Argentines Brace For Devaluation Of Their Currency
Peso's Decline May Mean Ruin for Many

By:  Anthony Faiola
 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 down.

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 upside-down now."

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