ARGENTINA: Cost of Crisis Lower than in Mexico, Malaysia

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Feb 7 2002 (IPS) - The fiscal cost of compensating those affected by the devaluation of the Argentine peso will be equivalent to four percent of GDP, Economy Minister Jorge Remes Lenicov said Wednesday, adding that he was sorry the country could not count on stronger support from the IMF.

In a conference with foreign reporters, Remes Lenicov said the fiscal costs would be lower than those faced in the past by Mexico, Chile or Malaysia when they found themselves in similar crisis situations.

He also said people’s savings, converted from dollars to pesos, would not lose their buying power.

However, account-holders are not pleased with the forced conversion of their dollars to pesos at a rate of 1.40 to the dollar. (The peso, to begin to float freely on Monday, is currently trading at two to the dollar on the open market).

On Wednesday, groups of savers banged pots outside banks in downtown Buenos Aires, waving placards, one of which read “We Deposited Dollars, We Want Dollars.”

María Elena Fernández had 5,000 dollars in an account in Citibank, 2,000 of which were converted to pesos and transferred – without her signature – to another savings account.

“They do whatever they want with our money,” Fernández told IPS. “I sent notifications, but it did no good. Now the only thing I want is my deposit in dollars, because I’m going to live in Spain. I don’t trust Argentina anymore – not its leaders, and much less its currency.”

The Office of the Public Prosecutor has asked the courts to investigate President Eduardo Duhalde and his ministers for “incompliance with the duties of a public official”, “abuse of power” and other offences.

The charges are linked to the decree that suspended, for 180 days, all lawsuits filed by account-holders trying to recover their deposits from the partial freeze on bank withdrawals put in place in early December by then-president Fernando de la Rúa, before he was forced out on Dec 20.

The continued banking restrictions were declared “unconstitutional” by the Supreme Court last Friday, and a flood of lawsuits was expected this week.

But Duhalde anticipated that, and early Monday issued the decree that suspended all such legal proceedings, which has been the target of strong criticism from lawyers and constitutionalists.

Remes Lenicov justified the decision to convert to pesos the huge debts denominated in dollars of large companies, at the one- to-one exchange rate created by the currency board in place from 1991 to Jan 1 this year.

Firms that receive revenues in dollars for their exports, like the Repsol oil company or the Pecom power company, benefited by the conversion of their debts, which amount to nearly 400 million dollars in each of those two cases.

“The rules had to be simple and equal for all,” said Remes Lenicov, who said he did not agree with “discriminating” against export companies – which also benefited by the devaluation – or those which have the capital needed to take responsibility for their debts.

However, he clarified that the debts converted to pesos would be indexed to the monthly rise in the cost of living, and to the interest rate set by the bank.

The government is negotiating with oil companies the size of a new tax they are to pay on their exports, and within 10 days it will begin to hold discussions with privatised utilities on the new rates to be charged, now that they are no longer able to bill in dollars.

With respect to the foreign exchange market, whose opening, scheduled for Wednesday, was postponed to next Monday, Remes Lenicov said Argentina’s exchange rate would now be more similar to those of Brazil and Uruguay, which will facilitate the long- announced macroeconomic coordination in the Mercosur trade bloc (which also includes Paraguay).

The Economy Ministry had ordered a banking and foreign exchange trading holiday for Monday and Tuesday. But on Wednesday it only allowed a limited range of bank operations, and put off the opening of the foreign exchange market to Monday, when the free- floating peso will make its debut.

Remes Lenicov did not say whether the Central Bank would intervene in the market, nor whether a band within which the peso would be allowed to trade would be set. He merely stated his confidence that things would go smoothly.

But he said he had hoped for stronger support from the International Monetary Fund (IMF), which had pushed Argentina to float the peso.

The IMF has kept silent on the economic measures announced by Remes Lenicov last Sunday aimed at pulling Latin America’s third largest economy out of its crisis, in which rioting, looting and protests forced two presidents to resign in late December, and payments were suspended on the 141 billion dollar public debt.

However, the minister said that within the next few days, negotiations for new financial support would begin, which in turn would help unblock the backing pledged by foreign governments.

The minister acknowledged that without a doubt, Argentina’s crisis would exact “a very high cost,” which even before Sunday’s austerity measures was seen in a 16 percent loss in per capita income with respect to four years earlier.

In fact, 40 percent of the population of 36 million has fallen below the poverty line.

But he underlined that the fiscal costs of recovery were much higher in other countries suffering similar meltdowns.

Last Sunday, Remes Lenicov announced the conversion to pesos of all debts in dollars, including the money owed by individuals to banks and private creditors, the debts of small and large companies, and the debt owed by the state to banks, insurers and private pension fund administrators.

The cost of that conversion will be compensated by the conversion to pesos of some of the debt owed by the state, while the rest will be financed by a new bond, 16 to 20 billion dollars’ worth of which are to be issued.

Remes Lenicov also announced an austere budget for the year, with a fiscal deficit of three billion dollars – seven billion less than in 2001 – 15 percent inflation and a nearly five percent drop in GDP.