ECONOMY-ARGENTINA: The Patient Cannot Wait for Oxygen Therapy

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Feb 5 2002 (IPS) - Argentine society is busy calculating the expected benefits and damages of the government’s new economic measures, which put an end to the dual exchange rate, leave the peso floating free, and convert local bank deposits, debts and contracts in dollars to pesos.

President Eduardo Duhalde said Monday that the new economic plan “cannot make everyone happy,” and added that he did not expect any “hurrahs” from the population.

He added that “the central, strategic thread is to quickly restart production throughout the country” after nearly four years of recession and soaring unemployment.

With the banks and foreign currency houses on holiday until Wednesday, the reactions to the measures presented Sunday by Economy Minister Jorge Remes Lenicov were expressed Monday by common citizens, businessmen, exporters, bankers, economists and analysts in general.

Businessman Claudio Arditti, the owner of a company that makes school uniforms, said he is now selling 60 percent less than a year ago, when sales were already weak, because “we faced competition from South Korea and China and from contraband” from neighbouring countries.

With the new measures, Arditti hopes things will start looking up, but he described the situation today as “awful.” The textile factories that supply the garment industry have convened their creditors to reach an agreement on how much they can repay, he said, expressing his fear that “the oxygen will arrive after the patient is already dead.”

The launch of the new economic plan was postponed 24 hours, after the freeze on bank accounts in place since early December was declared unconstitutional by the Supreme Court Friday.

The court ruling raised new fears of the much-dreaded run on banks that the restrictions on withdrawals were designed to prevent, and the government was forced to modify several of its new measures.

On Monday, the government decreed a six-month suspension of all lawsuits against the limits on bank withdrawals, known as the “corralito.”

Meanwhile, the government and parliament sped up action to remove the members of the Supreme Court, who are being investigated for alleged corruption and cronyism.

Thousands of demonstrators gathered Sunday in “neighbourhood assemblies”, while people banged on pots and pans throughout the capital to protest the new measures, which fail to live up to the government’s promise to return the dollar deposits of account- holders in that same currency. Another “cacerolazo” or pan banging protest was announced for Friday.

The people meeting in the neighbourhood assemblies agreed that it was crucial not to lose the momentum gained since late December – when president Fernando de la Rúa was forced to resign – in their street protests demanding changes in the political leadership and the removal of the Supreme Court magistrates.

Remes Lenicov announced that debts in dollars would be converted to pesos, including individuals’ debt to banks and private creditors, the loans held by small and large companies, and the state’s debt to banks, insurance companies and retirement fund administrators.

But the debts will be converted at a rate of one-to-one against the dollar, the exchange rate put in place in 1991 by the convertibility regime that was scrapped on Jan 1.

The currency board that pegged the peso to the dollar for a decade gave way to a dual currency regime on Jan 1, in which official transactions were carried out at a rate of 1.40 pesos to the dollar, while the peso traded freely on the open market, where it climbed to two against the dollar.

The cost of converting debts and deposits to pesos will be compensated by the transformation to pesos of some of the debts owed by the state, while the rest will be financed with between 16 and 20 billion dollars worth of new bonds that are to be issued.

The conversion to pesos will entail a “spectacular” transfer of income from society as a whole towards the most powerful sectors, since credits held by large companies that have their dollars abroad will be “made liquid,” according to economist Claudio Lozano, with the Congress of Argentine Workers central trade union.

“The conversion of debts to pesos will avoid causing further complications for small holders of debts in dollars,” Lozano explaind.

“But by making it a blanket measure, there will be an enormous process of ‘liquification’ of debts that will force the state to assume the cost by emitting new debt instruments. In other wards, the state is ‘nationalising’ the private sector debt, and we will all pay for it.”

According to the economist, the government had yielded to pressure from different sectors: from the International Monetary Fund (IMF), which was pushing for a free-floating peso; from exporters, who were calling for devaluation; from large businesses, who wanted to liquify their debts; and from the banks, to get the state to assume their costs.

However, other economists with views more in line with those of the multilateral financial institutions said the conversion of debts to pesos was a good decision, which should also have been applied to deposits in dollars, which will be converted to pesos but at an exchange rate of 1.40 pesos against the dollar.

The partial freeze on savings accounts will remain in place, with the exception of special cases, but savers will be able to purchase goods by showing a certificate issued by the banks.

In no case will the banks issue dollars to account-holders with savings in that currency.

People with savings in dollars will be able to leave up to 30,000 dollars in that currency, but in exchange for a “dollarised” bond that they will only be able to redeem several years down the road. In no case will the banks return dollars to account-holders.

Former Inter-American Development Bank (IDB) economist Ricardo Hausman said now Argentina would have a “coherent” monetary regime, with limits on emissions of money. But he criticised that the conversion to pesos would not be “symmetrical,” because the banks would have to convert deposits to dollars at a rate of 1.4 pesos to the dollar.

Professor Guillermo Calvo at the University of Maryland in the United States, an IMF adviser, shared Hausman’s concerns. “The conversion to pesos is a good idea, but I’m worried about the cost for the banks created by converting credits at a one-to-one rate and deposits at a rate of 1.4 to the dollar,” said the Argentine economist.

Remes Lenicov, who had not planned to allow the peso to float freely until six months from now, said the measure would go into effect on Wednesday, when the markets open, since the treasury has sufficient foreign reserves – 14 billion dollars – and because a 12 billion dollar trade surplus is expected this year.

“With a prudent monetary policy and an austere fiscal policy, the flotation of the peso will boost the competitiveness of exports, bolster the activity of regional economies, and increase inflows of tourists,” said the minister, while announcing that only 3.5 billion pesos would be emitted this year.

Presidential spokesman Eduardo Amadeo admitted that once the markets opened, the dollar “could jump around,” but said he was confident that the state would be strong enough to withstand the pressure and that it would be able to intervene as necessary, through the Central Bank.

Remes Lenicov also said this year’s budget would be very austere, with a fiscal deficit of three billion dollars – seven billion less than in 2001 – and inflation of around 15 percent for the entire year as well as a nearly five percent fall in gross domestic product.