Argentine peso falls 39 percent

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Posted 8:37AM on Saturday, January 12, 2002

BUENOS AIRES, ARGENTINA - The value of the Argentine peso fell by more than 39 percent in its first day as a free-floating currency, ending a decade-long link to the U.S. dollar and an era as Latin America's most stable currency. President Eduardo Duhalde set the peso free on the marketplace Friday as part of a two-tiered exchange rate the government hopes will hoist South America's second-largest economy from four years of bitter recession. Banks reopened their hard currency tills Friday after a night of violence and protests over a draconian banking freeze that limited access to deposits. In the capital, what began as a peaceful pot-banging protest ended with enraged Argentines smashing bank windows and ATMs. There were no reports of injuries. In the first serious test of Duhalde's economic plan, the peso's value did not plunge as much as some had feared, trading at about 1.7 to the dollar in Buenos Aires exchange houses. That was weaker than the 1.4 pesos per dollar rate set by the government for exports, imports and large business transaction. The 11-year peg to the dollar was long seen as a cure for chronic inflation, but it made Argentina's exports too expensive and its imports cheap, forcing many local industries out of business. While many fear the new system will bring a return of hyperinflation, Duhalde hopes a cheaper peso will boost exports and eventually reverse the economic tailspin. Nearly one in five Argentines is out of work and the country defaulted on its massive $141 billion debt last week. Meanwhile, there was little sign from the International Monetary Fund that more support was on the way. The IMF withheld a $1.23 billion loan last month after officials decided the country did not have a sustainable economic program. IMF Deputy Managing Director Anne Krueger told reporters Friday the agency does not believe the dual exchange rate system is sustainable. Krueger said an IMF delegation was heading to Argentina next week to gather information and offer technical assistance, but she said it was ``too soon'' to consider negotiating a new loan. Some economists said the only thing that kept the peso's value from plunging more dramatically Friday was the fact that Argentines have so little cash. Many wanted to buy dollars but they didn't dump enough pesos to pull the rug from under the currency. ``There's no liquidity, so there hasn't been a huge slide,'' said Fernando Losada, chief Latin American economist at ABN Amro in New York. The limits on withdrawals are in place to stave off a collapse of the country's battered banking system, which has weakened as Argentines gradually have pulled out more than $15 billion, or some 20 percent of all deposits. To soften the blow of the devaluation on Argentines, the government decreed all bank loans of less than $100,000 be converted one-to-one into pesos, a move that will leave many bank books off-balance. On Thursday, Duhalde ordered all checking accounts with over $10,000 and savings accounts with over $3,000 be converted into fixed-term deposits - making them off-limits to depositors for at least a year. ``I've got credit card bills and a mortgage to pay,'' said Lucas Viola, a 43-year-old lawyer, waiting for hours in a Buenos Aires bank line Friday. ``How do they plan to jump-start the economy if people can't get their hands on any money?'' Hoping to put money in the hands of cash-hungry Argentines, the government is reportedly considering offering depositors - most of whom switched their pesos to dollars in recent months - a chance to move their dollar savings back into pesos at the 1.4 rate. For many, that could ultimately mean a loss in savings with the market rate now lower than the official government peg. ``No way, I will not accept that,'' said shopkeeper Jose Rodriguez, who has $70,000 in a savings account. ``It took me years to build up those savings.''