Argentina Unveils Crisis Strategy, to Ditch Dollar

February 5, 2002 - 0:0
BUENOS AIRES, Argentina Argentina unveiled steps to tackle its economic crisis on Sunday, saying it would ditch the dollar, fully float the devalued peso and partially lift a savings freeze that sparked public outrage and bloody riots.

Economy Minister Jorge Remes Lenicov told a news conference the government would run the economy just on pesos, turn all dollar bank loans into pesos at the pre-devaluation one-to-one rate and give people full access to wages paid into the bank.

He said the peso -- which has already been partially floated on the foreign exchange market, where it has fallen to around two to the dollar since devaluation -- would be fully floated only when conditions were ripe.

"We are going to need international help, because it will help us speed up our exit from this crisis," Remes Lenicov said, adding that he planned to send an "austere" 2002 budget to congress Today.

He hoped to start aid negotiations with the International Monetary Fund this week and hoped in March to start talks with foreign debt holders hit by the nation's default on part of its $141 billion sovereign debt pile.

International lenders like the IMF are demanding deep spending cuts as conditions for financial aid the bankrupt economy badly needs to help it emerge from a recession now in its fourth year.

The government admits the plan will not be enough to create growth this year -- it expects the economy to contract around 5.0 percent in 2002 -- but says it will help slow the slide. Analysts gave the plan a mixed reception.

"The real test for this policy will be on Wednesday when the bank holiday ends," said Omar J. Borla, a senior economist with Santander Investment in New York.

"The government is trying force the population to accept the peso when it is obvious that the population prefers dollars. So we can expect strong pressure on the peso."

Argentines with dollar bank loans come off best under the plan, with the loans turned into pesos at parity to the dollar. But savers stand to lose out, with dollar savings forcibly turned into pesos at the government's official 1.40 to the dollar rate.

Economists said it could send Argentines rushing to withdraw their deposits, which were blocked above a 1,500 pesos a month limit since december to avoid a run on the banks which already lost a record 20-25 percent of deposits last year.

Lifting the freeze could destroy many banks, already on their knees after a debt default and peso devaluation, and possibly spark another massive depreciation of the peso.