ECONOMY-ARGENTINA: New Currency Met with Scepticism

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Dec 27 2001 (IPS) - A new currency will begin to inject liquidity into Argentina’s depressed economy in January. But like the roughly 10 provincial and other bonds already in circulation, the parallel tender will merely prolong the final death throes of the country’s convertibility system that pegs the peso to the dollar.

“The new government’s economic proposal is incorrect, and I’m afraid that the take-charge image that interim President Adolfo Rodríguez Sáa tried to transmit from the first day will swiftly deteriorate,” economic analyst Eduardo Curia, who is critical of Argentina’s currency board regime as well as the new third currency, told IPS.

Curia, a former finance minister, called the new parallel currency “a botch,” because it will be nonconvertible and will “be born devalued.”

“If few bills are printed, the money supply will remain tight, and if many are issued, (the new currency) will depreciate immediately in an anarchic manner,” he forecast.

Authorities have not yet decided how many ‘argentinos’ – as the new currency will be called – are to be issued.

But they admit off-the-record that the argentino will depreciate from the moment it is born, and that it is only a quick fix to shore up public confidence, in the current context of social and economic turmoil that led last week to the fall of Rodríguez Sáa’s predecessor, Fernando de la Rúa.

Rodríguez Sáa was installed as president on Sunday, after rioting and looting triggered by economic hardship and austerity plans left 28 dead last week and forced de la Rúa to resign.

A full one-third of the population of Argentina, Latin America’s third-largest economy and once one of the world’s richest countries, has been pushed below the poverty line.

Curia said traders already take for granted that devaluation will occur, leading to shortages and spiralling prices. Indeed, some pharmacies have already begun to stockpile medicines, waiting for prices to go up.

The president of the Federation of Commerce of the City of Buenos Aires, Osvaldo Cornide, said lists of prices of industrial products, calculated on the basis of a devalued peso, have already begun to circulate. But he gave his assurances that given the recession, shopkeepers will make an effort to keep prices down.

“I don’t see this gradual approach as going in the right direction, and the problem is that things are moving at breakneck speed,” warned Curia.

Even with foreign exchange houses closed through Jan 2, the dollar, which according to the convertibility law must be exchanged one-to-one for the peso, already stood at 1.10 to 1.25 pesos Wednesday, while an informal market with an even higher price has begun to emerge.

The argentino will not replace the peso, nor will it circulate as a bond, but as a third legal tender, alongside the peso and the dollar.

The aim is to urgently pay off back salaries and pensions, jump- start consumption, and stave off a steep devaluation of the peso before the Mar 3 elections, in which a president will be chosen to serve out the remainder of de la Rúa’s term, until December 2003.

But the lack of confidence in the alternatives chosen to pull out of the crisis in the short-term have already begun to be reflected in the political arena.

The provincial governors and other political leaders preparing to run in the Mar 3 elections have backed off, and are limiting their public statements to references to the current situation, pointedly ignoring the subject of their possible candidacies.

A 41-month recession, a bulky fiscal deficit and the restrictions on the printing of money imposed by the convertibility system had led a number of provinces to issue their own bonds which, although not technically currencies, have the appearance of money.

At least seven provinces now have their own bonds, and national and municipal bonds were also printed, with the names “quebracho”, “patacon”, “bonfe”, “ceacor”, “lecor”, “boncafor”, “bocade” or “lecop”, which are used in various provinces to pay wages, utility bills and other services, and to purchase goods.

As the money supply contracted fiercely over the past few days, the provincial bonds have reached the city of Buenos Aires, where most people do not even recognise them.

“A patient offered to pay for her treatment in ‘lecops’, and I told her no because I don’t even know what they are,” a psychoanalyst, Sandra Novas, told IPS. Later, an economist recommended that she accept “anything” she was offered, because in the current liquidity crisis, any of the bonds are accepted as a substitute for pesos.

None of the bonds is convertible to dollars, nor will the new argentino be. Anyone who wants to buy dollars will have to exchange their bonds for pesos – paying a commission ranging from five to 50 percent, depending on the bond – which they will then use to purchase dollars.

The creation of the argentino was announced by the government’s new economic authorities, after Rodríguez Sáa said devaluation had been ruled out.

The new Finance Minister Rodolfo Frigeri said “there will be no devaluation at this time,” and added that the caretaker government had opted instead for “an orderly exit from convertibility…as the least traumatic way out.”

Analysts writing in local newspapers explained that deferring the departure from the currency board scheme was decided a day after de la Rúa stepped down, on the request of service sector businesses whose rates are in dollars, which asked for time to transfer their dollar earnings to their head offices.

The decision to put off a solution to the convertibility problem was overshadowed by the more spectacular announcement that payments on Argentina’s foreign debt, which has soared to 147 billion dollars, would be suspended.

Curia, however, explained that the shock of the announced default would soon fade in Argentina because it will not apply to domestic public debt creditors, like banks and pension fund administrators that continue to finance the public sector.

In fact, 500 million dollars in debt in that sector will be cancelled Friday, he added.

The analyst said the new government should have done “everything in one fell swoop”: transfer all bank deposits into pesos, establish a timetable for the release of deposits held out of account-holders’ reach since late November, and float the currency – which is what he said would occur anyway, but at some unknown time in the future.

Thus, the convertibility system, created in 1991 by former economy minister Domingo Cavallo to tame hyperinflation, remains in place, although that is merely due to the banking restrictions keeping the people of this country of 36 million from withdrawing their money and changing their pesos to dollars.

Frigeri assured that once the argentino has begun to circulate, account-holders will be able to withdraw their deposits in the new currency – a measure that is designed to ward off a run on the banks and to ease the money supply.

In the meantime, and just in case, the Finance Ministry is setting up a safety net for the banking system.

The currency peg stipulates that by law, pesos can only be printed if they are backed by foreign currency reserves. In consequence, only the hard currency that enters the country through foreign trade or investment enables the Central Bank to issue pesos to pay wages, pensions and the rest of the government’s commitments.

Frigeri admitted Wednesday that the pesos in the hands of the population are equivalent to just 10 billion dollars, while the Central Bank’s reserves stand at a mere 3.3 billion dollars.

In other words, convertibility would not be possible if the restrictions on cash withdrawals from banks were lifted.

While the various alternatives were being discussed, Cavallo, who was forced to resign last Wednesday by the social eruption, asked the courts to lift the ban that keeps him from leaving the country (he is implicated in several scandals) and allow him to go abroad with his family for safety reasons – and because he needs a rest.