Brace For Devaluation Of Their Currency
Peso's Decline May Mean Ruin for Many
Washington Post, January 4, 2002
Buenos Aires,--The elderly gentleman sitting on an old couch in his
one-bedroom apartment can feel it coming, a force so strong it threatens
to leave him and his wife in financial ruin in their twilight years. He
says its name out loud, as if in therapy: "Devaluation."
The mere mention of the word makes Eduardo Gambino, 67, begin to
fidget, his hands casting around for the few pesos left in his pocket --
pesos he fears may soon be worthless.
After a decade of unprecedented monetary stability through the system,
called convertibility, that pegged the peso to the U.S. dollar at a
one-to-one ratio, Argentines are bracing for a devaluation that would
strike at many of their family budgets with devastating effect.
The collapse of Latin America's third-largest economy has further
increased long-standing pressure to abolish the dollar peg and devalue.
The new administration of President Eduardo Duhalde plans on Friday to
propose a devaluation that could cut the value of the peso by 40 percent
or more, government officials said.
Economists say the overvalued peso is a fundamental economic problem of
Argentina, and its devaluation will help boost exports by making Argentine
goods cheaper for foreigners to buy. That could bring the economy out of
recession, but be difficult for Argentines to swallow in the short run.
Bearing the brunt would be people like Gambino, the son of a Sicilian
immigrant who moved to Argentina a generation ago when it was one of the
world's richest nations.
The problem is that though Argentines are paid in pesos, 80 percent of
their debts are in dollars. They convert pesos into dollars to make their
loan payments. If the peso were devalued, it would take many more of them
than it does now just to keep current on their payments.
Gambino and his wife owe $27,000 on a mortgage that two years ago
financed the purchase of their apartment in a quiet, middle-class
neighborhood. For their mortgage, they pay $435 a month. Yet their monthly
income, battered by the collapse of his sheet-metal business two months
ago, is only 700 pesos -- 500 from Mrs. Gambino's job as a file clerk and
200 from one of their sons.
With that income currently worth $700, they've managed to keep afloat.
They have cut virtually all-unnecessary expenses: no cable television, no
vacations, and no new clothes. But they have bills piling up from Mrs.
Gambino's cancer treatment.
A devaluation could cut the pesos' value so far that everything they
make wouldn't cover even the mortgage.
"You fight all your life to build something, only to see it come
crashing down around you because the country you live in doesn't
work," said the tall, broad man, his shoulders slouched in defeat.
"We work as hard if not harder than people anywhere in the world, we
have dreams for our children, we have hopes of owning property and
building a life. Now, to suffer this at my age is too much. I have lost
faith. My advice to my children is to leave here, emigrate abroad. I would
if I could."
For many Argentines, the convertibility system the country adopted in
the 1990s seemed a godsend. It tamed the hyperinflation that was pushing
up prices by the hour. By law, the central bank had to change pesos into
dollars at the one-to-one ratio, meaning it couldn't pump inflationary
volumes of pesos into the economy.
But the country is now bankrupt. After announcing two weeks ago it
would halt payment on its foreign debts, it made that policy official
today, missing its first payment, due on 28 billion lira of Italian bonds.
Though the devaluation is only looming, many merchants are acting as if
it has already taken place. Stores were rushing to hike prices today on
many goods while refusing to sell such foreign products as computers and
televisions because of uncertainty over what to charge. Pharmacies jacked
up prices on imported medicines and banks stopped accepting pesos for
payments of debts in dollars, claiming their computer systems had gone
The potential bankruptcies of households and companies -- and fears
that the devaluation may provoke another popular revolt like the one that
brought down President Fernando de la Rua on Dec. 20 -- has the government
scrambling for a way to ease the burden for families like the Gambinos.
Among the plans under discussion is ordering banks to extend the terms
of payments and lower interest rates. But that could destabilize banks and
would still saddle Argentines with years of additional debt payments.
Like many Argentines, the Gambinos were unable to buy a home earlier
because banks were reluctant to give loans, worrying that inflation would
make the pesos used to pay back the loans worth far less than the ones
that were borrowed. That changed in the 1990s with the convertibility law.
By making the dollar and the peso interchangeable, banks had the option of
lending in either currency. More often than not, they lent in dollars.
When Gambino took out his mortgage two years ago, the small industrial
steel sheeting business he owned was going strong. He hoped to pay off the
10-year loan and leave the sunny little apartment to his sons. Now, with
his business in bankruptcy and devaluation ahead, he fears he may have to
ask not one, but all three of his sons -- each of whom has suffered a
drastic pay cut in the past three months -- for money.
"My stomach is sick at the thought of asking my children for help
-- no. It's supposed to be the other way around, the parents help the
children," he said. "It's not just the peso. Everything is
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