The local press media include :

• Buenos Aires Herald
• Clarin (in Spanish)
• La Nacion (in Spanish)
• La Razon (in Spanish)
• Terra.com (in Spanish)

In recent weeks there have been numerous press reports and articles indicating that Argentina is facing serious economic problems that could lead to a default on its sovereign debt.  Some of these analyses compare Argentina’s current situation to that of 2001, when the government of Argentina did actually default.¹

It is not only journalists and financial analysts that have expressed such views.  From July 22 to August 7, before the recent financial market turmoil sent emerging market bond country risk premiums sharply higher, Argentina’s five-year credit default swap rate rose by 186 basis points.  This means that the cost of insuring $10 million of Argentine bonds rose from $639,000 to $825,000.

This report will look briefly at Argentina’s current debt, fiscal, and overall economic situation to see if such analyses are justified.  It appears that there is little or no basis for the fear that Argentina might default on its sovereign debt at any time in the foreseeable future, or indeed even the more distant future.

Argentina’s Debt Burden

Figure 1 shows Argentina’s total public debt as a percentage of GDP.  As can be seen in the graph, it peaked at 143.5 percent of GDP during the economic crisis of 2002, in the fourth quarter, and, despite some ups and downs prior to 2005, has declined to 51.5 percent today.  The steepest drop was in the second quarter of 2005, when the debt fell from 121.7 percent to 66.2 percent of GDP as a result of the debt restructuring.  Nonetheless it has fallen steadily since then, to its current level of 51.5 percent of GDP.²

Clearly the government is not facing a rising or unusually high debt relative to GDP; rather it is falling.

What about the burden of debt service in coming years?  This is shown in Table 1.  As can be seen, the interest payments on the debt are relatively modest, about 1.5 percent of GDP for 2008, and 1.4 percent of GDP for 2009, and then declining thereafter.

Principal payments are larger: 3.7 percent of GDP for the second half of this year, also peaking in 2009 at 4.9 percent of GDP, then declining.  Normally, when there is a lump in principal payments, as in this case, it can be smoothed out by rolling some of it over.  However, Argentina defaulted on its sovereign debt in 2001, and foreign creditors holding some 24 percent (19.3 billion) of the restructured debt did not agree to the debt restructuring that took place in 2005.  As a result, there are pending legal actions from the holdout creditors that prevent the government from accessing most international credit markets.

However, there is no reason to believe that the Argentine government will have trouble making all of its debt payments in these next two years, including principal payments.

Table 2 shows the Argentine government’s financing strategy as of April 2008.  As can be seen, total debt service, including $2 billion of debt buybacks, for 2009 will increase to $20.2 billion from $16.1 billion for 2008.  Some $8.3 billion of the money is projected to be available, most of it ($7.7 billon or 2.7 percent of GDP) coming from the federal government’s primary budget surplus. 

This leaves a financing gap of $11.8 billion.  It is worth noting that the government is assuming just 4 percent real GDP growth for 2009, as compared to the current growth of about 8 percent annually.

In their most recent (August 26) analysis of Argentina’s debt, Morgan Stanley also takes $20.2 billion for the starting point of total debt service for 2009.³  However, they note that $5.5 billion of this is likely to be rolled over without problems, leaving only $14.7 billion to be financed.  Of this, they project a primary surplus of $8.7 billion.  They project $1.8 - $3 billion to be financed from pension funds, and take the lower number; and $2.1 billion from a reduction in the rate of growth of energy subsidies.

This would leave Argentina with only $2.1 billion to cover from either borrowing from Venezuela — as it has done in recent years — or financing from savings or reserves.  Morgan Stanley estimates that the Argentine government has at least $6-7 billion in savings, in addition to $47 billion in reserves.  Even taking into account that the government has now decided to pay off its $6.7 billion debt to the Paris Club,⁴ this is quite a bit of savings and reserves relative to any potential shortfall.⁵

The Morgan Stanley analysis assumes 4.7 percent growth for next year and another 30 percent decline in the price of soybeans, a major export and sources of tax revenue. They note that there are other possible scenarios which would leave the government with a shortfall bigger than the $2.1 billion that they consider likely.

But the bottom line is that any shortfall in 2009 is going to be very small relative to the combination of the government’s savings and excess international reserves at the Central Bank.  It is very difficult to imagine a situation in which there would be a problem in servicing the debt, and default would appear to be out of the question.

