Mercosur’s Misplaced Messy Progeny
As Argentina and Brazil hurl trade barbs and barriers cross-border contributing to double-digit stock market declines, Paraguay’s “institutional coup” which forced disgraced President Lugo, a priest by training who admitted to several illegitimate offspring, out of power a year before his term expires has further soured relations. The former chief executive expressed admiration of socialist policies which tended to align the administration with the leftist extreme although in practice economic management was centrist, but the dismissal has resurrected the continental split over toppling of duly-elected leaders last seen with an ally of Buenos Aires and Caracas in Honduras where the OAS tried to bridge differences with mixed success. The interim President Franco has met with a lukewarm response at home and abroad as the separate frontrunner for next year’s poll is a business tycoon from the resurgent Colorado party which dominated for decades. The ouster coincided with a downcast IMF Article IV report citing recession on lingering drought effects for beef exports which also generated domestic food price inflation. Fiscal and monetary stances were eased to tackle the crisis resulting in a 2.5 percent of GDP budget gap that was to be covered by inaugural Treasury bond issuance and multilateral credit that may now be inaccessible with the government replacement. The survey points out that tax collection ranks near the bottom in Latin America with no personal income charge and numerous loopholes. It calls on the central bank to adopt formal inflation targeting and be wary of bad loan buildup and deposit diversion toward state-owned institutions. The saga played out as Mercosur counterpart Uruguay regained investment-grade sovereign status and Asuncion had begun to sound out investors and underwriters at the spring Inter-American Development Bank meeting for its own pilot external debt attempt.
As the political drama evolves a new Finance Minister has to tackle exchange rate depreciation momentum as well as chronic poverty which originally propelled Lugo to power. Argentine officials claim to offer a currency stability alternative with the recently reinforced control regime imposing an outright ban on formal dollar sale to individuals. Households had brought lawsuits after requests were rejected as according to edicts even real estate transactions must be conducted entirely in pesos. The parallel market conversion is double to the greenback at over 9 if citizens are willing to risk arrest and confiscation. The financial restrictions have combined with commercial ones to slash monthly auto output 25 percent with Q2 overall figures reflecting recession. Agricultural exports have held up, but manufactured one especially to Brazil plunged on lower demand and tariff surcharges. A record cut in the benchmark Selic to 8 percent has not revived appetite as private banks hesitate to extend lavish credit essential to the previous party atmosphere.
