Plan to Devalue Money in Argentina
By Tony Smith
AP Business Writer
Saturday, January 5, 2002; 9:34 AM
BUENOS AIRES, Argentina –– Argentine lawmakers are debating a painful currency devaluation, part of a bill that would give the new president emergency powers for an effort to rebuild the country's shattered economy.
Two days after taking office as the fifth president in less than two weeks, Eduardo Duhalde asked Congress on Friday to pass a law that would let him ease the peso's parity with the U.S. dollar, reform the banking system and regulate consumer prices.
He also wants to use citizens' hard currency savings temporarily to bolster Argentina's bankrupt accounts, while protecting small-time debtors by converting loans up to $100,000 into pesos.
The bill, which Congress was to continue debating Saturday, declares a "public emergency in economic, financial and exchange rate" policies.
It gives no details on when or how the peso – pegged at one-to-one to the dollar since 1991 – would be devalued, but in his first public speech as president, Duhalde confirmed Friday that a devaluation was imminent.
Addressing Argentina's industrialist lobby, which claims it was decimated by a decade of unbridled free-market policies and an overvalued peso, Duhalde said that "devaluation is a given."
His cabinet chief, Jorge Capitanich, said the devaluation could be around 40 percent.
The devaluation plan is also said to include a tricky dual exchange rate: the peso would be fixed at about 1.30 or 1.40 to the dollar for business and trade, while individual Argentines would have to pay a free-market rate for hard cash.
Many Argentines fear that could bring back the currency chaos and hyperinflation of the 1980s, when money changers stood on nearly every street corner with handfuls of dollars, earning them the nickname "arbolitos," or little trees.
Many businesses already were hiking prices to cover the expected jump in import costs, with appliance stores, pharmacies and supermarkets raising prices as much as 20 percent.
The new government, backed by the industrialists, says a devaluation is the only way to try and drag South America's No. 2 economy back from the brink of collapse.
Duhalde has not said exactly how his economic plan would work, but he appears to be counting on propping up the country's finances, at least temporarily, with the estimated $46 billion and 20 billion pesos deposited in Argentines' savings accounts.
The news agency Noticias Argentinas reported Friday the government plan was to return those deposits to savers over a period of six months to two years.
Analysts predicted that banks, exporters and some foreign companies operating in Argentina would also be presented with a hefty share of the tab.
Bank shares slid on the Buenos Aires stock exchange's Merval index, while local industrial stocks were up, boosted by the rising influence of new Production Minister Jose Ignacio de Mendiguren, an industrialist with a protectionist bent.
Spanish companies, which have invested some $30 billion in Argentina – more than any other country except the United States – are expected to be hit hard.
Shares on the Madrid stock exchange slipped Friday, with the big losers banks and other companies with major Argentine holdings, including Banco Bilbao Vizcaya Argentaria and energy conglomerate Repsol-YPF.
With around 70 percent of the Spanish banks' loans denominated in dollars, a peso devaluation could wreck balance sheets because many borrowers would find debt repayment impossible, analysts said.
"If you get your salary in pesos and you owe money in dollars, devaluation will increase your debt in a single stroke," said Camino Hidalgo of Madrid's Banco Urquijo.
The expected demise of the decade-old "Convertibility Law" pegging the peso to the dollar ends an economic experiment once seen as a panacea for emerging markets because it conquered inflation and the ensuing stability was a magnet for foreign investment.
But analysts now see the fixed exchange rate as a key reason for Argentina's 43-month slump, blaming it for making locally produced goods too expensive to sell abroad or compete with imports at home.
The result, Duhalde told the industrialists Friday, was that "we are broke, we are bankrupt, and many of you are broke and bankrupt too."
Argentina has bled so much cash in the past year – some say about $20 billion – that it has declared a moratorium on its $141 billion debt, freezing itself out of international capital markets.