Beyond 2009, Argentina’s debt service as a percent of GDP falls significantly and steadily.  This can be seen in Table 1.  It falls from 6.31 percent of GDP in 2009, to 4.19 percent in 2010, then rises slightly 4.54 percent in 2011, and then declines steadily.  It is clear that 2008 and 2009 are the “hump” years.  There is no obvious trouble once these years have passed.

Trends in Debt, Debt Service, and the Economy

Table 3 shows other major indicators of public debt.  As can be seen from the table, they have all been declining steadily since the huge drop that took place with the debt restructuring in 2005.  Foreign public debt has declined from 34.8 percent of GDP in 2005 to 23.2 percent in 2008.  During the same period, foreign public debt measured as a percentage of international reserves declined from 217 percent to 125.1 percent; and from 129.6 to 89.9 percent of export earnings.  Debt service as a percentage of tax revenue also declined steadily from 52.2 to 36.9 percent.

These indicators show no evidence of a deteriorating debt situation; on the contrary, there has been steady improvement.  The relevant economic indicators also do not show any sign of a looming correction that would dramatically alter the debt sustainability picture.  The federal government budget currently has a primary surplus of 4.0 percent, and an overall surplus of 2.2 percent.

Figure 2 shows the quarterly primary fiscal surplus, plotted as a four-quarter moving average.  As can be seen, there is no obvious downward trend in the last three years.

Argentina is also running a trade surplus of 5.1 percent of GDP and a current account surplus of 2.2 percent of GDP.

Inflation is a more difficult challenge, partly because the official figure for the Consumer Price Index (CPI) has been disputed, and is widely seen by economists as under-estimating inflation since January 2007.  Figure 3 shows three official measures of inflation over the last decade: the official Consumer Price Index, based on price surveys in the Greater Buenos Aires area, which is currently running at 9.1 percent year-over-year (second quarter 2008); the consumer price index for Cordoba, which is at 12.2 percent year-over-year (second quarter 2008); and the private consumption deflator, which is currently at 15.6 percent (first quarter year-over-year).

However, economists outside the government have estimated consumer price inflation at about 24 percent this year, and this seems more reflective of actual price changes than the official Consumer Price Index⁶.

Some analysts have argued that the presumed underestimation of inflation demonstrates an unwillingness of the government to pay its debt, since some 41 percent of public debt has interest payments indexed to the official CPI.  However, the under-estimation of inflation is not the same as an actual default on debt, and there is no indication that the latter is even close to being contemplated by the government.  While it is important for a number of reasons to restore credibility to the official CPI, it does not follow that the risk of default on debt increases as a result of a lack of public confidence in the official measurement of inflation.

Conclusion

As can be seen from the data discussed above, there is little or no reason to expect that Argentina will default on its debt any time in the foreseeable future or beyond.

Comparisons to the Argentine economy of 2001 are even more unfounded.  At that time, the economy was suffering through one of the worst recessions in Argentine history, and caught in a vicious spiral where it had to borrow at increasingly higher interest rates to support an overvalued exchange rate.  Most importantly, the overvalued fixed exchange rate was a ticking time bomb; like the U.S. stock market bubble in the late 1990s or the housing bubble in the first half of the current decade, it was clear that a collapse was inevitable at some point.  And of course Argentina’s currency collapse made its debt impossible to sustain.⁷  The Argentine economy today — which has grown more than 60 percent since its recovery began six years ago, has trade and current account surpluses, and has declining levels of debt relative to GDP and other indicators — has little in common with the situation of 2001.

It is worth noting that the consensus view of Argentina’s economy has been widely off the mark for most of the last decade.  This can be seen in the International Monetary Fund (IMF)’s projections during the last recession, and then again in the recovery that followed.  The IMF overestimated GDP growth for 2000, 2001, and 2002 by 2.3, 8.1, and 13.5 percentage points respectively, in its September World Economic Outlook forecast prior to each year.⁸  After the debt default at the end of 2001, the consensus view was that Argentina would suffer for years from lack of access to international financial markets and foreign investment.  The IMF projections for the four years, 2003 through 2006 then came in low by 7.8, 5.0, 5.2, and 4.3 percentage points respectively.  These forecast errors are enormous for the seven years noted, and among the largest consistent errors for the IMF in recent memory.  Most economists and the business press were similarly wrong about the Argentine economy throughout most of the current economic expansion.

