`Tequila Effect' gives Menem a headache

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In Latin America, "the Tequila Effect" is not something you feel the morning after too many margaritas.

Foreign investors use the expression to describe the shock-waves caused by a Mexican economic crisis on economies and stock markets throughout South America as foreign investors get cold feet and pull out their money.

In Argentina, where President Carlos Menem had created economic stability and rapid expansion since 1989, the latest fall-out from Mexico caused a 38-per-cent plunge in the stock market since December before the trend began reversing this week.

The President was considered a shoo-in for re-election, but the new economic problems, while hardly on the scale of those in Mexico, threaten to cut into his popularity and perhaps force the 14 May presidential race into a second, run-off round. Serious splits within the opposition suggest he will still win and fulfil his great ambition - he managed to force a change in the 1853 constitution to do so - of ruling for a second term.

Under the constitutional change, he will be allowed to run for only four more years, two fewer than his first term, taking him through to 1999. (He has often pledged the Falkland Islands "will be Argentine by the year 2000".)

For the first time since taking office in 1989, Mr Menem was jeered during a recent visit to his home province of La Rioja as local-government workers demanded "decent salaries".

One of the problems of the "Tequila Effect" is that Argentina's rapid growth in the past five years has been based largely on foreign capital investment. As nervous investors and speculators withdrew funds in the wake of Mexico's crisis, dumping pesos and buying dollars as a hedge, Argentina's provinces were the first to suffer.

Provincial governments have been unable to pay employees. In the northern city of Salta, municipal workers, owed two months' back-pay, set fire to the town hall in January, injuring seven people. With $5.2bn (£3.3bn) in Argentine debts maturing this year, provincial unrest may only grow.

One of Mr Menem's leading presidential opponents, Horacio Massaccesi, of the Radical Civic Union (UCR) party - traditional rival of Mr Menem's Peronists - said the President's concentration of political and economic power in the country's centre, particularly in Buenos Aires province, caused provinces to suffer "violent surgery without an anaesthetic".

The centre "has become a big shopping mall of 300 square kilometres," Mr Massaccesi, governor of Rio Negro province, said. He has been described as the Robin Hood of Patagonia after "robbing" the province's treasury to pay public workers. But splits within his party, previously led by the former president Raul Alfonsin, have pushed him back into third place in opinion-polls.

The UCR suffered another blow this week when Dante Caputo, foreign minister under Mr Alfonsin and more recently UN mediator in Haiti, suggested he may abandon the party to join the growing Front for a Country of Solidarity (Frepaso), which links left-wing parties, disgruntled former Peronists and environmental groups. Frepaso's presidential candidate, Senator Jose Octavio Bordon, has moved ahead of Mr Massaccesi into second place in opinion-polls for the election.

If Mr Menem fails to win re-election, he may blame the "Tequila Effect" but will have to shoulder some of the responsibility himself. Living up to his reputation for putting his foot in it, he recently came out with remarks on the poor which, paraphrased, amounted to "let them play golf".