ARGENTINA: CHALLENGES FACING THE ALFONSIN ADMINISTRATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00302R001101700001-4
• Release Decision: RIPPUB
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• Document Creation Date: December 21, 2016
• Document Release Date: February 17, 2009
• Sequence Number: 1
• Publication Date: December 6, 1983
• Content Type: SNIE

Director of
Central
Argentina: Challenges Facing
the Alfonsin Administration
SNIE 91-2-83
6 December 1983
Copy 4 3 3
 ARGENTINA: CHALLENGES FACING
THE ALFONSIN ADMINISTRATION
Information available as of 1 December 1983 was
used in the preparation of this Estimate.
 THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, and the intelligence organizations of the Departments of State and
the Treasury.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
The Director of Intelligence, Headquarters, Marine Corps
The Department of Commerce
 The Alfonsin Phenomenon ..................................................................................... 3
Personality and Ideology .................................................................................... 3
Winning the Election ......................................................................................... 3
Implementing Radical Objectives ......................................................................... 3
Coping With Peronism ....................................................................................... 4
Dealing With the Military ................................................................................. 5
Economic Policy ................................................................................................. 5
Foreign Policy ......................................................................................................... 7
Attitude Toward the United States ................................................................... 7
Attitudes Toward the USSR and Cuba ............................................................. 7
Outlook .................................................................................................................... 8
The First Six Months .......................................................................................... 8
Page
v
KEY JUDGMENTS .................................................................................................... 1
DISCUSSION .............................................................................................................. 3
A Tougher Second Six Months .......................................................................... 9
Implications for the United States ......................................................................... 9
Indicators of instability .......................................................................................... 10
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 President-elect Raul Alfonsin's decisive electoral victory on 30
October marks a sharp departure from the Argentine politics of the last
four decades. With a platform combining populist economic programs
with pledges to defend human rights, reform the military, and democ-
ratize the labor movement, Alfonsin's moderately left-of-center Radical
party may have built a new coalition of middle- and working-class
Argentines. Alfonsin is deeply committed to the political philosophy
reflected in his party's platform but is neither dogmatic nor inflexible.
While there is some near-term risk to Alfonsin as he takes on
Argentina's traditional power brokers-the military, the Peronists, and
labor-disarray in their ranks, the strength of his victory, and his
apparent willingness to compromise indicate that the opposition will be
on the defensive for at least the first six months. Alfonsin's immediate
objectives will be to transform his electoral coalition into an effective
national political movement; to depoliticize the military through a
number of institutional reforms; to democratize Argentina's authoritar-
ian, Peronist-dominated labor movement; and to launch an economic
program designed to control inflation, reactivate the economy, and
resolve Argentina's major foreign debt problems. El
We believe that Alfonsin will be able to exploit the military's
current weaknesses to reassert civilian control over the services and to
cut defense spending, but that he will compromise on two issues critical
to the military-human rights and corruption. Alfonsin's considerable
support from rank-and-file workers should allow him to begin reform-
ing their powerful unions, at least to the point of forcing out several dis-
reputable and corrupt leaders.
We also expect inflation to drop sharply-both for psychological
reasons and because of market trends and new policies-with the
restoration of civilian government. This may allow the new President to
conclude wage and price settlements that will further lower inflation to
a monthly rate of about 5 percent-which would translate into an 80-
percent annual rate. At the same time, his plans to stimulate growth by
increasing government spending for housing and welfare programs
should generate a modest economic recovery during the first six months.
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 To ease bankers' apprehensions, Alfonsin and his Economy Minister
have already publicly declared their intention to pay all "legitimate" debts.
We believe the new government will have ample opportunity to work out a
new agreement with the International Monetary Fund and to negotiate
Argentina's $40 billion debt. We see considerable room for accord on key
questions such as the substantial reduction of the public-sector deficit
which Alfonsin has projected. An impasse in the negotiations is unlikely
unless the IMF takes an unusually tough stance.
Beyond mid-1984, however, economic and political pressures will
build. Although we believe Alfonsin has the requisite political skills, he will
face an increasingly difficult challenge. We expect wage and price
pressures to increase and that Alfonsin will discover that his tax restructur-
ing and collection efforts have not generated sufficient funds to cover
substantial increases in public spending. If the IMF and international
bankers react to a growing deficit by halting disbursements and restricting
new lending, the Radicals will have little choice but to rely on monetary
expansion, leading to a resurgence of inflationary pressures and laying the
groundwork for another wage-price spiral. ^
We also expect political opposition to increase after mid-1984,
especially if economic performance deteriorates and popular expectations
are unrealized. The Peronists, and labor especially, probably will have
begun to challenge the new government, and Alfonsin's electoral coalition
will begin to fray at the edges in the face of competing demands. While we
see no serious threat to Alfonsin from the military during his first year, the
armed forces would begin to reassert their strength if they perceive a
substantial loss of civilian control and increased social tensions.