As Argentina’s debt burden declines after 2009, it will become clearer to the “holdout” bondholders that their continued efforts to block Argentina’s access to credit are not likely to have much impact on Argentina’s economy — they have had no apparent impact so far.  It is therefore likely that this problem will also be resolved, and Argentina will regain normal access to international credit markets.  But in any case, the current discussion of default possibilities has little or no basis in Argentina’s economic reality, current or projected.

1  See, for example, Drew Benson, “Kirchners Losing Argentina in Slump Leading to Crisis,” Bloomberg, September 2, 2008 (accessed online on October 2, 2008); and Aldo Abram and Martin Krause, “Deuda e inflación: Volver al futuro,” CIIMA-ESEADE, 2008:  <www.eseade.edu.ar/ciima/articulos/deuda.pdf>.

2  Some reports have compared the present level of debt to that in 2001, just before the default, when it was 57.3 percent of GDP.  However, this is not an appropriate comparison, because the exchange rate was so overvalued in 2001; as soon as the currency collapsed, the same debt in 2002 was 143.5 percent of GDP (see Table 3).

3  Gray Newman and Daniel Volberg, “Argentina. Default Fears,” Global Economic Forum, Morgan Stanley, August 26, 2008 (accessed online on October 2, 2008).

4  On September 2, the Argentine government announced that it was going to pay off its debt to the Paris Club, which totals $6.7 billion.  (See, The Associated Press, “Argentina Will Pay US$6 Billion Paris Club Debt,” International Herald Tribune, September 3, 2008.  Accessed online on September 26, 2008.)  The timing of the payment was not announced.

5  There are currently legal restrictions on the government’s use of reserves at the Central Bank to pay off foreign debt.  However, it is difficult to imagine that such constraints would be binding in a case where the reserves were necessary to avoid default.

6  See, for example, Miguel Bein and Marina Dal Poggeto (Estudio Bein), “Perspectivas para lo que resta del año,” in Ámbito Financiero, August 26, 2008 (accessed online on October 2, 2008); Ecolatina, “Informe Economico Semanal, No. 681,” September 5, 2008 (accessed online on October 2, 2008): <www.ecolatina.com/informes/IES%20681.pdf>; Prefinex, “Argentina Economic and Business Perspectives,” October 2008 (accessed online on October 2, 2008): <www.prefinex.com.ar/pdfs/AE&BP_2008-10_s.pdf>.

7  See footnote 2 above.

8  David Rosnick and Mark Weisbrot,  “Political Forecasting?  The IMF’s Flawed Growth Projections for Argentina and Venezuela,”  Washington, DC.: Center for Economic and Policy Research, 2007 (accessed online on October 2, 2008).

www.chinaview.cn 2008-09-09

    RIO DE JANEIRO — Brazil and Argentina agreed Monday that their bilateral trade will be settled by Brazilian reais and Argentine pesos, eliminating the U.S. dollar as an intermedium.

    Brazil’s President Luiz Inacio Lula da Silva and his Argentine counterpart Cristina Kirchner signed the agreement in Brazil’s capital city Brasilia.

    According to Brazil’s Minister of Finance Guido Mantega, the new system will reduce the costs of intermediation, making trade easier for smaller companies of the two countries.

    Mantega said the agreement represents the first step toward a common currency for Mercosur (Common Market of the South), which gathers Brazil, Argentina, Paraguay and Uruguay.

    He added that the trade volume between Brazil and Argentina has reached 25 billion U.S. dollars annually, and Argentina has become Brazil’s third largest trading partner, after the United States and China.

    Statistics show that some 19 percent of Argentina’s exportation heads to Brazil, and 32 percent of Brazil’s exportation goes to Argentina.

    The agreement, which takes effect on Oct. 6, aims to reduce the obstacles in commercial transactions between the two countries and encourage small and medium-sized companies to join international trade.

    With the elimination of the U.S. dollar from the two nations’ bilateral trade, exporters will no longer be exposed to the variation of the exchange rates, and will receive exactly the amount of money they negotiated.

    The exchange rate between reais and pesos will be calculated through the rates of reais-dollar and pesos-dollar, and will be published by the Brazilian and Argentine central banks daily.

BY WALTER T. MOLANO Monday, August 11, 2008

Argentine bond prices plunged more than 6 percent on Friday, as the market gave up hope that President Cristina Kirchner would amend her ways. Argentina suffered its worst week since the default of 2002. The Argentine EMBI+ jumped to 727, the widest spread in the region.

