Argentina Lets Peso Float

By: Paul Blustein
The Washington post, February 12, 2002


Buenos Aires, Feb. 11 -- The lines stretched for half a block or more today at the foreign exchange houses downtown, and those who came at midday to swap their pesos for U.S. dollars faced waits lasting as long as three hours in the Argentine summer heat. At least one woman passed out.

El gran debut of the floating peso was finally underway in a country that for more than a decade had kept its currency fixed against the dollar. By the time it was all over, the peso was selling at about 2.03 per dollar for large transactions.

That wasn't the plunge some had feared, and Argentine television stations reported this evening that the majority of people thronging the exchange houses were selling dollars rather than dumping pesos. So the outcome gave a psychological boost to the government of President Eduardo Duhalde, which is desperately trying to convince an angry populace that it is capable of resolving a crisis that has devastated the country's once-thriving economy.

Today's trading left the peso at about the same level as the last time the foreign exchange markets were open at the beginning of this month, when the government announced that it was dropping a partly fixed rate system. Still, the Argentine currency is worth less than half the $1 per peso at which it was fixed from 1991 to 2001. And only limited comfort could be drawn from the opening day of the peso's float because most people and businesses are extremely restricted from gaining access to their funds under government rules aimed at keeping money from fleeing the banking system.

Indeed, many of those who were selling dollars for pesos today were doing so not out of any sense of confidence in Argentina's economic future but because they badly needed cash to pay bills.

That was the case for Ana, a 40-year-old teacher who confided that she keeps her savings in dollars in her house and was swapping some of them for pesos so she could pay her gas, electricity and Internet access bills. "You just can't put your money in banks here," she said, echoing a view that has become widespread since the government imposed a freeze on deposits late last year. "We have had the same type of problems in the past, but this is a much different situation."

The lines were orderly, thanks in part to a heavy police presence, although the expressions on most faces were grim. Trying to capitalize on the weather, black market money changers called arbolitos, or little trees, offered dollars to people sweltering in the long lines, but there were few takers. At one downtown exchange house, another enterprising Argentine charged five pesos to stand in line for people while they went to get a cool drink or go to the bathroom.

"People saw long queues at the exchange houses, yet there was just small demand for dollars," said Gustavo Canonero, senior economist at the Buenos Aires branch of Deutsche Bank. "In that sense, it was good for perception. But I don't think it surprised anybody in the financial markets, because if you know the market, you know there are still lots of restrictions on trade in foreign exchange, and at the same time, there is not a lot of cash around to buy dollars."

The restrictions include limits on companies' right to make payments to foreigners without central bank approval, plus a ban on individuals buying dollars with anything but cash.

So the real question, economists said, is how the peso performs over the next weeks and months. One major worry is that a vicious cycle will start, in which a falling peso rekindles inflation by raising the price of imported goods, and inflation prompts a flight from the peso.

In one sign that an inflationary cycle could be taking hold, a union leader, Rodolfo Daer, said today on a radio program that because workers' wages have been "pulverized" by the devaluation of the peso in early January, unions may start pressing soon for pay adjustments that keep up with rising prices.

One key factor in determining the peso's future course will be the chances that the International Monetary Fund will come through with a major loan that the government is seeking. Economy Minister Jorge Remes Lenicov left for Washington tonight to meet with top officials at the IMF and the U.S. government, and President Duhalde called IMF Managing Director Horst Koehler to promise that Argentina will adopt a "sustainable" economic plan, as the fund has been insisting, according to presidential spokesman Eduardo Amadeo.

But Amadeo acknowledged, as IMF officials have been saying privately for some time, that the fund is not going to offer money imminently because it is still not satisfied with the measures the government has taken. "All we'll have is the opening of negotiations," Amadeo said. 

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