Argentina will scrap its fixed rate for the peso and convert all dollar deposits and loans at below-market rates, exposing banks to billions of dollars of losses to revive an economy that's ground to a halt.
President Eduardo Duhalde will issue a decree to turn dollar loans into pesos at a rate of 1-to-1, indexed to inflation, and dollar deposits at 1.4, Economy Minister Jorge Remes Lenicov said in a televised news conference. The government will eliminate a dual exchange system that fixed the rate at 1.4 pesos per dollar for trade while allowing it to trade freely elsewhere. The peso was quoted at 2.2 per dollar at money-changers.
"Argentina is bankrupt," Remes Lenicov said. "We believe that this cost in the future will help us unlock the present."
Floating the peso will allow Argentina to win International Monetary Fund loans, while converting banks' loans and deposits into pesos lays a framework for an easing of restrictions on bank withdrawals that angered Argentines. Duhalde, the fifth president since late December after former President Fernando de la Rua was toppled by riots that left as many as 27 people dead, has also faced daily protests by thousands of people that threaten to again bring down the government.
To prop up the value of the peso at exchange houses and protect the banking system, the government has prohibited overseas money transfers, limited cash withdrawals, frozen deposits and sold dollars daily. The restrictions halted most commerce and pushed the economy, which analysts have forecast may contract as much as 10 percent this year, deeper into recession.
"I'm not very hopeful for the success of these measures," said Walter Molano, head of emerging markets at BCP Securities in Greenwich, Connecticut. As soon as Argentines get access to their money "they will exchange it for whatever rate they can get and then the exchange ratio will deteriorate markedly," he said.
Pesos for delivery in one month dropped to 2.75 from 2.05 last week, based on JP Morgan Chase & Co prices.
The IMF has said Argentina must let the peso float before it will consider new economic assistance.
Argentina is seeking as much as US$20 billion in loans from the IMF and other international lenders to prop up the banking system and stabilize the economy.
"If we have international support, and I'm convinced we will have it, the exit from this crisis will be accelerated and we will have much faster growth," Remes Lenicov said.
The government will also print US$3.5 billion of pesos to add to the 10.9 billion of peso notes and coins in circulation to finance Argentina's deficit.
Remes Lenicov said the government would convert US$50 billion of domestically held sovereign loans into pesos. The loans were issued last year in exchange for sovereign bonds in a default and restructuring organized after the de la Rua government conceded it could no longer pay its bills.
The economy minister said banks face billions of dollars in losses because they will be forced to change deposits and loans into pesos at different rates. The government will help banks finance the loss with the savings that it reaps by converting its own sovereign debt into pesos. The government will also issue new notes designed to help the banks, he said.
Bank depositors will be allowed to withdraw their full salaries instead of a limit of 1,500 pesos, raising concern Argentines will rush to withdraw all their salaries immediately.
The central bank called a bank holiday for yesterday and today.
The monetary authority called the bank holiday to prevent pressure on the banking system following a Supreme Court ruling Friday that declared Duhalde's freezing of a third of Argentine deposits unconstitutional. The ruling opens the way for a flood of lawsuits to allow Argentines to withdraw their savings.
The high court ruling came 48 hours after Congress began a probe into the Supreme Court. Just three weeks ago, the court threw out a lower court ruling that would have allowed depositors to withdraw their money.
Deputies said Congress will continue to work on a probe into the Supreme Court that may potentially remove one or more justices through a special congressional vote. Argentines have held weekly protests outside the nine-member court.
In the four weeks since Duhalde dropped a decade-old currency system that had kept the peso pegged 1-to-1 to the dollar, the country has kept a fixed rate for trade transactions while letting money-changers set their own rates.
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