Argentina Lets Peso Float Freely

Following days of uncertainty, hoarding and repeated calls for calm, Argentina allowed its currency to float freely against the dollar for the first time in a decade Monday. The peso slipped slightly in value but did not suffer the free fall many feared.

Hundreds of people lined up outside exchange houses in Buenos Aires, the capital, where the dollar sold for about 2.1 pesos, a drop of about 5% from the peso’s unofficial value Friday. The day of relative calm represented an important--if temporary--victory for the government of Eduardo Duhalde, which is struggling to rescue Argentina from economic collapse.

In the hours before trading opened, officials repeatedly assured nervous Argentines that if necessary the central bank would use some of its $14 billion in cash reserves to keep the value of the peso at “a reasonable level.”

Since a partial devaluation Jan. 11, the peso has traded at two levels: an official rate, 1.4 to the dollar, for most government transactions, and a free-floating rate set by the market. The government now has, in effect, allowed the market to set one peso rate.

Still, “the government will not sit with its arms crossed, doing nothing,” Anibal Fernandez, Duhalde’s chief of staff, said Monday morning on a radio show. “The government will intervene as is necessary to defend the peso.”

The full peso devaluation comes as the government tries to end months of economic instability and social unrest that have seen five presidents, a freeze on many banking transactions and daily street protests. Unemployment has surged, hitting 22% this month.

Monday’s closing rate represents a 52% drop in the peso’s value compared with December, when it traded one-for-one with the dollar. Argentina’s decade-long policy of keeping the peso equivalent to the dollar nearly bankrupted the country and helped lead to the rioting that brought down President Fernando de la Rua on Dec. 20.

“I’m coming to buy [dollars] because it’s not clear what’s going to happen next,” said Isabel Pessoa, 35, as she waited outside an exchange house. “I prefer having dollars because it’s always the most sure thing to have.”

Fears of a new round of hyper-inflation sent Argentines scurrying to supermarkets to hoard foodstuffs and household items, including cooking oil, sugar, pasta and cleaning goods.

Inflation reached 3.6% just in the month of January. Prices for a wide range of consumer goods, from apples to computer supplies, have risen even more dramatically in the past week.

“There’s been a fever of price increases,” said Miguel Fernandez Madero of Proconsumer, a consumer protection group. “We have good reason to fear prices will skyrocket in the coming week.”

Even domestically produced vegetables now cost 30% more than they did last week, Fernandez said. The price of disposable diapers has increased 27% over the same period. Many computer products are unavailable, he said, because many retailers are refusing to sell products in anticipation of a rise in the dollar’s value.

“Everyone is speculating, trying to take advantage of the situation,” said shopper Ruben Villareal as he left a grocery store where he stocked up on sugar and cartons of cookies.

“What’s happening here is a symptom of what’s wrong with Argentina,” store manager Gerardo Abrieta in the northern suburb of San Isidro said of his empty shelves. “There is no confidence in anything. We don’t know if the peso will find a floor or fall to pieces. The uncertainty is total.”

Despite fears of widespread social unrest, Monday saw only the protests that have become part of daily life. Unemployed workers blocked several roads leading into the capital, forcing hundreds of commuters to walk into town.

Officials continued to work Monday on a plan to reopen banks and reduce government spending. Such a plan is considered vital to securing assistance from the International Monetary Fund and other agencies.

Economy Minister Jorge Remes Lenicov is set to meet today in Washington with the IMF and U.S. officials, including Treasury Secretary Paul H. O’Neill. Remes hopes to secure an aid package of as much as $25 billion.

IMF Managing Director Horst Kohler issued an encouraging statement Friday, saying Argentina’s move to a fully free-floating currency was a positive step. But Argentina may have to cut its budget further before it gets such an aid package.

The government has already taken some cost-cutting measures. It announced Saturday that it would close 21 embassies--a quarter of its worldwide total--and 15 consulates. The Senate is also preparing a bill to cut legislators’ salaries, trips and vehicle usage.