Although there were initial hopes that the president would strike a more conciliatory tune after she lost the conflict with the agro sector, her actions showed the contrary. Former President Nestor Kirchner’s henchmen, Planning Minister Julio de Vido and Interior Commerce Secretary Guillermo Moreno, were never replaced.

An attempt by the newly appointed Chief of Staff, Sergio Massa, to restore confidence in the INDEC and Administration were quickly sidelined. Given the intransigence of the Kirchners, it is only a matter of time until they are ousted. Unfortunately, abrupt changes of power in Argentina tend to be chaotic. This is the reason why the markets are bracing for a default, even though the country’s macroeconomic indicators are sound.

ARGENTINE-VENEZUELA BONDS

In addition to the Kirchners’ recalcitrance, investors were buffeted by a slew of negative news. The first was the government’s desperate issuance of more than $1 billion to the Venezuelan government at the usurious rate of 15 percent. The Chavez Administration immediately resold the bonds to local Venezuelan banks and investors who dumped the paper on the international market as a way to circumvent the capital controls.

The deluge of Argentina bonds was one of the factors that triggered the selloff. Given the desperate act, it was not surprising that Moody’s immediately announced that it would soon cut Argentina’s outlook due to concerns about the government’s willingness to service its financial obligations.

At the same time, the meltdown in the commodity markets led many investors to turn their backs on commodity producers, such as Argentina. Soybean prices plunged more than 13 percent last week, erasing 5 percent on Friday—the day of the Argentine debacle. This left very few reasons for anyone to place a bid on Argentine paper, which explained why asset prices dropped so precipitously on Friday.

POLITICAL CLOUT

President Cristina Kirchner was on a well-received tour the day of meltdown in San Juan and Mendoza, two provinces which were not affected by the agro turmoil, but there was still a sense that the clock was running out.

It is no longer an issue of popularity. It is an issue of political and economic clout. The repeal of the tariff initiative was a powerful blow to the government’s purse. With soybean prices on the decline, the outlook is even worse. Although tax revenues soared 40.3 percent y/y in July, approximately 81 percent of the primary surplus was generated by soybean tariffs. Now the surplus is shrinking.

The Kirchners increased spending during the crisis in order to buy friends and influence, but a reduction in government revenues will soon leave them stranded. The government froze provincial transfers last week, as well as some public spending programs. It is only a matter of time until the labor unions turns their backs on the presidential duo. The loss of economic clout translates to less political power. The Peronists are split in two, with more than half of the party under the command of former President Duhalde. This is the reason why people are doubting that the Kirchners will make it to the end of the year.

WHEN, NOT IF

It is no longer a question of “if,” it is now a question of “when” the Kirchners will be ousted. They lost all sense of reality, inventing conspiracy theories instead of bridging their differences with the opposition.

The Kirchners’ dream of remaining in office for another 12 years is a distant memory. The main debate in Buenos Aires is whether they have three or four months left in office and how chaotic will be the transition of power. Argentina has a nasty history of political collapses. The untimely demise of the military junta and the ousting of Presidents Alfonsin and de la Rua were associated with sovereign defaults and/or hyperinflation.

Hopefully, this time the situation will be different. Argentina has fiscal and current account surpluses. The economy is growing and the government’s financing needs are relatively low. Argentina’s macro indicators are sound, for now. Unfortunately, the deterioration of the external environment and the rapid erosion of the domestic situation could put it in dire straits by the end of the year.

Walter Molano is head of research at BCP Securities.

http://www.latinbusinesschronicle.com

Monday July 21, 2008

http://www.guardian.co.uk

Some common sense has returned to the country
and hopefully so too, to the President

http://afp.google.com/article/ALeqM5g5ZT7IEwmw8yFbkh_qJ_uJq1NIcQ

Argentine Senate rejects farm tax

The Argentine Senate has narrowly rejected controversial tax increases on agricultural exports that have provoked repeated protests by farmers.

With senators tied 36 to 36 after more than 16 hours of debate, Vice-President Julio Cobos cast the deciding vote to reject his government’s proposals.

The outcome is as a blow to President Cristina Fernandez, correspondents say.

Farmers said the taxes would be crippling, but the government said they were needed to fight poverty. Farmers have won a critical battle but the dispute is not over and Argentina faces some tough days and weeks ahead, says the BBC’s Daniel Schweimler in Buenos Aires.

