Argentina may abandon the peso/dollar peg

Alejandro Lifschitz

BUENOS AIRES, Argentina: Argentina’s new President Eduardo Duhalde, facing massive pressure to save the economy from a four-year recession, could abandon or radically change the country’s one-to-one currency peg to the dollar, his advisers said on Tuesday. “The depreciation of the peso is being analysed,” an adviser to Mr Duhalde said.

The new government could change the peg to 1.30 pesos or 1.40 pesos to the dollar, said the source, who asked to remain anonymous. The devalued peso would then be pegged to a new basket of currencies, including the Brazilian real, euro, dollar and the Japanese yen. While the peg, known as “convertibility”, helped bring Latin America’s third largest economy monetary stability and high growth in the 1990s, it has been blamed for making Argentina one of the most expensive countries in the world to do business, aggravating an economic downturn.

Economists say a devaluation in the peso could bankrupt the country. Most Argentines earn in pesos but hold debts, such as mortgages and cars, in dollars. A sharp devaluation could lead to hyperinflation, a problem that haunted Argentina in the 1980s, they say Mr Duhalde’s team may plan to soften this blow by transforming dollar debts into pesos, sources said.

New plan on Friday
Mr Duhalde, Argentina’s fifth president in two weeks, said in an inauguration speech on Tuesday he would announce a new economic programme on Friday. Two predecessors were forced to resign after street protests amid a recession that is making Argentina head to the biggest sovereign debt default in history.

Mr Duhalde’s economics team is planning to add some flexibility to banking curbs slapped on by former President Fernando de la Rua, who limited cash withdrawals to $1,000 a month. The restrictions were one of the main reasons for the street protests over the last month.

One possibility is allowing deposit holders to access their savings only in pesos—even if the deposits are officially held in dollars. “Two of the basic issues are giving needy people food and flexibility on (banking) restrictions, searching for a mechanism that allows people to have guarantees that they will get their money back,” said an economist linked to Mr Duhalde.

Another presidential adviser said the economic plan was about “giving a boost to liquidity, de-dollarising and depreciating the peso”. To increase the tight liquidity in Argentina, the new government may issue up to $3 billion to $3.5 billion in domestic bonds—known as Lecops—to pay for state spending, including state salaries and payments to government suppliers.

The new government will keep to plans to suspend foreign debt payments. Mr Duhalde’s predecessor Adolfo Rodriguez Saa originally announced a suspension of payments on the government’s $132 billion foreign debt. “One of the possible options is a reduction in the principal (on bonds) with two years of grace.

This weekend people close to Mr Duhalde could be travelling to Washington to discuss this issue with the IMF,” said a Peronist Party source.

— Reuters