Argentines Told to Brace For Free-Floating Peso
Buenos Aires, Feb. 10 -- Argentines braced for the peso to be freely floated Monday, an important test of whether the country's economy will continue imploding or start to recover from the recent shocks that have driven it to the brink of chaos.
Officials plan to fully uncouple the peso from the U.S. dollar for the first time in more than a decade, allowing it to find its value more or less according to market forces.
The government of President Eduardo Duhalde abandoned the peso's peg to the dollar on Jan. 4. It then set up a temporary, dual-rate system, in which the peso was fixed at 1.4 to the dollar for certain types of transactions. Officials announced a week ago that this peg would also be disbanded.
Although foreign exchange markets were closed last week, black-market traders were swapping pesos for dollars at well under half the old one-to-one rate. The government has taken steps to guard against a free fall of the peso, and has hinted it stands ready to prop up its value by using the country's significant dollar reserves to buy pesos.
"Be careful, because those who bet on the dollar are going to lose money again," Duhalde said on a radio program Saturday. He derided "campaigns, which are not very patriotic, talking about a quick rise of the dollar without noticing that such a thing would be very dangerous for our farmers and businessmen."
By allowing the peso to float freely, the government will obtain greater control over the economy. The peg to the dollar legally prevented the central bank from printing enough pesos to generate purchasing power to lift the economy out of a four-year recession. The government now has the monetary levers to begin fighting the slump, and it is hoping that the economy will bounce back as Brazil's did in 1999 following a collapse of its currency.
But the further the peso falls, the worse off the economy will be, because so many Argentine transactions were conducted in dollars during the currency peg. Businesses typically borrowed dollars; home mortgages were denominated in dollars; and the majority of bank deposits were in dollars. Because individuals and businesses generally receive their income in pesos, the devaluation means they cannot pay their debts. To prevent mass bankruptcies, many borrowers will be allowed to repay their loans with the same number of pesos as they would have before the peg was broken. Bank depositors have been promised that their dollar deposits will be converted to pesos at a 1.4 peso-per-dollar rate, meaning that their losses will be at least somewhat limited.
But the protection for borrowers and depositors entails horrendous losses for the country's banks, estimated at upward of $20 billion, which threatens to leave the country without a viable banking system. Although the government has promised to cover some of the banks' losses, its ability to do so is questionable.
Desperate for the funds that could help remedy these problems and keep the peso from falling too far, the government is pressing for a massive loan package from the International Monetary Fund. Economy Minister Jorge Remes Lenicov is scheduled to meet Tuesday in Washington with officials from the IMF, other international lending institutions and the U.S. government.
The IMF and its overseers in Washington and other capitals, however, have made it clear that they do not yet believe the Duhalde government is meeting their requirement of establishing a "sustainable" and "comprehensive" plan for reviving the economy. In a statement Friday welcoming Remes Lenicov's planned visit to Washington, IMF Managing Director Horst Koehler said he viewed the opening of the foreign exchange markets under a single rate as "a good step forward." But the IMF has remained mum on other steps Buenos Aires has taken, including a budget plan announced last week.
On Saturday, finance ministers of the Group of Seven major industrial nations, including Treasury Secretary Paul H. O'Neill, issued a statement at a meeting in Canada that they "welcome as steps in the right direction recent announcements by the Argentine authorities," adding, "We encourage them to continue to work closely" with the IMF.
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