“Argentina’s economy is facing a hard landing as activity has stalled partly due to an increasingly heterodox policy response,” Morgan Stanley economist Daniel Volberg said in a report. Morgan Stanley revised Argentina’s GDP for 2012 to 2.4% from 3.1%, and for 2013 to 0.5% from 3%. The bank left its year-end 2012 exchange rate forecast unchanged at 4.95 Pesos to the US dollar, but it sees the Peso ending 2013 at 7.00 to the greenback.

Brazil’s third largest trade partner is currently facing capital flight, high inflation and a major slowdown of its industry. If Argentina’s economy deteriorates further, some Brazilian sectors, such as the automotive, textile and food industry, will suffer the consequences –a situation Dilma Rousseff’s government wants to avoid at all costs.

Brazil news portal Folha found out through sources that Brazil might be willing to reduce its surplus with Argentina from R$ 5.8 billion ($2.9 billion) in 2011 to R$ 4 billion ($2 billion). The Brazilian government has accepted the $1 billion reduction in bilateral trade surplus with Argentina to help its troubled neighbor, whose economic woes could potentially spread across the border.

As of today, several items sold to Argentina have trade tarrifs. Non-official quotas would free products from this obstacle, even restricting sales.

In Buenos Aires, the problems faced by President Cristina Kirchner are eroding her popularity. In Brasília, the whistle had already been blown by Brazilian diplomats, as the Brazilian embassy in Buenos Aires warned that capital flight will continue until the end of 2012.

Dilma Rousseff is aware that the rise in currency rates in Argentina has resulted in a loss of competitivity, and diminished reserves.

Brazil’s decision to reduce its surplus represents a new position in dealing with the Argentinean crisis. At the beginning of the year, ministries were considering retaliating against its neighbor. The change of tone reveals how worried the country is about its trade partner.

Although both economies are closely tied to each other, the Ministry of the Treasury does not think that a currency crisis would have dramatic consequences on Brazil. Tristán Rodríguez, economist at the Center for the Opening and Development of Latin America (CADAL), says the slowdown in Brazilian industry affects Argentina more than the other way around.

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