Alfonsin's position on the Falkland islands dispute differs little from
that of his military predecessors, although he is even less likely to use force.
On the Beagle Channel dispute with Chile, his substantive position is
almost as tough as the military's, but he evidences some tactical flexibility
that could provide impetus for a solution. Argentine relations with the
USSR and Cuba are not likely to improve substantially under an Alfonsin
administration=
Alfonsin has stated that he seeks improved bilateral relations, but the
United States can expect little support from the Radical government on
foreign policy issues that touch Alfonsin's anti-imperialist nerve. A nation-
alist, he will keep Argentina in the nonaligned camp and maintain a strong
stand against US military involvement in Central America and the
Caribbean. I
Nonetheless, Alfonsin does not appear predisposed toward bilateral con-
frontation, and he recognizes the wisdom of gaining US support for
Argentine debt refinancing=
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 1. The electoral victory on 30 October of Radical
Civic Union (UCR) presidential candidate Raul Alfon-
sin marks a sharp departure from the Argentine
politics of the last four decades. Having long placed a
poor second behind the followers of Juan Peron in
national political contests, the Radicals this time won
52 percent of the popular vote, as opposed to the
Peronists' 40 percent. With a populist platform and
strong advocacy of democratic government and hu-
man rights, the moderately left-of-center Radicals-
under the charismatic Alfonsin-may have built a
coalition of middle- and working-class Argentines.
2. Alfonsin's triumph has created high expectations
and generated considerable enthusiasm even among
traditional opponents. At the same time, however, he
inherits a legacy of contentious, seemingly intractable
problems that make governing Argentina difficult
even in the near term. The economy is in shambles,
with enormous foreign debt servicing obligations and
inflation soaring at nearly 400 percent annually, and
labor, whose leadership has been dominated by
rightwing Peronists, has made growing demands on
the system. Furthermore, the military has failed to
govern effectively or to defend national interests
adequately and stands publicly accused of murdering
thousands of Argentines during the 1970s antiterrorist
campaign.
The Alfonsin Phenomenon
Personality and Ideology
3. The Radicals owe their success in large part to
the dynamic and forceful personality of 56-year-old
standard bearer Alfonsin. A lawyer from Buenos Aires
Province, he is widely considered to be sincere and
highly principled. Although Alfonsin has held only one
national post-as a congressional deputy in the early
1960s-he is described by most observers as an astute
politician with an excellent understanding of Argen-
tine political realities. Alfonsin reportedly identifies
with the leftist positions of West European Social
Democratic parties and the Socialist international and
main- tains close contacts with them.
best when speaking on his favorite themes: the evils of
authoritarian rule and the need to root out corruption
Winning the Election
4. Alfonsin's presidential nomination last July was
the culmination of nearly 10 years of struggle to wrest
control of his party from those he saw as middle-class
moderates out of touch with the Argentine masses
whose thinking was considerably left of mainstream
Radical ideology. During the campaign, Alfonsin
moved quickly to expand the Radical camp beyond its
historical middle-class constituency-his program
combined familiar populist economic and social wel-
fare programs with strong advocacy of democratic
government, union and military reform, and a strong
defense of human rights. He ran an aggressive media
campaign against a fractured Peronist party, took his
message to every part of Argentina, and battled the
Peronists in their own stronghold-the working-class
districts ringing Buenos Aires and other major urban
areas. F-1
5. According to political preference polls and other
reporting, Alfonsin won with a broad electoral coali-
tion, drawing on what some have dubbed "The New
Argentina." Backers included the urban middle class,
significant numbers of working-class Argentines who
saw the current union leadership as corrupt and too
closely tied to the detested military, and conservatives
and leftists who opposed Peronism. Alfonsin's triumph
did not extend to other party candidates. In the
provincial and local elections they could not match the
52 percent of the popular vote their leader drew. F_
Implementing Radical Objectives
6. Alfonsin's immediate objective in the weeks fol-
lowing his inauguration will be to transform his di-
verse electoral coalition into an effective national
political movement. He is unlikely to implement an
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 early preelection plan to convert his Movement for
Renovation and Change into a national organization-
largely because many within his own campaign oppose
it on the grounds that such a move would smack of
Peronism. Alfonsin instead will seek a government of
national unity. According to Alfonsin, such a govern-
ment would have ongoing consultations with interest
groups to build a consensus on key issues, especially
economic policy. He has already met with moderate
Peronist political and labor leaders, and offered de-
feated Peronist candidate Italo Luder the position of
chief justice of the Supreme Court. Other opposition
moderates probably will be offered posts in the new
administration to promote this concept.
