Argentina cut loose on Sunday a decade-old fixed currency peg blamed for strangling its economy and devalued the peso by nearly 30 percent against the US dollar in a desperate bid to reverse a recession in its fourth year and broker social peace.
Just five days after President Eduardo Duhalde took office, the populist from the Peronist party secured special powers from Congress to make the shift that will affect every facet of Latin America's third largest economy.
``This is a change in direction,'' Economy Minister Jorge Remes Lenicov told a news conference. He announced the devaluation of the peso to a fixed rate of 1.40 to the dollar from the one-to-one peg and a move to a floating rate in four to five months.
``There will be transitory measures, but we want to have an economy like other countries,'' he added.
The emergency economic plan -- which comes after a month of cash shortages, bloody rioting and looting that killed 27 and forced the resignation of two presidents -- includes measures to soften the blow of the devaluation for individuals.
In a country where 80 percent of loans are in dollars but wages are in pesos, the government will order a conversion of dollar debts up to US$100,000 into pesos at one-to-one to avoid widespread bankruptcies.
To compensate for the losses to an already weakened banking sector, the government will give banks bonds backed by fuel exports.
Public utilities, including telephone, electricity and water companies, will also take a hit as the government switches dollar tariffs into pesos to protect consumers.
Foreign banks and utility companies -- mainly Spanish and US giants that moved into Argentina through the purchase of state assets in the 1990s -- may be big losers.
``The poor has already made an effort and we are asking for the collaboration of the rich,'' Remes Lenicov.
PRICES ALREADY REFLECT DEVALUATION
Duhalde, who will be president for the next two years, is racing to defuse a social time bomb as the economy contracts by 5 percent annually, unemployment rises to 20 percent and more than 2,000 people drop below the poverty line each day.
In the last week, medicines have run low and prices have risen on everything from refrigerators to bread as businesses hedged against devaluation. A $1,000 monthly limit on cash withdrawals remains in place, reducing purchasing power to a trickle and infuriating many middle-class Argentines.
``We hope that these measures lift us out of the crisis because we really cannot get worse,'' said Blanca Viglione as she played with her grandchildren in the park. ``What I don't like is that they always say this will save us and then we just end up falling further.''
Any wrong step by the government could bring Argentines back out on the streets, banging pots and pans in the spontaneous protests that have come to symbolize their disgust with politicians.
On Dec. 20, former President Fernando de la Rua quit halfway through his four-year term after peaceful protests by the middle class to his unpopular austerity measures and bank restrictions gave way to violent rioting and supermarket looting. Of the 27 dead, five were killed outside the presidential palace.
To avoid a return to the exchange paranoia of the 1980s and an accumulation of dollars, the government will keep liquidity tight by maintaining the restrictions on withdrawals.
A ban on foreign exchange operations, now in its third week, will remain in place until Wednesday.
``We'll have to wait and see how the population reacts,'' said Jim Barrineau, a vice president in emerging markets research at Alliance Capital Management in the US
NEW AUSTERE BUDGET
``It is difficult to think that you can peg, especially under these circumstances, a currency at a specific level for a number of months,'' he added.
Duhalde also needs to quickly rebuild relations with foreign creditors and the International Monetary Fund and show willingness to cut profligate overspending -- one of the main reasons for the crisis.
``In the third week of January, there will be a new austere budget which will guarantee that this new exchange system can remain under control and not produce inflation,'' Remes Lenicov said, adding that the government will renegotiate its foreign debt -- which it has defaulted on -- in February.
Duhalde, who lost the presidential race to De la Rua in 1999, also has to renegotiate with foreign creditors the $141 billion public debt, under a moratorium since Dec. 23 and technically in default since Thursday when Argentina missed a bond payment in Europe.
But analysts abroad were skeptical at what some saw as a return to the days of heavy-handed state intervention.
``Instead of implementing transparent, market-friendly policies that might bring about a favorable response from the IMF and other official creditors, this Argentine government appears to be embarking on the kind of inward looking, interventionist policies that have failed in the past,'' said Matt Ryan, an emerging markets portfolio Manager at Boston-based MFS Investment Management, which does not hold Argentine debt.
(China Daily January 7, 2002)
