Outlook: Don't cry for the peso-dollar peg, Argentina

Rover goes east; Home security  
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The Independent Online

When the flames begin to rise from the finance ministry and the bodies start to pile up on the streets, and the president resigns then you know that Buenos Aires has more than just an economic crisis on its hands. The disaster which has befallen the Argentinian economy has been brewing for three years. But it was the seizure of private pension funds and the draconian curbs on cash withdrawals from the banking system which have turned the drama into a full-blown political crisis. In a country where large chunks of the economy still operate on a cash-only basis, cutting off the supply was asking for big trouble.

In a developed Western economy, the textbook response to economic downturn is to slash interest rates and raise public spending. In an emerging economy like Argentina, particularly one saddled with the biggest sovereign debt crisis in history, the IMF-sponsored solution is the polar opposite – raise taxes and slash spending until the budget returns to surplus and the debt can begin to be paid off.

For Argentina such medicine looks to have come too late and even the big guns of Merrill Lynch, drafted in by an increasing frantic government a month ago to administer the magic bullet, are struggling to come up with a plausible cure.

The Argentine crisis has its roots in the hubristic policy of convertibility – the exchange rate regime under which the peso is pegged at the rate of one dollar. In truth convertibility does not exist on the streets where dollars trade at a fat premium to the peso. But the Argentines have had to maintain the fiction. One reason is that the country has £90bn of external debt, the bulk of it dollar denominated. So to have any hope of paying off the debt, the peso has to be worth as much as the greenback.

The truth, however, is that the Argentine government even before the resignation of President Fernando de la Rua was inevitably heading for default. The debt cannot be repaid so it might as well be restructured which means large amounts written off and foreign lenders persuaded to lump it.

If the debt is restructured, then there is little point in sticking to the currency peg which in turn means devaluation of the peso. Carlos Menem, the former president, wants to replace the peso with the dollar and the vast majority of his Peronist party wants to devalue altogether. In the short term that might deepen the economic downturn. But in the long term it may be the only hope of salvation.

In any case time is running out for Argentina, a country with a long history of the generals taking over at times of crisis.

Rover goes east

China Brilliance Holdings. Don't say you haven't heard of them. They are, er, Chinese and they make the ever popular Zhonghua sedan. They may also be making Rovers one day in Shanghai, not just clapped-out models constructed from knock-down kits or Oriental impersonations of the Mini Metro but brand new MG models.

MG Rover rather took the motor industry aback yesterday by announcing that after its year-long search for a strategic partner to design, develop and build new cars, it had alighted upon Dr Yang Rong's Brilliance Group, China's biggest producer of minibuses.

It was somewhat less illuminating about the detail of its joint venture discussions, like who will build what, where and when and whether the talks with Dr Yang are really another way of exporting jobs from Longbridge to Beijing.

The strategic alliance, if it comes to pass, brings back memories of Rover's tie-up with Honda which all ended rather tragically when British Aerospace (Rover's last owner but two) sold the Japanese down the river by offloading the business to BMW.

More than one car company has repented at leisure after jumping into bed with Rover or consummating the marriage entirely. In Munich they have only just recovered from the nightmare that began when Bernd Pischetsrieder got all misty-eyed about the Riley and decided to splash out £800m buying the company that used to make it.

The Honda alliance was cemented with a cross-shareholding. In the case of Brilliance, there will be no such arrangement, which is probably a wise move on the part of both companies considering Rover's past form and China's lack of track record in actually making cars.

The lack of detail forthcoming from MG Rover suggests there is a lot of ground to cover and a high risk that the talks will crumble before they have reached fruition, rather like the abortive Proton link-up. They don't need to start learning Mandarin in Longbridge just yet.

Home security

The phrase "safe as houses" appears as reliable as ever. Nationwide Building Society, one of the country's largest mortgage lenders, believes house prices will rise by 6 per cent next year. That may not sound like fantastic news when compared with the 12 per cent enjoyed this year and eye-watering gains of as much as 40 per cent in parts of London.

But after a year when share prices have fallen on average by 18 per cent and savings rates have dropped some 2 per cent to the lowest since Disraeli was prime minister, most people would be grateful for such a return.

The average homebuyer – and this is one market where the average person is an investor – could be forgiven for being sceptical about such forecasts.

Most remember the early 1990s when similar large price rises were followed by a sharp crash that left millions in negative equity

But there are some key differences between now and 10 years ago. At the tail end of the last boom, as the Chancellor, Gordon Brown, loves to remind us, interest rates rose as high as 15 per cent.

Today rates are still as likely to fall as to rise and even an increase in the base rate from 4 per cent would leave mortgage rates at levels undreamed of in the 1980s. This has meant that the average home is still affordable by historic standards, even at the astronomic prices they currently command.

But as Nationwide admits, a bet on the housing market is effectively a bet on the UK economy.

Ten years ago the housing market crash came hand-in-hand with recession and certainly a full-blown economic slump now would topple the housing market.

Savills reports that in London, where the economic downturn has been felt most severely, prices for £1m properties have come off 10 to 15 per cent since 11 September.

The latest estimates of economic growth, published yesterday, show that recession is still some way away. Not only has the estimate for the latest quarter been revised up but so have all quarters since the start of 2000, meaning that the UK entered the slowdown in a stronger position that previously thought.

That should limit the rise in unemployment, which is certain to increase, which is turn support the wealth and earning capacity needed to sustain the housing market.