7. Alfonsin will probably strike quickly on a variety
of legislative fronts. Recognizing that consensus can be
both elusive and short-lived, he most likely will try to
implement a program along the lines of the "100 days
plan" alluded to in his campaign. Key objectives
would be economic and military reform and breaking
Coping With Peronism
9. In the Congress. The Peronists and Radicals
agree on a variety of issues, but their differences on
others could make compromise difficult. The Peronists
have enough seats to play an obstructive role. Econom-
ic policy and union reform will probably be the major
battlegrounds. Moderate Peronists are publicly com-
mitted to forming a loyal opposition to protect the
concept of civilian government, but they will have to
take tough stands on some questions in order at least to
appear responsive to their constituency. ^
10. The ability of the Peronists to exploit their
advantage remains in doubt. The loss of the presiden-
tial election apparently has stunned the Peronist lead-
Development of new leadership cadres, however, has
already proved difficult-given seven years of mili-
11. In the Unions. One of Alfonsin's principal
challenges will be the successful democratization of
Argentina's authoritarian, Peronist-dominated labor
movement. The new President intends to strip the
current labor leadership of its power because he views
it as corrupt and at odds with the true interests of the
workers. Alfonsin must break its grip if he wants to
bring the working class permanently into the Radical
camp and to limit labor's ability to mobilize against
the government. Alfonsin's Minister of Labor is not
influential in the party or among the workers, suggest-
ing that the President intends to be directly involved
in union reform.)
12. Judging by his public statements, we expect
Alfonsin to:
- Force the current leadership to stand for reelec-
tion in closely supervised contests. (He believes
they will lose, thus allowing a more responsible
union leadership to take charge.)
- Guarantee the right of workers to join and leave
unions freely.
- Allow rival unions to form in each industrial
sector and guarantee minority representation on
executive boards.
- Appoint judicial overseers to assure the independ-
ence of huge union welfare funds that have been
used in the past for Peronist political and personal
gain.
13. Alfonsin's strategy to build support for union
reform by exploiting existing rifts within the Peronist
labor movement offers hope, in our view, for at least
partial success. Unlike the proposals of other Radical
politicians, he has distinguished his criticism of the
labor hierarchy from his support for an independent
labor movement. The size of his working-class vote
suggests that he has been successful in isolating the
leadership from the rank and file and that most union
members would support new elections, if not other
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 Dealing With The Military
14. Alfonsin intends to depoliticize the military,
which, having overthrown six elected civilian adminis-
trations since 1930, potentially poses the greatest
threat to his government. During the campaign he
railed against military corruption and authoritarian-
ism, and he accused rightwing commanders-correct-
ly-of colluding with their Peronist trade union coun-
terparts. Furthermore, he has pointed to the Falklands
defeat as evidence that the armed forces have lost
sight of their external mission and are no longer able to
defend national interests.
15. Alfonsin's harshest attack, however, has cen-
tered on the military's security and intelligence serv-
ices, which he believes responsible for the disappear-
ance of thousands of Argentines during the struggle
against leftist terrorists in the 1970s-the so-called
"dirty war." His platform called for full judicial
investigations of human rights abuses and the repeal of
the military's decree law of last September, which
both granted amnesty to officials and other groups
involved in counterterrorist activities and prohibited
future inquiries into past counterterrorist excesses. C
16. We expect Alfonsin to take advantage of the
military's weakness and his electoral mandate to ad-
dress some of these key issues. According to a variety
of sources, in order to achieve his stated objective of
democratizing the armed forces by preventing their
reentry into national politics, he intends to:
- Introduce structural reforms that will dilute the
power of the service chiefs and place a second
layer of bureaucracy between the civilian au-
thorities and the military.
- Reassign the military's role in internal security to
a special force under the national police jurisdic-
tion of the Ministry of Interior.
- Reduce military budgets by paring weapons pur-
chases and encouraging interservice cooperation
to avoid duplication.
