ECONOMY-ARGENTINA: Exchange Market Gives Gov’t Breathing Room

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Apr 29 2002 (IPS) - The stability of the Argentine peso gave the government some breathing space Monday after a week-long bank and foreign exchange holiday, and as the new Economy Minister Roberto Lavagna began to settle into his job.

Banks operated with relative normality – albeit with the usual protests outside the doors by savers – while the peso remained steady at just over three to the dollar, the same rate at which it closed on Apr 19, the last day of financial activity.

The foreign exchange market’s positive response, which the Central Bank influenced by selling hard currency, was the first test successfully weathered by Lavagna, who was designated last Friday to replace outgoing minister Jorge Remes Lenicov.

President Eduardo Duhalde’s new economy minister decided last week to allow the peso to continue floating freely, despite the risk of a run on the dollar.

Lavagna gambled that the law that has partially frozen account- holders’ deposits in the banks since December would curb the purchase of dollars.

The new minister is now working with bankers on an amended version of a bill that would force savers to swap their fixed-term deposits for medium-term bonds. However, the new version of the bill that was blocked by Congress last week would contain a stronger commitment by the banks to return part of the deposits immediately.

The original version of the bill, which entailed a return of deposits within five or 10 years, and included no commitment by the banks, was staunchly rejected by account-holders as well as parliament.

The failure of the draft law led Remes Lenicov to hand in his resignation.

In January, the Duhalde administration scrapped the “convertibility” or currency board scheme that had kept the Argentine peso on par with the dollar for over a decade. The resulting depreciation of the local currency fuelled a 60 percent increase in the prices of basic food items.

On Monday, the peso started out trading at 3.25 to the dollar, but dropped to 3.08 over the course of the day, just below the Apr 19 closing exchange rate of 3.10. However, that was just one challenge of many that lie ahead for Lavagna.

“If in the next few weeks, Duhalde is unable to find a solution to the crisis – and let’s be aware that he won’t be able to – the dollar will no longer be trading at three pesos, but at many more, and the consequence will be early elections, before the end of the year,” predicted political analyst Rosendo Fraga.

Although Duhalde is stronger now than a week ago, when Remes Lenicov resigned in the middle of a freeze on banking and foreign exchange transactions, he is weaker than 10 days ago, said Fraga.

“The new minister’s manuevering room is much more restricted than that enjoyed by Remes Lenicov in January,” he added.

The president will have to solve the country’s most pressing problems “this week, not within the next few weeks,” warned the governor of the southern province of La Pampa, Rubén Marín, who belongs to Duhalde’s Justice (Peronist) Party.

“Immediate solutions are indispensable for easing the social tension and establishing playing rules,” said Marín. If the president fails to come up with quick solutions, the only alternatives would be for Congress to designate a new president or to call early elections – neither of which is a viable option, he maintained.

Duhalde was designated caretaker president on Dec 31 to complete the term of Fernando de la Rúa, who was forced by widespread looting and protests to step down on Dec 20. Presidential elections are scheduled for September 2003.

Fully aware of the depth of Argentina’s crisis – the worst in the history of Latin America’s third-largest economy – and of the urgent need for solutions, Lavagna met Monday with ambassadors from the Group of Seven most industrialised countries, the Southern Common Market (Mercosur trade bloc – made up of Argentina, Brazil, Paraguay and Uruguay), and Bolivia, Chile and Mexico.

In the meetings, the minister reiterated his intention to negotiate an emergency agreement with the International Monetary Fund (IMF) in “the shortest possible term.”

Besides keeping the currency under control, the biggest challenge facing Lavagna is the need to solve the problem caused by the freeze on bank deposits, imposed by the De la Rúa administration in December to prevent capital flight.

Lavagna must also make progress towards meeting the conditions set by the IMF to disburse further aid to Argentina, such as the repeal of a law on “economic subversion” and the amendment of the bankruptcy law, which favours debtors.

He must also apply painful new spending cuts in the provinces and in the central government, and curtail the rise in prices and utility rates, a task in which the government has had only partial success.

Prices of goods and services have risen unevenly since the value of the peso began to decline, while wages remain frozen or have shrunk due to the high unemployment rate, which has soared above 20 percent.

The price of petrol has risen over 20 percent since January.

By law, Duhalde overruled the linking of public service rates to dollars that was in place under the currency board system. Since then, utilities have begun negotiating how to absorb the rising costs of inputs in order not to transfer them to their customers.

Lavagna will also have to negotiate an agreement with the IMF, not only to start servicing Argentina’s debt to multilateral lenders after January’s default, but to finance social programmes that would provide desperately needed help for the poor and the unemployed, and to boost exports, which would increase the country’s foreign exchange earnings.

The new minister has his job cut out for him in the midst of the country’s worst economic collapse ever, which has taken an enormous toll on the population of 37 million.

Protests continue to rage among workers, the unemployed, farmers and pensioners, and poverty continues to climb, to more than 50 percent of the population of what was the sixth richest country in income per head at the turn of the century.