How Argentina crisis will hit Britain

THE horrifying scenes in Argentina have intensified the fear gripping the global economy. Here, we investigate the causes of the crisis - and analyse how it could affect us all

Argentina seems in a real mess. What is going on?
The economy has collapsed and the president, Fernando de la Rua, has resigned and gone to ground. Presidents Raul Alfonsin (1989), General Galtieri (1982) and Isobel Peron (1976) all went the same way.

How did this crisis blow up?
Argentina has been in recession for more than three years. Unemployment is 18%. It needs a devaluation of the peso and a sharp cut in interest rates.

So why not do that?
Because Argentina has tied the peso to the dollar and vowed never to break the link. That means keeping interest rates high. Even if it wanted to devalue, it has more than $150bn (£107bn) of public sector debt, much of it repayable in dollars. Devaluation would make that debt much more expensive.

If the government has borrowed so much, why doesn't it boost public spending to help the economy?
The International Monetary Fund has effectively ordered Argentina to cut spending to qualify for IMF aid.

What happens now?
Argentina tried everything to defend the one peso to the dollar rate, including exchange controls, bank-withdrawal limits and cuts in public-sector salaries. Now, some observers expect Argentina to scrap the peso and use US currency.

Does it have enough dollars for that?
Probably not, which is why the alternative - a peso devaluation and default on some or all of its huge debts - is more likely.

Why should it spoil my Christmas?
Default would cause shockwaves globally - and Middle Britain would feel the tremors. Argentina's collapse could set off a domino effect, toppling other troubled economies. Such as Brazil, South Africa, Russia (a lot of debt due is next year), India (its public finances are shaky), Hong Kong (its currency is also pegged to the dollar), Turkey (heavily in debt) and the Czech Republic and Hungary (both have high trade deficits).

Britain's HSBC has up to $590m of exposure in Argentina, and Lloyds TSB has $400m in Brazil. The Bank of England reckons actual losses to all UK banks would be $450m should Argentina default and $300m in the case of Brazil. On top of that, certain UK pension funds have bought Argentine debt, believing the dollar link made it safe.

So what lessons should we draw?
Gerard Lyons, of Standard Chartered, says: 'Countries should always set economic policy to suit their own domestic conditions. This is where Argentina went wrong. In Britain, we should remember this when people urge us to join the euro. We don't need it.'