- Reduce personnel levels and eventually abolish
conscription.
- Use the forthcoming retirement and promotion
cycle to ease out rightwing officers and other
potential dissidents.
- Eliminate the services' control over state-owned
corporations, such as the armaments and ship-
ping industries. ^
17. Alfonsin apparently realizes, however, that tak-
ing on the military on the sensitive human rights issue,
at least in the short term, would galvanize his oppo-
nents in the military and cost him good will among
second-echelon and junior officers. He probably will
move cautiously and has already demonstrated consid-
erable flexibility by modifying his earlier position. He
has ceased his blanket condemnations of the security
forces and will seek retribution only against those who
issued the orders-not the operatives. We believe that
Alfonsin will probably also follow through on public
statements that he will focus on bringing to justice only
high-ranking officers suspected of corruption. Alfonsin
could, however, use the threat of blanket investigations
of human rights abuses and malfeasance in the short
term to gain acquiescence from the military on other
issues. 7
Economic Policy
18. During the early months of his presidency,
Alfonsin and Economy Minister Bernardo Grinspun
will face three formidable economic challenges-
controlling inflation, reactivating the economy, and
resolving foreign debt difficulties. On the domestic
front, they must try first to check inflation while
honoring campaign promises for wage hikes and ex-
pensive social programs. As they work toward moder-
ating price increases, they will move to fulfill their
primary goal of reactivating the economy, which has
contracted some 11 percent since 1980 and remained
stalled this year.' =
19. Grinspun must move to resolve Argentina's de
facto payments moratorium and establish a viable
repayment plan for some $18 billion in principal,
interest, and arrears due in 1984. Ending the current
financial stalemate will require the Argentines to
negotiate an agreement with the International Mone-
tary Fund, carefully weighing their planned reactiva-
tion of the economy against austerity measures we
expect the IMF to demand. Their ability to obtain the
IMF seal of approval will set the groundwork for
reschedulings and new loans from commercial banks
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 vital to a domestic upturn, but a new IMF agreement
may not be forthcoming before March.
20. Controlling Inflation. The new economic
team has yet to frame a detailed inflation policy, but
believes that present market and political forces and
its initial stimulative policies will pay early dividends.
Press reports indicate that Grinspun believes inflation
initially will fall to about 10 percent a month-or
about 215 percent annually-as the reestablishment of
constitutional government under Alfonsin dampens
uncertainty and speculation in local financial markets.
Alfonsin expects substantial gains from planned in-
creases in productivity to moderate inflationary mo-
mentum. He has also predicted that inflation will be
further abated by a resurgence of production as
existing idle industrial capacity is drawn upon. Grin-
spun is seeking wage and price control agreements
with labor and business that would reduce inflation to
a monthly rate of 5 percent within three to four
months.
21. Domestic Reactivation. Alfonsin recognizes
that massive efforts to stimulate the economy will be
constrained by the shortage of skilled labor, Argenti-
na's obsolete industrial equipment, its deteriorating
infrastructure, and an inefficient commercial sector.
Press statements indicate that the Radicals will pro-
mote growth mainly through demand stimulation
policies and the easing of industrial costs. They will
push for new and substantial government spending for
nanced by reducing military spending and implement-
ing badly needed tax reforms and collection efforts. To
stimulate private industry, he will resort to subsidized
interest rates to reduce business costs in addition to
generating new investment. Grinspun has said that
real wage increases will be limited to 6 percent yearly
and then only if supported by corresponding produc-
tivity gains.
22. Alfonsin s attempts to stimulate the economy
are certain to prove popular and at least create an
impression of renovation and change. Businesses will
be pleased initially with subsidized interest rates and
reductions in military spending that should make more
credit available to the private sector. Similarly, sup-
port for more housing, higher real wages, and antipov-
23. Foreign Debt. We expect Grinspun to become
directly involved in negotiations on the $40 billion
foreign debt, but he
will need two to three months to work out internally
consistent economic policies before formally present-
ing a program to the IMF. Argentina is already far out
of compliance with its IMF program, and Grinspun
will have to forge a completely new agreement with
the Fund to hold the debt restructuring effort togeth-
er. Although party campaign promises will lead Grin-
spun to resist publicly tough austerity measures that
would preclude public works and investment pro-
grams designed to restart the economy, his recent
statements demonstrate pragmatism in handling debt
issues.)
24. Grinspun has indicated that, subsequent to the
IMF negotiations, he will go to commercial banks to
discuss rescheduling and a new loan in order to settle
past-due payments and to free some export earnings for
the purchase of imports needed to reactivate industry.
