Argentina’s New President Is Expected to Devalue Peso

Argentina’s fifth president in two weeks took power Wednesday, immediately confronting a worsening financial crisis, including a “fiscal rebellion” among taxpayers that caused tax collections to drop by a third in December.

Expectations are that the new president, Eduardo Duhalde, will devalue the currency as early as Friday by as much as 40%, abandoning the one-to-one dollar peg that snuffed out hyperinflation in the early 1990s but has stifled Argentina’s economy since. Duhalde is expected to announce his new Cabinet today and his economic package Friday.

One day after being voted into office by an overwhelming majority of senators and deputies at an emergency session of Congress, Duhalde, a senator and former vice president from the Peronist party, was sworn in at noon in the ornate White Room of the presidential palace. Just 10 days earlier, the previous caretaker president, Adolfo Rodriguez Saa, had assumed power in the same chamber.

Crowded into the room were a cross-section of the provincial governors, members of Congress and businesspeople who came together in a rare display of support for Duhalde in the wake of the Dec. 30 resignation of Rodriguez after only a week in office. Duhalde did not speak at the ceremony.

“The overwhelming majority for Duhalde was proof there is consciousness that the government must be strengthened by all the means available if it is to emerge from the grave condition we are in today,” said Guillermo Alchouron, a lawmaker and leader of the Action for the Republic Party, one of the minority factions that rallied around Duhalde.

But lacking a popular mandate, Duhalde faces difficult days ahead, especially if reduced tax collections force the federal and local governments to forgo payment of wages in coming weeks, which some economists say is inevitable.

Duhalde must also find a way to kick-start Argentina’s moribund economy, which has been in recession four years. Miguel Garcia Merida, a farmer from the Guamani district of Buenos Aires province who attended Wednesday’s ceremony, said crop prices have dropped 46% and demand is down 70% since 1999.

“Based on Duhalde’s past experience as governor of our province, we have hopes he is prepared to deal with this most difficult of situations that Argentina has been left in,” Garcia Merida said. “How bad is the situation? I would say terminal.”

Duhalde is a leftist product of old-fashioned, working-class Peronism. In true Peronist fashion, he instituted costly government make-work programs in his two terms as Buenos Aires governor that left the province deep in debt.

As governor, Duhalde was tainted by charges of cronyism and corruption. But, unlike Rodriguez, Duhalde rallied the support of important provincial governors who play strong roles in Argentine politics.

“The critical situation that the nation is in made all the politicians be aware that no one person or party can lead us out of it,” said Luis Obarrio, a Peronist deputy from Buenos Aires.

In an address to the nation late Tuesday, Duhalde said he will do away with the economic and political models he said had brought the country to the brink of ruin, destroying the middle class. He invoked the names of Juan and Evita Peron, populist leaders of the past, in promising Argentines a new start.

Although Duhalde did not specify any new measures, financial markets took him to mean that he will abandon the regime that matched the peso to the dollar, which has made Argentine goods noncompetitive at home and abroad.

Although exchange houses have officially been closed since Fernando de la Rua’s resignation in a bid by the government to squelch demand for dollars, the few money changers doing business here Wednesday took the hint and were offering between 1.4 and 1.5 pesos to the dollar, in anticipation of a devaluation of 40% to 50%. Officially, the peso has traded on a one-to-one basis to the dollar since 1991.

Argentines are also waiting to see whether Duhalde proposes a conversion of the dollar-denominated debts and contracts that dominate the economy, encompassing everything from mortgages to cable bills. Without such an offsetting adjustment, a devaluation would cause a wave of bankruptcies and foreclosures because many Argentines would be unable to meet their obligations.

“Without an adjustment [to debts] in the same percentage as a devaluation, there will be no social justice and we will all be destroyed. Peronism is first and foremost about social justice,” said Manuel Fernandez, a businessman from a Buenos Aires suburb who was one of several hundred people demonstrating in front of the presidential palace Wednesday in favor of Duhalde.

Duhalde’s economic package will probably include a reaffirmation of Rodriguez’s vow to default on Argentina’s $132 billion in foreign debt. But whereas Rodriguez promised to use the savings to fund 1 million public works jobs, Duhalde said he supports unspecified government aid to the unemployed.

The new president, who is to serve out the remainder of De la Rua’s term ending Dec. 10, 2003, may also impose taxes on imports and exports in a bid to raise revenue for coffers depleted by a 33% reduction in tax collections nationwide in December, said Abel Viglione, an economist at the Fiel economic think tank in Buenos Aires.

The tax revenue drop was even greater--47%--in the capital, where one-quarter of the nation’s economy is generated. Argentines’ refusal to pay taxes amounts to a massive bet on the likelihood of a devaluation: By waiting a few days or weeks to pay, their hoarded dollars will be worth more in peso terms, making peso-denominated taxes cheaper.

That’s sound thinking, say economists, who expect Duhalde to introduce either a free-floating peso or, more likely, a “crawling peg,” in which the government would support a new exchange rate starting at about 1.4 pesos to the dollar but allowing it to gradually devalue further over time, much like Brazil’s currency before it went to a floating system in 1999.

Argentina can’t go to a free-floating currency immediately because it might lose as much as two-thirds of its value, Viglione said.