other emerging markets, raising borrowing costs.