In an effort to address bankers' concerns, he and
Alfonsin have already publicly declared their intention
to pay all "legitimate" debt 3 to the extent that payment
inflicts no serious hardships on the public.[:]
25. Grinspun has
pinned his hopes for meeting future debt servicing on
Argentina's impressive ability to export. In addition to
encouraging the production of manufactured goods
and other nontraditional exports by subsidies and
continued devaluations, he hopes to spur foreign grain
sales by facilitating flows of credit, fertilizer, and other
inputs to the agricultural sector.
26. We believe that Alfonsin and his economic
team do not favor a debtors' cartel, but will lobby for
easier repayment terms. The press notes that unnamed
advisers to Alfonsin favor a drop of one-eighth of a
percentage point in interest rates and a two-year
extension of the payback period. The new Central
Bank President commented in a preelection interview
that an Alfonsin government would seek one year of
grace on international debts to allow reactivation of
the economy before further payments were made.
' By legitimate debt, Argentines mean obligations owed to foreign
creditors. In the past, individuals and firms were known to present
false financial records of external obligations to obtain foreign
exchange at preferential rates from the Central Bank. To ease the
debt-servicing burden, Alfonsin wants to identify and curtail such
operations, which are estimated by some Argentine economists to
account for as much as one-fourth of the total external debt.n
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 Calls for a debt repudiation-not supported or encour-
aged by the Radicals-have faded with the departure
of ultranationalist Air Force officers from economic
decision making.
27. Alfonsin's past criticism of multinational corpo-
rations for their economic imperialism probably will
deter some foreign investors, at least initially. The new
President has indicated that he would welcome for-
eign investment that is beneficial to Argentina, but we
expect him to control it carefully. The most probable
development is a new foreign investment law that
would be a compromise between the unrealistic con-
straints contained in the 1973 Peronist legislation and
the very relaxed conditions established by the military
since 1976.F-1
Foreign Policy
28. Alfonsin shares the nationalism of his military
predecessors and has publicly applauded the armed
forces' move away from unconditional support for the
West in the wake of the Falklands defeat and toward
stronger ties with Latin American and other Third
World countries. We believe the new President will
retain several other of the military's general foreign
policy precepts, including:
- Strong support for most objectives of the Non-
aligned Movement.
- Advocacy of superpower nuclear disarmament.
- Opposition to the Nuclear Non-Proliferation
Treaty, and ratification of the Tlatelolco Treaty
only if the right to conduct peaceful nuclear
explosive tests is recognized.'
29. Alfonsin's position on the Falklands dispute
reflects no discernible change in tone and little in
substance from that of the military. He will maintain a
tough stand, but has said he would not condone
harassment of the British garrison. His public pro-
nouncements also indicate that he believes the islands
are an integral part of Argentine territory and any
formal cessation of hostilities with the United King-
dom would have to be part of an overall plan to
30. On the Beagle Channel dispute with Chile,
Alfonsin differs from the military in that he intends to
accept the 1980 papal mediation proposal-without
the prior concessions the military had demanded-as
the basis for a final agreement. He will back the
military's position that there must be adjustments in
the final settlement that confirms Argentina's preemi-
nence in the Atlantic.' Alfonsin may seek early resolu-
tion of this dispute, which would boost both his
as anti-imperialist and has
Attitude Toward the United States
31. Alfonsin has stated publicly and privately that
he seeks better relations with the United States, but
there are potential areas of contention, particularly
given his personal preferences and understanding of
Argentine national interests. He has described himself
blamed the United States-more than the Soviets-for
much of the world tension. Alfonsin has been especial-
ly critical of the US role in Central America and has
strongly condemned US actions in Grenada. He has
also criticized Washington for its stand on the Falk-
lands and for not opposing British plans to build a
major base on the islands. In addition, he has attacked
Western-primarily US-banking interests, accusing
lenders of contributing to current economic woes and
charging outrageous commissions, fees, and interest
32. Alfonsin might be receptive to some initiatives,
but he cannot openly identify with the United States.
