Argentina on the Verge of Economic Collapse

Thousands of angry protestors gathered outside Argentina’s parliament for the second day in a row on Tuesday. Banging empty pots and pans against the gates of power, the inflamed crowd accused the government of thievery and demanded the resignation of the entire cabinet.

Inside the building, protected behind a heavy shield of security, President Eduardo Duhalde met with his ministers to discuss how to restructure the cabinet and resolve the latest economic crisis following the resignation of the country’s economics minister.

A general sense of frustration and helplessness characterizes the country. Banks have been shut down for the entire week to prevent panic withdrawals. Police have been called in to protect members of parliament, and everywhere people fear a return to the violent unrest which shook the country in December and forced the then President Fernando de la Rua to quit.

Financial crisis

In a bitter statement illustrating the hopelessness of the current situation, presidential aid Anibal Fernandez said, "We could not even talk about implementing a new economic plan, because we have no economics minister."

Jorge Remes Lenicov, the country’s fifth economics minister in a year, resigned from his post amid protests against his emergency plan to prevent the banking system from collapsing.

Earlier in the week Lenicov triggered an outbreak of social unrest when he announced legislation to convert people’s savings into government bonds in order to keep banks from running out of money. The proposal, which would have allowed Argentine banks to convert about 60 percent of savings deposits into government bonds, would have in effect forced people to lend money to a government they no longer trust to pay up.

Angry deposit holders accused the government of wanting to steel the people’s money and dubbed Lenicov’s proposed securities "Mafia bonds".

When the Argentine Congress announced on Tuesday it would not even consider Lenicov’s emergency legislation, crowds outside the parliament cheered. Shortly there after, Lenicov announced he would step down.

Turning point or exit?

After being freed of a widely unpopular economics minister, the pressure is on President Duhalde to put Argentina back on the right track economically. As one of the first moves, Duhalde "will most likely fix the exchange rate", said Graciela Camano, a legislator from Duhalde’s Peronist party.

Such a move represents a turn-about in economic policy, and could help stabilize the devaluation of the Argentine currency. Since free flotation in January, the peso has lost two-thirds of its value against the US dollar and driven the country’s inflation sky-high.

But the Argentine government also needs to get serious about tightening its belt on expenditures. The International Monetary Fund which rejected Argentina’s bid for international aid earlier this month has issued a series of necessary, but unpopular, economic and legal reforms before the country can begin receiving financial assistance.

Some analysts see Lenicov’s exit as the beginning of the end for Duhalde, whose own popularity in the polls has declined rapidly since taking office only four months ago. The latest social unrest, they say, has left the president in a weakened position trapped between business lobbies, street protestors, trade unions and provincial governors. Legislation, like the economy, has been brought to a standstill.

"The only thing helping Duhalde is that no one else wants his job. On the one hand, nobody wants Duhalde to do anything, but nobody wants him to leave, either," Christian Stracke, emerging market debt strategist at Germany’s Commerzbank told Reuters news service after governmental meetings on Tuesday.