ECONOMY-ARGENTINA: Relative Calm in Open Currency Market Debut

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Feb 12 2002 (IPS) - Argentina’s new economic programme underwent trial by fire Monday as the peso, the local currency, was floated for the first time in more than a decade, occurring in a climate of great anxiety, but without the hysteria feared by the doomsayers.

The dollar exchange rate began at about the same point as at the close of operations Feb 1, when it stood at 1.9 pesos purchase rate and 2.2 sales rate. Halfway through the day of trading it reached a peak of 2.05 and 2.3, respectively, and closed at levels below opening.

This depreciation of the Argentine currency is noteworthy, particularly when compared to the peso’s one-to-one parity with the dollar that reigned from 1991 until Jan 1 of this year. But the hike was less than was feared by economists who predicted the dollar would surpass three pesos – and who have recommended “dollarising” the economy.

The government remained tight-lipped about the strategy employed by the recently created Central Bank Exchange Committee to maintain currency exchange rates at reasonable levels, free of high spikes, which would have been difficult to recover from.

Reality showed that there were numerous individuals and companies that were forced to sell dollars in order to make debt payments in pesos, a dynamic that was in tune with repeated statements from the government, which assured there would be instruments in place to teach speculators a lesson.

“The market proved to be calm, with few speculative operations and without unsettling movements,” said Gustavo Nielsen, the Economy Ministry’s representative on the Central Bank board.

Meanwhile, presidential spokesman Eduardo Amadeo predicted that there would be instability in currency exchange rates for several weeks to come.

The opening of the currency exchange market, therefore, was a relative success, a key test in the economic plan announced eight days ago by Economy Ministry Jorge Remes Lenicov, who now faces a second challenge: dealing with the multilateral financial institutions and the United States government.

Remes Lenicov headed to Washington to meet with Horst Koehler, managing director of the International Monetary Fund (IMF), with James Wolfensohn, president of the World Bank, with Enrique Iglesias, head of the Inter-American Development Bank, and with U.S. Treasury Secretary Paul O’Neill.

In his first trip abroad as minister, Remes Lenicov hopes to convince the financiers of the sustainability of President Eduardo Duhalde’s plan for jump-starting the Argentine economy, which has suffered a decline in gross domestic product for the last four years and with unemployment now surpassing 22 percent.

The plan consists in transforming bank deposits and debts into dollars, while at the same time freeing up the dollar exchange rate in order to promote foreign sales.

But the government must take care to prevent the devaluation from hitting domestic prices, as has traditionally occurred in Argentina’s chequered economic past.

Amadeo avoided making any predictions about immediate financial assistance arising from Remes Lenicov’s trip. “We want to stay away from expectations that we would return Thursday with a suitcase full of money. This is just the beginning of a negotiation process that will take at least two months… we are not going to talk about figures,” he said.

The official thus ruled out the possibility that the international financial institutions would set up an assistance fund, at least in the short term. Economists close to the IMF explained that the will does not exist in Washington to finance the stability of the peso or new fiscal imbalances.

Meanwhile, as the dollar surpassed the two-peso mark, savers whose accounts were frozen earlier this month by government decree, protested outside several banks and in front of the Legislative Palace in Buenos Aires. Those affected by what has been dubbed the banking “corralito” (the corral) are threatening to stage massive protests three teams a week.

In Mar del Plata, 400 km south of Buenos Aires, some 300 people who no longer have access to their savings gathered downtown in front of banks Monday, carrying signs and banging pots and pans – the now emblematic form of protest, known as the ‘cacerolazo’ – and jangling their keys.

The moment of greatest tension occurred when a group of retirees pounded on the windows of a Banco Provincia de Buenos Aires office in Mar del Plata, breaking the glass. The calmer approach seemed to be to repeatedly spray-paint the word “thieves” across the facades of banks.

The restrictions on bank withdrawals were loosened Monday, authorising those whose salaries are directly deposited into savings accounts to take out their full wages, including those who earn more than the benchmark 1,500 pesos – today equivalent to 700 dollars.

But the feared transfer of these pesos to the purchase of dollars did not take place, or at least not at a magnitude capable of pushing the dollar higher. It appears the need to settle financial commitments after several days of bank holidays predominated.

Now, for the middle term, the Central Bank is studying alternatives to savings in pesos, so that those who have the capacity to save some cash have options besides purchasing dollars.