Argentina's desire for Washington's support on debt
refinancing will encourage at least low-profile cooper-
ation. He would welcome assurances that Washington
would not condone any military moves against his
Attitude Toward the USSR and Cuba
33. In our view, the constraints that limited bilater-
al relations with the Soviet Union under the military
regime are likely to apply to the Alfonsin administra-
tion.' While we expect improvements to continue
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 although the military's fractured, feuding state almost
ensures that reports of conspiracies will surface period-
ically. Historically, the armed forces have not inter-
vened without popular acquiescence, and we judge
that they will remain wary of confronting Alfonsin in
light of his overwhelming win. Only in the unlikely
event that Alfonsin recklessly moves to a confronta-
tional strategy on the human rights issue would he face
a threat from the military during the first six months
deeply rooted anti-Communist views of the military
and the Peronists and their suspicions of Moscow's
intentions in Latin America. Nevertheless we expect
the Soviets to continue to press for trade concessions to
reduce the huge trade imbalance resulting from grain
purchases. Alfonsin is likely to be responsive where
possible to protect this vital market, but we do not see
commensurate gains in Soviet political influence. We
believe, moreover, that the new administration will be
disinclined for ideological and financial reasons to
purchase Soviet weaponry.
34. Cuba publicly expressed delight with Alfonsin's
election, but, in our view, Havana will move cautious-
ly in strengthening ties with the new government.
Castro is likely to probe the administration for posi-
tions on key issues-especially Central America and
the Caribbean-and build common policies where
possible. We do not believe he will provide any direct
support to radical leftists, but will maintain contacts to
keep his longer term options open. Alfonsin most likely
will be equally circumspect, for the most part continu-
ing the military's policy of cooperation where possible
to assure Cuban backing on Falklands-related initia-
tives and to maintain Argentina's credentials among
Third World countries. Trade will be based upon
already existing credits extended to Havana.)
The First Six Months
35. The strength of Alfonsin's electoral mandate, his
personal attributes, and the problems facing his oppo-
nents argue that the new Radical government will not
be seriously threatened during its first six months in
office. The President-elect drew strong support from
almost every class and geographic region in Argentina,
and this will make it difficult for even his staunchest
opponents to challenge him. The President's stated
intentions to form a government of national unity and
to consult on key issues should keep opponents on the
defensive for some time. Moreover, we expect a bitter
internal power struggle to occupy the Peronists for at
least the next several months, perhaps leading to
36. We believe the armed forces will be reluctant to
move against the government for at least six months,
37. The first major challenge to Alfonsin's policies is
likely to come from labor, especially from the old-line
bosses who will resist reform and stir factional vio-
lence. We doubt, however, that labor agitation would
pose any real threat to the government during the first
38. Alfonsin's economic team should enjoy some
immediate economic successes that will also blunt
opposition to the government. Inflation is likely to
drop sharply as the civilians come into power, largely
because wages and prices were raised sharply in the
immediate preelection period in anticipation of wage
and price controls following the election. As specula-
tion eases and price agreements take effect, inflation-
ary momentum will tend to slow. Grinspun's goal of a
5-percent monthly inflation rate should be attainable,
at least initially, especially if Alfonsin can capitalize on
the initial honeymoon period to strip away some of the
psychological pressures behind inflation. Free-market
rates of exchange since the election indicate that
inflationary expectations already are diminished. C
39. Argentina's external payments difficulties
should also abate temporarily. Foreign grain sales-
scheduled to resume this month-will generate new
flows of foreign exchange that can help clear up debt
arrears and lead to the removal of the exchange
restrictions currently constricting imports. We also
expect that lenders will be willing to allow small
reductions of the interest rate spread and extended
grace and payments periods because of the precedent
established by Brazil's bank advisory committee and
the privately reported desire of bankers to cooperate
with the new government.
40. There is a small risk, however, that the perform-
ance criteria in any new IMF program could stall a
quick reconciliation. We judge that there is ample
room for reduction of the Argentine deficit-likely to
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 be at least 15 percent of gross domestic product in
1983-and Grinspun's optimistic plans to keep the
deficit to 5 percent of GDP will prove satisfactory to
the Fund. Contention over Grinspun's plans for import
and capital controls and export subsidies, however,
may well delay an agreement and stall access to IMF
funds, contributing to persistent cash-flow difficulties.
The probability of a moratorium or a declared default
would increase under this scenario.=
41. Even if past-due loans are rescheduled and a
new IMF program to gain access to new bank loans is
established, as much as
$3 billion in additional credit will be required by
Buenos Aires to clear past-due debts and obtain im-
ports to nourish a recovery in 1984. Any agreement
Grinspun signs, however, has the potential to cause
trouble. Unless presented to the public as a growth
program with which the banks are assisting, it could
trigger a backlash, fueling demands for a long-term
moratorium.)
