Buenos Aires Revamps Finances

Ending agonizing days of uncertainty, Argentina finally embarked on a new economic path Sunday night, ending its 10-year experiment with a dollar-based currency by declaring an immediate devaluation of nearly 30%.

As expected, the nation is also stopping payment on $135 billion in public debt, the biggest default ever by a country.

The government of new President Eduardo Duhalde finally acted Sunday night after the Argentine Congress granted him sweeping powers to reshape the economy and at the same time nullify the Argentine peso’s one-to-one peg to the U.S. dollar. That was the economy’s blessing, then its bane.

The introduction of a dollar-pegged peso in 1991 ended Argentina’s nightmarish cycles of hyper-inflation because it immediately restricted the nation’s ability to print money to the number of dollars it had in reserve. But that became a handicap after Brazil, the country’s chief trading partner--and economic rival--devalued its currency in 1999, making Argentina’s products less competitive at one fell swoop.

The emergency plan follows a month of civil disturbances that left 27 people dead and forced the resignation of two presidents.

After a weekend free of the demonstrations and violence that had caused the crisis in Latin America’s third-largest economy to deepen, the nation today awaits the popular verdict on the new economic measures. In the short term, they seem sure to cause pain, including inflation and wage cuts, especially among government workers whose salaries have already been reduced.

It also remains to be seen whether the government can successfully maintain the new exchange rate of 1.40 pesos to the dollar. History has shown that a devalued currency finds its own equilibrium and that government attempts to support a certain level of value usually fail.

The plan calls for all dollar-denominated loans and contracts of up to $100,000 to be converted to pesos--a measure that could prompt a banking crisis. Facing billions of dollars in loan losses, Spanish banks that have established themselves here in recent years were said to be threatening to shut their doors and leave the country.

U.S. investors who bought privatized government banks, utilities and energy companies here in the 1990s are also being exposed to huge potential losses because the terms of such contracts, on services ranging from electricity to telephones, are also being converted to pesos.

Sempra Energy of San Diego owns a huge stake in a gas distribution system in central Argentina and will see its revenue drop significantly in dollar terms.

In a televised briefing for reporters, new Economy Minister Jorge Remes Lenicov acknowledged that the plan will create winners and losers but said the government was forced to take drastic action because the economy had been flattened by crushing external debt, a “growing depression” and a failed monetary policy.

“The economy, like Argentina, is in collapse,” said Lenicov, who became economy minister Thursday, the day after Duhalde became Argentina’s fifth president in two weeks. “This is a new direction. It would have been a miracle had we continued with the policies of the past and seen different results.”

The plan’s immediate goal is to reactivate economic activity and regain the confidence of Argentine savings depositors, who withdrew $21 billion from the banking system last year, depleting the nation’s reserves. Lenicov reiterated Duhalde’s promise of last week that those with dollar deposits will, over time, be able to get their money, but he did not specify when.

Lenicov said Argentina will try to begin talks with the International Monetary Fund in coming weeks after putting its new monetary and budget plans on the table. He told reporters that the country might ask for $15 billion to $20 billion in aid.

Despite an $11-billion budget deficit last year and tax revenue that dropped 33% in December, Lenicov said the new government budget coming this week will attempt to achieve “equilibrium.”

Argentina will impose an “austerity” program, he said, but he declined to estimate how much spending will be cut. The plan includes a 90-day ban on firings but no price freezes. The government will also tax foreign oil sales for a fund that will compensate companies hurt by the devaluation.

Pesos will trade starting Wednesday--today and Tuesday have been designated bank holidays--at 1.40 to the dollar, a 28% devaluation, Lenicov said. The new rate will apply to commerce in goods and services and capital flows. The exchange rate for tourists will be allowed to float freely.

In a few months, Lenicov said, the government will let the currency float freely on currency markets. Prices will not be fixed, although some services will be regulated, he said.

Lenicov added that the country has no intention of becoming protectionist or closing its doors.

“We will be doing nothing strange. We want to do what other countries have done to become productive,” he said.

During January and February, the government will print an unspecified amount of new pesos, a risky move that could ignite inflation if overdone, said Gary Hufbauer of the Institute of International Economics.

The Congress was moved to act after a worsening economy and civil unrest provoked by a restriction on savings withdrawals forced the resignation of Fernando de la Rua on Dec. 20 and then of his interim replacement, Adolfo Rodriguez Saa, on Dec. 30. Two other men also served briefly as caretaker president.

“Given the circumstances Duhalde was in, this was about the best he could do,” Hufbauer said.

Banks will be especially hurt by the conversion of obligations indexed to the dollar to debts payable in pesos, making portfolios of car, consumer and home loans suddenly less revenue-producing. Spanish energy giant Repsol, which paid $18 billion for the Argentine oil company YPF in the 1990s, and telecommunications giant Telefonica, which owns land line and cellular phone interests here, are also staring at big losses.

Lenicov acknowledged that there had been intense lobbying efforts by Spanish government officials and business leaders to change the terms of the conversion of contracts, but he said he refused to take their telephone calls until after the new economic package is put in place. Duhalde and other Cabinet members reportedly will meet with foreign firms this week.