Argentina to Peg Peso to Euro As Well As Dollar

BUENOS AIRES, Argentina – Argentina's economy minister will introduce legislation pegging the peso both to the euro and the U.S. dollar, breaking with the decade-long practice of tying the peso only to the dollar.

Economy Minister Domingo Cavallo says the introduction of the euro will make it less expensive for European and Argentine companies to trade and do business. He also contends it would shield the peso and local interest rates from any sudden shifts in the value of either currency.

The new currency controls would not be triggered until the next time the dollar and euro reach the same value, or parity, which could take anywhere from a few months to a few years. The peso would then be valued at the average of the dollar and the euro.

Cavallo was expected to announce details of the bill Monday and send it to Congress within days. Opposition parties indicated on Sunday that they wanted to see more details of Cavallo's proposal before deciding whether to support it.

The economy minister told a news conference Saturday that the legislation would provide greater flexibility for the currency regime, and that it would not lead to a devaluation.

"When I speak of the euro ... it is to give people more alternatives, to give them more convertibility and more stability. ... In no way is this going to mean devaluation," Cavallo said.

Cavallo's legislation might be an initial step toward an even broader base for the peso. Cavallo has indicated he might later seek to tie the peso to a mix of additional currencies, including the yen.

The economy minister said he believed that the dollar and euro could reach parity "within several months," although others have said euro-dollar parity could take up to three years.

The euro is currently worth 89 cents. Two years ago it was worth $1.17.

Cavallo's proposal has brought opposition from a number of economists and officials, including Argentina's Central Bank President Pedro Pou.

Pou said the measure could generate uncertainty just as Argentina is trying to pull out of a 33-month recession, which has sent unemployment up to 14.7 percent.

"This has little to offer right now in terms of dealing with the grave economic and financial problems the country is facing," Pou told reporters.

Others say that with many Argentines holding debts in dollars, the measure could deepen the recession if it led to an effective devaluation of the peso against the dollar.

Cavallo introduced the Convertibility Law, which pegged the peso to the dollar, in 1991 when he was economy minister under former President Carlos Menem, as a way of ending the hyperinflation racking the country. The currency has been pegged one-to-one with the U.S. dollar since then.

Within a year, inflation was slashed to single digits and the economy began a four-year growth spurt that turned Argentina into a darling of international investors and helped garner Menem's re-election in 1995.

Cavallo is known to have supported a change to the currency peg for several years. But his first public statement on the issue as economy minister came last month in Madrid when Cavallo predicted the float could happen in two to three years.