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Argentina Unveils Sweeping New Economic Plan
Thomas Catan

The government of Argentina on February 3 set out a sweeping new plan to deal with the country's economic, social and constitutional crises.

At the heart of the new plan is an effort to end Argentines' long love-affair with the US dollar, which for 10 years has been used interchangeably with the peso. The government, which jettisoned the dollar peg last month, plans to float the currency entirely as early as this week, albeit with heavy state regulation to stop it from plunging.

"We are going to 'pesify' the entire Argentine economy," said Jorge Remes Lenicov, economy minister. "We want our own autonomy; our own currency. "As part of the "sustainable" plan sought by the International Monetary Fund in order to restart aid, the government will send an austere budget to Congress with a modest deficit, to be financed in part by the controlled issuance of new currency.

To comply with a surprise ruling on February 1 by the Supreme Court - which declared two-month-old bank controls to be unconstitutional - the government will allow banks to issue customers with negotiable bankers' draughts that will be used by Argentines in lieu of cash. They will be able to trade these new pseudo-currencies or deposit them at other financial institutions, raising the prospect that they will desert local banks, many of which face insolvency, for foreign-owned banks.
 
The scheme is a way around the Supreme Court ruling, which had threatened to wipe out the country's banking system. The main political parties in the Congress will also try to impeach the justices of the court, setting the stage for the most serious constitutional confrontation since the country returned to democracy in 1983.
 
As part of its effort to break away from the US currency, the government will transform dollar banks deposits into pesos at a rate of 1.4 - below the current market rate of around 2 pesos to the dollar. At the same time, it will transform all dollar debts into pesos at a rate of 1 to 1.
The cost to the banks of that mismatch - estimated to be billions of dollars - would be met in part by a new government bond, Mr Remes Lenicov said. The central bank will also issue 3.5bn in new pesos - 2.5bn of which will be provided to help the banking system. The remaining 1bn new pesos will finance the government budget, which foresees a deficit of 3bn pesos.

February 03, 2002.

 

© International Development Economics Associates 2002