Edition: U.S. / Global

Turmoil, Then Hope in Argentina

By NATHANIEL C. NASH, Special to The New York Times
Published: January 31, 1991

Following the appointment of a new Economy Minister, Argentina's stock market soared 30 percent today, in a stunning reversal of investor sentiment after three days of sharp plunges by the nation's currency.

Economic officials saw the rising market as a sign that financial and business executives still believe that the country's economic recovery plan is on track, despite the financial and political turmoil earlier this week.

"The wild moves over the last few days are really just a hiccup and I don't think any of this signals a departure from the broad policies," said the head of one foreign bank, who insisted on anonymity. "So we had a little bit of volatility. Welcome to Argentina."

Under President Carlos Saul Menem, Argentina has been reducing the size of the Government payroll, selling off money-losing Government-owned businesses to private investors and, in general, opening the economy more to free-market forces. The nation is also placing greater restraints on printing new money.

Bankers and economists said today that they welcomed Tuesday's appointment of Domingo Cavallo as Economy Minister and predicted that he would continue the Menem Government's broad economic policies. Mr. Cavallo, who had been the country's Foreign Minister, is President Menem's fourth Economy Minister in a little more than 18 months.

Mr. Cavallo is expected to announce a new economic plan by Monday, and many people are predicting that it will include an overhaul of the country's inefficient tax system.

Investors also said the sharp drop in the austral, the Argentine currency, could help their economy by making Agentine products cheaper abroad, leading to an export boom and enabling the country to pay more of its debts. The austral fell to 9,500 to the dollar today, from 6,500 to the dollar on Friday, and some economists had predicted that the devaluation could unleash a new round of hyperinflation.

Still lending agencies like the International Monetary Fund, as well as the United States Government, will be watching closely to see how the Menem Government handles the crisis. While President Menem has gained popularity and some credibility in Washington, Government officials are quick to acknowledged that they are still not sure if he will be able to overcome a history of inflationary economic policies and bloated Government payrolls in this country. Big Investment Needs

Argentina sorely needs vast amounts of new capital investment from abroad to revitalize its economy. The way it handles a crisis like a currency swing sends unmistakable signals to business and banking executives.

Many Argentine economists, bankers and Government officials had been saying for months that the austral was greatly overvalued.

Despite inflation that exceeded 1,000 percent in 1990, the austral rose against the dollar throughout the year, mainly because of highly restrictive Government measures that tied up vast sources of dollars. By December, the austral had been trading as high as 4,500 to the dollar. Some economists say a more realistic exchange rate is around 12,000 australs to the dollar.

As the austral began to fall on Friday, speculative fever erupted, so that foreign-exchange houses were crowded with investors frantically trying to sell australs. Two Officials Resign

Late Monday, the Government announced that banks and exchange houses would close for two days, and Tuesday night President Menem accpeted the resignations of the Economy Minister, Antonio Erman Gonzalez, and the central bank president, Javier Gonzalez-Fraga.

After being named Economy Minister, Mr. Cavallo announced late Tuesday night that he would reopen the banks and exchange houses, and that for now the central bank would keep the austral in a trading range of 8,000 to 10,000 to the dollar.

Some of the optimism following the appointment of Mr. Cavallo reflects the fact that he has been known to advocate a higher exchange rate. Moreover, he announced that he planned to give the Argentine central bank complete autonomy from the Finance Ministry.

Business executives here said such a step would go a long way toward insulating the central bank from pressure by other parts of the Government to cover budget deficits by printing more australs. Rising Consumer Prices

Despite the optimism, some prices have risen sharply this week, with increases as great as 40 percent for sugar and 25 precent for cooking oil.

Many shops have been posting signs that they will no longer accept credit cards, fearing that by the time they are paid by the banks for the charge purchases, the value of the austral will have dropped sharply.

Moves like that left some economists expecting prices to rise even further.