Perhaps nothing so well illustrates the widespread demoralization of the Argentinian economy as the bizarre arrest of Julio Gonzalez del Solar, president of the Argentinian central bank, on his return home from New York, where he was trying to renegotiate the huge Argentine debt.
The government forced a local judge, who had charged Gonzalez with misconduct and treason, to back off. But the incident served to underline the fact that erratic behavior may be the rule, rather than the exception, in Argentina, which, like other Latin American nations, is in real-- if not technical--default on its debt.
The next stage in a worrisome scenario could be outright repudiation of the debt.
On Sunday Argentinians will go to the polls for their first election in 10 years, to choose a civilian regime to replace the generals who blundered into the Falklands war. The guessing is that the Peronista candidate, Italo A. Luder, will eventually win out over Raul Alfonsin, candidate of the left-of-center Radical Civic Union, perhaps after a runoff.
The military regime controlling Argentina for the past eight years has dragged the nation into what most observers rate as the worst crisis in its history. Not only is Argentina the world's third largest debtor (about $40 billion), but the current annual rate of inflation is well over 400 percent, and economic growth has been zero for the entire time.
Against this backdrop of deteriorating social conditions, there has been a distressing upsurge of anti-Semitic violence that has sent tremors through the seventh-largest Jewish community in the world. The Reagan administration has publicly deplored this outburst.
But this sickening behavior will not delay the State Department's intention to certify to Congress that Argentina has made significant progress on human rights. This would once again make Argentina eligible to get military equipment from this country.
"Large-scale arms sales are not contemplated," Assistant Secretary of State Elliott Abrams said in a telephone interview. But he contends that Argentina is on its way to becoming a democratic country, "although the picture is not unblemished."
Meanwhile, because Argentina is in arrears on loan payments, the IMF has cut off further lending. In effect, all IMF and commercial bank-loan arrangements are in limbo until after the election, when the IMF will send a mission to Buenos Aires to discuss the situation with newly elected officials.
It is clear that, at a minimum, any new government will demand more generous terms. At a maximum, it may take things in its own hands, and turn the de facto default that now exists into a real one.
The argument would be that the debt was contracted for by a previous, discredited regime, and need not be honored. The Economist (of London), concluding that a default by a new Peronist regime is possible, quotes a "semi-educated" Peronist technocrat as follows:
"If we imposed successful exchange controls, the country need not be even desperately shorter of foreign exchange than it has been in recent years, especially as we will not be buying so many Exocets (missiles). So it is not vital for Argentina to curry favor with foreign banks, at the expense of allowing the IMF to impose cruel policies on our shirtless ones."
If a new Argentine government--or any other major debtor nation--should follow such a policy, going from a de facto default that it is trying to work out with the IMF and its bankers to an outright repudiation, it could trigger an international financial panic.
Banking regulators here and in Europe, who have been turning the other cheek, would be forced to require that the banks tell the truth about the situation on their balance sheets. If the repudiation scheme spreads, economist Alan Greenspan recently observed, it "would heighten the possibility that international banks could have their capital virtually wiped out."
The Economist suggests that such a crisis would not happen, because the world's banking authorities would not require a 100 percent write-off of bad loans. But this is sheer conjecture. What is clear is that there would be a tremendous psychological shock to financial markets. Obviously, affected banks could not carry on normal lending operations in their domestic economies. Greenspan believes that in the United States, the "required" bail-out by the Federal Reserve would run to "many billions of dollars." That would pose a new inflationary threat, probably requiring an offsetting, tighter monetary policy.
Greenspan agrees that the most likely result would fall short of the worst-case scenario. But equally unlikely is the possibility that the banks can skinny by as they have in the past year, pretending that all of the loans they've made to the Third World are worth 100 cents on the dollar. Greenspan's best guess: an unresolved debt crisis will result in unsettling damage to the financial system for "several years."