A Tougher Second Six Months
42. In spite of a somewhat hopeful beginning and a
few initial successes, we expect Argentina's economic
difficulties and attendant political problems to in-
crease substantially around mid-1984. Alfonsin's eco-
nomic policies will probably generate problems with
the IMF, which is likely to oppose some spending
programs and press for reduced economic interven-
tion. Commercial banks will follow the Fund's lead in
demanding adjustment policies in return for new loans
necessary to sustain the upturn.
43. Domestically, Alfonsin is likely to find that tax
restructuring and collection efforts have not generated
funds needed to support economic reactivation while
keeping the deficit to 5 percent of GDP. If he then
continues to push higher public investment, more
spending for housing, higher salaries, and new social
welfare programs, he will face a growing government
deficit, and the IMF probably would halt disburse-
ments under any new loan programs. Without foreign
borrowing, the Radicals would have little choice but to
rely on monetary expansion, setting inflationary forces
at work against price controls
44. On the basis of a sharp jump in the deficit and
attendant monetary expansion this year, we anticipate
a resurgence of inflationary pressures by mid-1984,
even if Grinspun forges a consensus to limit price and
wage increases. Such a resurgence would ultimately
undermine labor cooperation on wages. If labor sup-
port evaporates, the foundation will be laid for anoth-
er wage-price spiral.
45. The initial happiness in business circles with
below-market interest rates will wane by midyear if
they trigger renewed capital flight and undermine
capital formation. Moreover, the domestic debt relief
flowing from these policies could be quickly over-
whelmed by wage increases. With tight price controls,
profit margins would then be squeezed and bankrupt-
cies would increase. Resulting rises in unemployment
would gut the purchasing power initially gained by
wage earners. Real wages would be further squeezed
by higher prices as supplies of goods shrink, and
stagflation would then be likely to emerge by late
1984. F
46. Mounting political pressures will also begin to
take their toll, especially if the economy deteriorates.
Alfonsin's ability to hold his coalition together in the
face of conflicting demands could prove difficult.
Mainstream Radicals have already criticized his efforts
to accommodate ideological extremists within the par-
ty and his plans to form a national movement similar
to Peronism. Human rights groups have vowed to press
for full-scale investigations of abuses. Conservative
allies in the Senate may break with Alfonsin on key
legislation. Peronists will almost certainly exploit these
rifts to try to consolidate their own following. Al-
though the Peronists are not likely to try to bring down
the new government, a reinvigorated Peronist move-
ment would greatly complicate policymaking. Similar-
ly, the military, in the face of greater social and
political turmoil, would begin to reassert its strength in
key policy areas.)
Implications for the United States
47. The United States can expect little support from
the Radical Civic Union government on several impor-
tant regional and international issues. Alfonsin is a
strong supporter of the Contadora initiative, and his
administration will continue to maintain a tough stand
against US military involvement in Central America
and the Caribbean. We also expect Alfonsin to move
forward with publicly articulated plans to promote
Latin American regional organizations, especially in
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 the area of economic development, that exclude the
United States. Relations with Washington might also
be complicated by Alfonsin's apparent plans to en-
Alfonsin will probably en-
courage, if not openly support, their efforts. E]
48. On the other hand, on most political and securi-
ty interests involving the USSR and Cuba, Washing-
ton's interests and those of the Radical government are
likely to overlap. Alfonsin's desire to resolve territorial
disputes with Chile and the United Kingdom also
coincides with US interests. If he is able to bring about
a swift resolution to the Beagle Channel dispute with
Chile, it would remove a longstanding potential flash-
point in the hemisphere. Moreover, although he will
take a tough negotiating stand on the Falklands, he has
refused to condone renewed military harassment of
the British garrison
49. A significant warming trend in US-Argentine
relations in the short term would pose some risk for US
51. A breakdown in Argentina's debt renegotiations
would have serious implications for US banks. At the
beginning of 1983, Buenos Aires was the fourth largest
debtor to the United States, with some $8.2 billion
outstanding to US lending institutions. A long-term
moratorium, or a selected default, would quickly push
some Argentine loans into nonperformance, seriously
eroding the profits of some banks and perhaps raising
the necessity of a government bailout or mergers to
keep others afloat.