The government has said that it will seek another vote in the lower house, which passed the measures earlier this month.

Food prices

Mr Cobos, who is also leader of the Senate, said it had been “the most difficult day of my life” . Close to tears, he cast his deciding vote.

“They tell me I must go along with the government for institutional reasons, but my heart tells me otherwise. May history judge me, my vote is not for, it’s against,” he said.

Argentina is a major producer of soya, grains and beef, which fetch high prices on international markets.

The dispute between the government and farmers began in March, when President Fernandez’s government raised taxes on soya exports from 35% to 45%, and imposed new taxes on other farm exports.

The government argued that they needed to raise taxes on agricultural exports to help build a new Argentina.

It said farmers could afford to pay more, as they were benefiting from high prices.

The authorities also accused farmers and their supporters of undermining democracy by refusing to respect the wishes of the elected government.

However, farmers’ leaders said that any profits needed to be reinvested so that Argentina, one of the world’s leading agricultural producers, could help to feed a hungry world.

BUENOS AIRES—Argentine farmers’ third strike in less than three months doesn’t augur well for Argentina’s President Cristina Kirchner. This unresolved conflict raises the possibility of serious food shortages during spring (September to December) in some of Argentina’s main cities. If no solution is found soon, the situation may well spiral out of control and speed up the unraveling of Mrs. Kirchner’s government.

The conflict with the farmers is just one more example of a government that is out of touch with the people. During two recent trips to Argentina—one last month and one in August of 2007—I was able to verify personally the sharp increase in the price of basic necessities.

According to government statistics, the inflation rate is 8.8 percent. Independent economists place the figure anywhere from 20 to 25 percent. The disparity between government figures and independent estimates may be due to the government’s arbitrary change of cost-of-living indicators from the national statistics institute, Instituto Nacional de Estadística y Censo (INDEC), a respected institution until now.

Corruption is rampant, and political pressure is used to neutralize the media and render opposition ineffective. At a political rally in my home province of Tucumán, one of the poorest in the country, President Cristina Kirchner, inaugurating a rural hospital, addressed a cheering crowd that had been shuttled in, and generously paid, by her Peronist Party with government funds to provide local color and support. The president made her trademark speech on the need to redistribute the country’s resources—her answer to the strike by the disgruntled farmers over sharply increased export taxes.

At a time when between 35 percent and 40 percent of the population lives under the poverty line, when major issues of health and education need to be addressed, the government has just signed a contract for building a fast “bullet” train to the tune of almost 4 billion dollars.

Luis Juez, a former mayor of Cordoba, one of the cities to be reached by the proposed bullet train recently stated, “What we really need is to recover those towns that became ghost towns after the railroad network was destroyed. Some cities don’t even have potable water, and the government wants to bring us a bullet train. …”

Human rights have long been a blotch on Argentina’s past, and the governments of both Kirchners (Cristina and her husband Néstor, the former president) have certainly attempted to bring to justice those responsible for the disappearance of thousands during the years of the military regime. Such commitment, however, has not translated into other areas of people’s rights, such as right to enough food and health care.

Adolfo Pérez Esquivel, an Argentine Nobel peace laureate, told me in Buenos Aires, “This government doesn’t have a coherent human rights policy.”

Argentina is one of the principal beneficiaries of the world agricultural crisis. Its exports are up, as is tourism. It was hoped that both Kirchner governments would profit from these exceptional boom years to raise living standards. Instead, some economists estimate that during 2007, 1.3 million Argentines descended into poverty, a situation that has only worsened in 2008.

Tomás Raffo, an economist with the Argentine Workers Central (CTA) has told Inter Press Service, “Argentina has beaten an all-time record: It is the only country in the world where poverty has grown faster than the population.”

What Argentina needs is a massive program of public works, rather than the paternalistic policies the government has promoted that hurt more than help poor Argentines. Special policies should be planned to address Argentina’s serious youth problems. Adolescents’ lives are impaired by widespread drug abuse and lack of job opportunities. They need training programs to adapt to new demands in the job market for which they are now badly prepared.

President Cristina Kirchner is facing increasing opposition to her policies, while the country descends into a profound crisis. Unless there is a drastic change of policy, her government runs the risk of being doomed.

