Bankrupt Argentina Devalues Currency

BUENOS AIRES, Argentina – His hands tied by an economy near collapse, Argentina's finance minister deeply devalued its currency as the country braced for an era of uncertainty in which one peso will no longer buy $1.

Overriding the worries of foreign investors and citizens alike, Economy Minister Jorge Remes Lenicov broke the news late Sunday that ``one-to-one'' - as the dollar-peso rate was known - is history.

``We are devaluing, we are in collapse, Argentina is bankrupt,'' Remes Lenicov said bluntly, announcing the erosion of a currency long the most stable in Latin America - until a run on the banks last Nov. 30 saw Argentines yank $2 billion in a day. The rioting and looting that followed forced President Fernando de la Rua from office and brought on a series of interim leaders.

Remes Lenicov said an official rate of 1.4 pesos per dollar would be applied to exports and imports, and a parallel, free-floating rate will be set by the marketplace and applied to most ordinary transactions by Argentines.

Such a dual foreign exchange system, the economy minister said, is intended to ``unlock the economy and set the conditions for growth.'' He also announced a two-day ``banking holiday'' on most financial transactions and said foreign exchange markets will remain closed until Wednesday.

The wrenching currency shift came after President Eduardo Duhalde, three days after taking office, told business leaders last week that ``a devaluation was a given.''

The abandonment of the currency peg ends a decade of the currency policy, enshrined in a 1991 ``Convertibility Law'' used to slash hyperinflation and to end a deep economic crisis at the time. The weakening of the peso heralds a radical departure from the unabashed free market era in which Argentina - South America's second-biggest economy - was the darling of emerging markets.

But devaluation comes amid fears among foreign investors who have billions of dollars now invested in Argentina since it undertook one of the most vigorous privatizations of state industry this last decade, selling off hundreds of inefficient businesses.

Investors from the United States to Europe now fear a devaluation will slash their profits and that the government will protect local industry with old-fashioned, less market-friendly policies.

Today, the annual growth rates averaging 9 percent in the mid-1990s seem a distant reality for a country mired in an 18 percent joblessness rate and a grinding recession now nearly four years in the making.

Pressure on the peso began rising after the country began its nosedive in 1997. The currency, long seen as an anchor to a steady economy, gradually came to be viewed as overvalued, making Argentinian exports increasingly uncompetitive while driving investors away. The Nov. 30 run on the banks hinted that the days of one-to-one parity were numbered.

Analysts warn that a steep drop in the peso's value could trigger billions of dollars in losses for foreign companies doing business in Argentina, such as banks, telecommunications companies, oil and utility firms.

But presidential spokesman Eduardo Amadeo said Duhalde and Remes Lenicov would begin ``a serious dialogue'' with representatives of foreign companies starting Monday.

``We can't slap in the face people who have invested in Argentina,'' Amadeo said. ``We want foreign investment because it means jobs.''

Meanwhile, the government is moving on other fronts to shore up the economy.

Late Sunday, Remes Lenicov said Argentina will begin renegotiating the terms of its $141 billion foreign debt in February. The country is in default after declaring a suspension of payments last month, formalized with a missed payment on a $28 billion foreign bond last Thursday.

Duhalde also was rushing to submit a 2002 budget plan to Congress, saying an ``austere'' plan would be presented in the third week of January.

In an early victory, Congress did give Duhalde sweeping emergency powers Sunday to tackle the crisis, the worst in decades. But time is of the essence.

Duhalde commands a caretaker government appointed by Congress Jan. 2. He has until late 2003 to fill out the term of the last elected president, de la Rua, who was toppled Dec. 20 amid deadly street riots.