52. We consider such radical actions to be unlikely,
at least during the first six months of the Alfonsin
administration, but Grinspun is an unproven debt
negotiator and has a reputation among bankers as
aggressive and undiplomatic. If negotiations reached
an impasse, Argentina might become a major debtor
around which smaller Latin American nations, which
are again trying to develop a joint debtors' negotiating
position, could coalesce. Should such a bloc push for a
long-term moratorium, the resulting damage to the
financial integrity of a large number of banks world-
wide could set off a major international financial
Indicators of Instability
53. Although we believe that President-elect Alfon-
sin's first six months in office will be relatively quiet,
there are near-term risks inherent in his plans to take
on Argentina's traditional power brokers. These risks,
in our view, increase after midyear. The following list
provides policymakers and analysts with indicators we
believe would point to an erosion of Alfonsin's posi-
Prime Minister Thatcher is even more concerned,
however, that expanded ties could signal renewed
arms sales to the Argentine military. While London
understands the need to certify the new government
on human rights, the Prime Minister strongly opposes
renewed arms sales, particularly if such transfers are
view, London is most concerned about sales of ad-
vanced weaponry, technology, and fighter aircraft,
and would probably be less worried about other
equipment, such as helicopters or older airframes that
did not qualitatively enhance the Argentines' capabili-
tors are listed from the least to the most critical for the
well-being of Alfonsin's administration, and they are
roughly in the order we would expect them to occur:
- Alfonsin backs away substantially from plans to
consult opposition on key policy issues.
- Rifts among Peronists heal quickly, and the
movement begins to respond to a recognized
leadership.
- Congressional opposition begins introducing leg-
islation to embarrass the government and stalls
key administration initiatives.
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 - Alfonsin's electoral coalition fails to coalesce in
the face of conflicting demands; Radicals take
initiatives in Congress contrary to Alfonsin's
wishes.
- Escalating criticism of Alfonsin by his supporters
is reflected in the media.
- Rank-and-file workers resist calls for new union
elections or reelect old leadership.
- Alfonsin fails to reach agreement on wages and
prices with labor and business.
- Second-echelon and junior military officers judge
that Alfonsin's reforms threaten the military as
an institution.
- Renewal of the inflationary spiral as austerity
programs fail.
- Labor pressure mounts; general strikes occur
both for wage hikes and to undermine the
government.
- Rightist and leftist terrorism reemerges and
escalates.
- Military right wing renews contacts with Peronist
counterparts.
- Alfonsin fails to reach agreement with interna-
tional lenders.
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- Military opposition to Alfonsin coalesces across
service lines.)
 After the economic chaos triggered by the Falklands
conflict, Argentina began the year on a hopeful note.
A default had been staved off by a $1.1 billion
commercial bank bridge loan and a $2.2 billion inter-
national Monetary Fund rescue program aimed at
reducing inflation from about 210 to 160 percent
while generating 5-percent real growth. Moreover, a
$1.5 billion new money loan was scheduled in the
second half of the year to cover foreign financing
requirements. A rebound in export earnings to $9.5
billion was expected to lead to an improved balance-
of-payments performance. The Alfonsin government,
however, will inherit nearly 400-percent yearly infla-
tion, negligible growth, and stalled bank and Fund
demands, especially in the public sector, augmenting
an extraordinary expansion of the government deficit
which itself fueled inflation.
The financial rescue program soon ran into difficul-
ties as a result of a dispute with bankers over domestic
legal issues affecting the debt, ultimately forcing
Argentina into a de facto payments moratorium.
Initially, Buenos Aires was unable to access promised
loans needed to eliminate its interest arrears on foreign
debts by the end of June as agreed upon with the
Fund, thus stalling bank and IMF loan drawings.
Despite having drawn foreign reserves down to dan-
gerously low levels in September to make external
payments, Argentina still has substantial interest ar-
loan arrangements.
Inflation was never brought under control as de-
mands for sharply higher salaries in January kept the
wage-price spiral in motion. Consumer price growth
will probably reach more than 400 percent for 1983,
introducing distortion throughout the economy. Such
rapid price jumps reduced the incentive for produc-
tion and new investment while encouraging efforts at
speculation. Despite some initial improvements in
industrial capacity utilization and other indicators of
recovery such as electricity use, economic growth will
probably be on the order of 1 percent for the year.
Moreover, price rises also generated large wage
riggered another series of delays in the
disbursement of loans. Although the Argentines were
able to make more than $3 billion in interest payments
during the year, they will need to negotiate another
IMF program largely because the military govern-
ment's inability to deny unrealistically high wage
demands caused the collapse of fiscal discipline. Non-
compliance with IMF targets is likely to make it
impossible to draw some $620 million in remaining
1983 Fund credit and to force new negotiations for
bank loans of at least $1 billion. n
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