Stocks Plunge in Argentina as Crisis Deepens

BUENOS AIRES, Argentina – Argentine stocks plummeted and bonds weakened Thursday as growing worries about its ability to keep up with debt payments deepened investor gloom and shook key Latin American currencies.

Investors were clearly skeptical a new series of spending cuts and moves against tax evasion proposed Wednesday by President Fernando De la Rua. Many wonder if he has the political backing to see the cuts through, arrest a ballooning budget deficit and help end a 3-year recession.

The latest trouble for Argentina came this week as the government struggled with a normally routine Treasury bill auction. The high interest rates set for the short-term bonds had many investors nervous that cash-starved Argentina was effectively being shut out of international credit markets.

Geoffrey Dennis, the director of Latin American equity research at Salomon Smith Barney in New York, said that while ``the risk of a default seems to be on the rise, I don't necessarily think there will be a default.''

Nonetheless he said markets are now ``less tolerant'' of Argentina's problems than they were months ago when the crisis began building. He added that a chain reaction of bad news has only undermined confidence in the government's recovery efforts.

``We have seen a series of attempts to revive the economy through fiscal cuts (intended) to improve confidence. Every time they do it, it doesn't seem to work.''

Argentine stocks fell 8.6 percent to close at 311.65, while the country's floating rate bond was off as much as 10 percent during trading.

Meanwhile, the jitters spread to other countries. Some European markets - and currencies in Brazil, Mexico, and Chile - all sagged Thursday at least in part over concerns about Argentina's public finances.

The Brazilian real tested 2.585 to the dollar in trading before recovering slightly to close at a midrate of 2.553, still a record low. Adding to investor worries about Latin America are an energy crisis in Brazil and fears about falling direct investment in Brazil, the largest South American economy.

Claudio Loser, the IMF's Western Hemisphere director, acknowledged that the Argentine crisis had ``already contaminated Brazil,'' but added that Latin America's largest country ``still can count on access to markets and has better chances of overcoming its problems.''

That currency's slide comes as the Brazilian government is celebrating the seventh anniversary of the real, which was introduced in 1994 as part of an economic stabilization plan that dropped quadruple-digit inflation to single digits in months.

Argentina's economy minister, Domingo Cavallo, insists his country is getting tough.

On Wednesday, he said the country could no longer chalk up debt at the double-digit interest rates paid at this week's Treasury bill auction. He vowed to rein in national and provincial spending amid growing pressure to make at least $1.5 billion in spending cuts.

While Argentina's supporters said they expect the country's situation to improve in coming weeks without a default, many others said the government hadn't produced a convincing recovery plan.

``We are not confident that the De la Rua government will have the political authority to enforce the proposed spending cuts,'' said Thierry Wizman, managing director at Bear Stearns in New York, writing in a market commentary.

De la Rua's aides spent the past week bickering unsuccessfully with the 23 provinces on ways to cut spending. Days ago, his supporters also had to publicly dismiss rumors about the president's staying power, calling such speculation unfounded and preposterous.