Argentina devalued its peso by 29 percent, scrapping a decade-old peg to the US dollar to ease an economic crisis that toppled two governments in 10 days and forced the nation to stop repaying debt.
The peso will be fixed at 1.4 per dollar compared with the previous one-to-one rate, Economy Minister Jorge Remes Lenicov said. The government will allow the peso to trade freely within a "few months," he said.
"We are in a collapse," Remes said. "We are broke. That means we have to be very prudent." President Eduardo Duhalde must persuade Argentines that the higher prices and lower spending power that will result from devaluation will pull the economy out of a three-year recession by making Argentine manufacturers more competitive overseas. The move may also help Argentina renegotiate US$141 billion debt, balance the budget and secure US$20 billion in loans.
Duhalde took office Wednesday after food riots brought down former President Fernando de la Rua's two-year-old government and its immediate successor.
"The bad news is out," said Claudio Piron, head of foreign exchange strategy at Standard Chartered Bank in Singapore. "The rebuilding can begin." Investors and economists doubt Argentina will maintain the currency's value at a lower fixed rate. Brazil, Mexico and Russia were forced to give up on fixed rates over the past six years.
Argentina's new legislation allows the central bank to print currency and buy and sell pesos to defend its value.
The devaluation leaves Hong Kong as one of the world's few remaining economies whose currency is fixed to the US dollar.
Unlike Argentina, Hong Kong doesn't have external debt and is also home to the world's fourth-largest reserves of foreign currency, making it less likely to end the 18-year-old peg.
* THE CURRENCY: The peso, pegged at one-to-one with the US dollar since 1991, can be devalued and its rate modified by the govern-ment. Economy Minister Jorge Remes Lenicov announced a new rate of 1.40 pesos to the dollar for import, export and capital transactions. Individuals buying dollars will pay a free-floating rate, probably higher. The government will recall all bonds issued recently by provincial governments and used as a substitute for cash across the country.
* DEBTS: The first US$100,000 of dollar-based mortgages, personal loans and loans to small businesses are to be converted into pesos at the old one-to-one rate. Outstanding debt will remain in dollars. Banks will be compensated for any losses by hard-currency government bonds financed through a new tax on oil exports.
* SAVINGS: The government will be authorized to use Argentines' savings as a cushion to bolster national accounts for the next two years. Deposits currently frozen in accounts will be paid back over time in the same currency they were deposited in.
* BILLS AND PRICES: Utility bills, rents and credit card bills will be switched from dollars to pesos. The government is authorized to regulate temporarily prices of some basic goods and services to avoid "distortions."
* COMPANIES: For companies earning more than 10 million pesos (US$7.1 million) a year or with assets of more than 5 million pesos (US$3.6 million), any losses resulting from devaluation can be written off against profit tax over a five-year period. Companies laying off staff in the next 90 days must pay double the regular compensation.
Source: AP
Argentina will begin talks with the International Monetary Fund and international banks for possible new aid and the restructuring of its US$95 billion in foreign bonds late this month, Remes said.
The government, which has called a bank holiday for Monday and Tuesday, will present a balanced budget plan to congress in the third week of January, Remes said.
Argentina will also outline this week its plan to place a new tax on oil exports from companies such as Spain's Repsol YPF SA.
Under the devaluation law passed yesterday, revenue from the tax may be used to back new bonds to protect the banking system from collapse as its dollar loans are converted to pesos.
Argentina will also convert gas, water and electricity payments from the US dollars into pesos at par and prohibit price increases. The government also won Congressional approval to renegotiate the terms of the sales of state-owned companies.
Such measures could hurt Spanish companies that have spent US$24 billion since 1991 to become the dominant providers of phone, energy and water services.
Remes confirmed that Spain's Prime Minister Jose Maria Aznar called Duhalde yesterday to complain about the proposed measures after Spanish executives were unable to get through to Argentina officials themselves.
US President George W. Bush has said the US won't help Argentina until the government develops a "sustainable" economic plan. That position was repeated yesterday by his top economic adviser.
"The fundamental problems in Argentina have to do with the way the Argentines ran things," Lawrence Lindsey, said on the Fox News Sunday program. Once political and economic reforms are underway, "I have no doubt that both the private sector and the US government will be happy to step forward." Duhalde overcame concern among some congressional leaders that bank deposits may not be protected and that a devaluation would bankrupt millions of people with debt in dollars. The plan would allow consumers to convert loans of up to US$100,000 in dollars to pesos, at a one-to-one exchange rate. Domestic credit card bills will be converted to pesos.
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