There has been a lot of discussion lately about the state of Argentina's faltering economy. There is talk of a default on debt, a currency devaluation and a deepening recession. The recent $8 billion aid package from the International Monetary Fund may temporarily ease the present economic meltdown, but Argentina's long-term issues need to be solved from within. If you don't think the economic problems in Argentina will make much of a difference, think again. If things get worse in Argentina, the ramifications for global emerging markets will be severe.

Argentina's financial health has been pretty dismal for a while, and although the latest IMF package may ease immediate concerns, the economy remains under extreme pressure. The level of consumer confidence has been dropping steadily, reaching a three month low in August. This low marked a 25 percent decline since December 1999 when President Fernando de la Rua took office. A deepening recession has pushed unemployment levels above 16 percent, and the Argentine government is threatening to default on $130 billion in debt. Many depositors have pulled their money out of the banking system and changed their pesos into US dollars, fearing currency devaluation. The Argentine peso is highly overvalued, having been pegged one to one with the US dollar since 1991. If this peg were to snap, it could spell disaster for the economy and the ability of Latin America's third-largest economy to pay its debts.

At the Buenos Aires Stock Exchange, volume is down, foreign investors are in short supply, and the number of listed companies has fallen dramatically. Recently, the government cut wages and pensions by 13 percent, which may exacerbate the low consumer confidence and tighten even further, the reins on consumer spending. Fed up with the current situation, protesters recently staged a rally in Buenos Aires, which was the biggest in the country in over a decade. Argentines are trying desperately to live with declining income, but many are losing hope and are opting to leave the country in search of better lives elsewhere.

Massive withdrawals from banks have left reserves empty, forcing Argentina to appeal for funds from the IMF in order to reestablish adequate levels of liquidity. Argentina received $40 billion in aid in December and another $8 billion in late August. The details of the latest package call for $5 billion of initial funding to ease immediate liquidity concerns and $3 billion in subsequent funding after Argentina proves that it is making progress in dealing with the underlying long-term issues. The main elements to long-term sustainable growth in Argentina are lower interest rates, decreased government spending, a reduction in debt, and an effective tax system.

The issues in Argentina have not developed out of thin air. The seeds of the present economic problems were sewn over the past few years. To begin with, the financial crises in Asia and Russia had severely negative effects upon the economy. These events pushed up borrowing costs and caused international investors to rethink investments in emerging markets. Finally, Brazil's currency devaluation in January 1999 proved to be economically disastrous for Argentina. This action put Argentine products at a competitive disadvantage by raising the price of them in Brazil.

One question to ask is, is the IMF just throwing money at the problem, or is there a viable plan in place to solve the long-term economic issues in Argentina? The latest injection of money should bolster reserves, but ultimately, it appears that the root of the problem will not have been addressed. Argentina needs to prove that it can grow its economy effectively without continuous injections of foreign aid. The policy of lending may have adverse long-term lending implications because it illustrates the fact that there are deep pockets in the background always willing to salvage a sputtering economy. If investors know that there is a safety net, they are more likely to lend large amounts of money to questionable debtors. This changes the entire relationship between investors and borrowers.

Present economic woes in Argentina have already rippled back through into neighbouring countries. Chile's currency has slipped 14 percent versus the dollar this year, and Brazil's real has fallen 23 percent versus the dollar. Due to the close relationship between South American economies, the IMF recently approved $15 billion in aid for Brazil to try to avoid any prolonged negative regional impact from the deteriorating situation in Argentina. It's no surprise that Latin American leaders have wholeheartedly supported the IMF's generous loans. It makes sense for them to keep Argentina afloat to avoid a regional financial crisis, which could significantly destabilise their own markets.

Argentina, the US, the IMF and the G7 have been participating in ongoing negotiations. One sticking point in the economic argument is the so-called "zero deficit" policy, which means that the government would spend only what it earns in taxes. The $40 billion in aid given in December doesn't appear to have stabilised the economy very much. This is one reason why the government lacks credibility. In the past it has failed to deliver on promises regarding economic issues, and the most recent IMF loan may be just postponing the inevitable.

Argentina needs to come up with a detailed, carefully constructed plan, and show that they have the intelligence and conviction to stick with it. At the moment, the economy has received a jolt that should help to put out the immediate fires, but the long-term issues are formidable. A total collapse of the economy will have broad based ramifications for Latin and South America, as well as emerging markets throughout the world.

Some believe that Argentina, Brazil, Paraguay, and Uruguay need to adopt a common monetary policy and currency, to give them a stronger place in the global economy. This is important to all of us because presently, world economies are linked more tightly than ever before. Emerging markets no longer operate in isolation, and major economic events that occur on one continent are felt almost immediately around the world.

It is quite possible that neither the IMF nor Argentina has established a legitimate plan to solve the present economic issues. The IMF seems to believe that it can put out the fire in Argentina by throwing money at it. Let's hope that the IMF is right and that this episode isn't going to provide an unfortunate example for why the IMF may need to reform it's lending policies and come up with a new approach. If the economy continues to deteriorate, it could set the course for a vicious cycle of global emerging markets issues.

These macro issues are of particular importance for Bermuda investors and Bermuda insurance/reinsurance companies with emerging markets exposure. Investors may have exposure through mutual funds, and even if the exposure is not specific to Argentina, many developing markets will feel the effect of the current situation. The course and character of present and future investments in emerging markets may be affected, and it is worth knowing what the issues are. Ultimately, investors should be exceedingly clear and informed about their risk and exposure.

While the direct impact of a financial crisis in Argentina may not be absolutely catastrophic for developed nations, the implications for emerging markets are enormous. A collapse in Argentina would change the way investors, and developed nations in general, deal with emerging markets. One can only hope that despite the apparent lack of a concrete plan, Argentina will beat the odds and set a course for sustainable long-term growth. Keep your fingers crossed, because an Argentine economic meltdown would be a calamitous event for global emerging markets.

Chase Toogood is vice president of Anchor Investment Management.