César Chelala is a co-winner of an Overseas Press Club of America award for an article on the human rights situation in Argentina during the last military dictatorship.

Jun 28, 2008

Source: epochtimes.com

TAKE two neighbouring economies, both heavily dependent on commodity prices to make their trade figures look good. Give one an orthodox monetary policy, watch it embrace foreign investors and float its currency. Hand the other over to mavericks who have resorted to fixing prices, banning or taxing some of their own exports and baldly lying about the inflation rate. The result? The rascal—Argentina—continues to grow at a blistering 9% clip, while by contrast well-behaved Brazil plods along (see chart). Is it time to rewrite the economics textbooks? Argentines would like to think so. But there are signs that Brazil may yet come out ahead.

Both countries recently reported surprisingly strong GDP numbers. In the last quarter of 2007 Brazil grew at an annualised rate of 6.4% and Argentina at 8%. But the different reaction to these figures in the two countries was telling. Whereas Brazil’s government showed concern, Argentina’s touted the news as a vindication of its contrarian wisdom.

In Brazil Guido Mantega, the finance minister, announced a tax of 1.5% on foreigners’ purchases of Brazilian treasury bonds to cool capital inflows and slow the steady appreciation of the currency, the real. In a faint echo of Argentina’s approach, he said that he wanted to forestall a large current-account deficit. But Henrique Meirelles, the governor of the Central Bank, said that his top concern was still inflation (which cheaper imports help to control). President Luiz Inácio Lula da Silva concurred, describing inflation, long a Brazilian bugbear, as a “degrading disease”. Both Mr Mantega and President da Silva often say they would prefer steady growth at 5% a year for 15 years to a faster, bumpier ride towards riches.

In Argentina such caution sounds wimpish. Its policymakers seem determined to demonstrate that all Latin America needs to grow as fast as China is to cast off the straitjacket of “neoliberalism” and its main backers—those beastly foreign bondholders and the IMF. They gleefully point out that consensus forecasts for Argentina have predicted a slowdown for the past five years. “Those economists have been wrong so many times,” says one confidant of Cristina Fernández, the president, and her husband and predecessor, Néstor Kirchner, “maybe it’s time to find some new ones.”

To understand how two nominally left-wing leaders came to embrace such different policies, look back at how their respective countries responded to economic troubles in 2001-02. Argentina, after several years of slump, abandoned a fixed exchange rate, devaluing the peso and defaulting on its public debt. Brazil, which had floated its currency in 1999, responded to turbulence in its currency and debt markets in 2002 by tightening fiscal and monetary policies.

Argentine officials have since been determined to keep the peso weak, mainly to protect local industry. Devaluation worked: the economy roared back to life. But by 2005 most of the country’s idle plant was back in action, and new investment was insufficient to sustain rapid growth. Mr Kirchner loosened the government’s purse strings, doling out increases in wages and pensions. Growth has continued, but inflation jumped to about 20% a year. Nobody knows the exact figure, since the government massages it. “Eventually, [the country] will lose track of where inflation is,” says Carola Sandy of Credit Suisse, an investment bank. “That’s when it gets really risky, because people will start having second thoughts about leaving money in banks.”

By contrast, Brazil’s Central Bank pursues a target for inflation, rather than the exchange rate. The real has appreciated on the back of record commodity prices, prompting grumbles from industrialists. But the Central Bank has kept its benchmark interest rate at 11.25% since last September. Even so, domestic demand is strong. With imports soaring, the economy is likely to post a small current-account deficit this year for the first time since 2002.

Argentina’s presidential couple never miss an opportunity to take credit for breakneck economic growth under their administration. But according to Daniel Volberg of Morgan Stanley, another investment bank, soaring soyabean prices may have had more to do with it than the Kirchners’ economic recipes. Had world GDP growth and commodity prices played out according to 2003 forecasts, Mr Volberg reckons that Argentina would have grown at just 3.7% a year. By contrast, only 1.6 percentage points would have been stripped from Brazil’s growth.

So although both countries have benefited greatly from favourable external conditions, Brazil is better placed than it might appear. Because of low inflation, in real terms the growth of Brazilian incomes has started to keep pace with those of Argentines. But Brazil has far more room for manoeuvre if the outlook turns choppier. It is free to cut interest rates or increase spending. Argentina, by contrast, has set itself up for a hard landing. Any decrease in export revenues would damage its tax base, and its Central Bank could hardly print more money than it does already.