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Argentina's peso plummets 41 percent

People form a line in front of a currency exchange in the Buenos Aires financial district yesterday. The peso made its free-market debut, where the dollar sold at 1.60 pesos at start of business. PHOTO: AFP

Argentina's currency dived on Friday on its return to the foreign exchange market after 10 years, imposing a 41 percent devaluation on ordinary Argentines who are losing patience at economic chaos.

The full extent of Argentina's financial turmoil began to hit home to global business as analysts warned of foreign banks losing US$6.2 billion and a European chemical giant suffering.

Thousands of people took to the streets of Buenos Aires after midnight on Thursday to demonstrate against new government curbs on bank withdrawals, the first mass protests since 27 people died in riots in late December that toppled a government.

The peso, pegged at parity to the US dollar in 1991 to fight inflation, closed on Friday at 1.65/1.70 per dollar on the free-floating market from the old rate of one-to-one.

But volume was low and exchange houses were quiet as Argentines, short of cash after new bank curbs and years of recession, shunned the new high price for the dollar.

New President Eduardo Duhalde last weekend fixed the peso at 1.40 to the dollar for foreign trade and official business, representing a devaluation of almost 30 percent.

The free market rate will be used for many transactions by the Argentine public, which sees the US currency as a harbor of stability.

Analysts say the peso might drop to as much as 2 to the dollar in coming months if the government's sweeping measures fail to stop Latin America's No. 3 economy spinning further out of control.

On the streets of the capital, muggy in the heat of the Southern Hemisphere's summer, few sought dollars.

"The heat is nothing, it's the price that kills you," said Adriana, a 48-year-old toy saleswoman with debts in dollars lining up at a foreign exchange house.

She, and other potential customers, gave up and walked away when she found out how much a dollar would now cost her.

Some 10,000 people, exasperated by years of recession and mismanagement of the economy, protested in front of the Casa Rosada presidential palace after midnight on Thursday.

Four people were arrested for attempting to rob shops and a bank cash dispenser, a police spokesman said.

Police fired tear gas at stragglers after the demonstration. One protester was hit at close range in the abdomen by buckshot fired by police near the palace, witnesses said. He limped away, helped by friends.

Residents of apartment buildings in poor and wealthy districts of the capital alike also expressed disgust at the government, banging pots and pans on their balconies.

The latest protests were sparked by the Duhalde's attempts to protect brittle banks by allowing them to keep some deposits under wraps until 2003.

As well as angering savers, government intervention in the banking system has badly spooked big foreign banks with investments in Argentina. Spanish institutions in particular have been badly hit.

A decree converting bank loans of less than US$100,000 into pesos, aimed at softened the blow of devaluation on ordinary people, has decimated banks' capital bases by devaluing the loans which represent some of their key assets.

Foreign banks are likely to lose all of their investments in Argentine subsidiaries and branches because of the crisis but will not see creditworthiness deteriorate, Standard & Poor's said.

"The sum total of equity capital is US$6.2 billion and we do think that is probably a loss," Tanya Azarchs, credit analyst at the rating agency told a conference call.

Analysts said German chemicals group BASF AG could lose tens of millions of euros in net profit this year as its oil and gas division suffers from devaluation and high tax in Argentina.

Spain's two biggest banks, Santander Central Hispano and Banco Bilbao Vizcaya Argentaria may be forced to pull out of Argentina altogether, analysts say.

Duhalde is the fifth president since December, when Fernando de la Rua was forced from power by looting and protests. Duhalde hails from the populist wing of the Peronist Party, which ran Argentina from 1989-1999.

The government decreed on Thursday that checking accounts above US$10,000 and savings accounts above US$3,000 will be turned into fixed-term deposits -- which means they will be untouchable for at least a year.

Latin American financial markets were mostly firmer on Friday despite wariness of Argentina.

Equities in Brazil, Mexico and Chilea firmed.

Brazil's currency, the real, also strengthened, but the Chilean peso was weaker on nervousness about Argentina's new dual exchange rate system.
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