New Money for Cash-Strapped Argentina Sparks Fears of Return to Inflation

Racing against time as Argentines run out of cash, the new government said Wednesday a new currency, the Argentino, would start circulating in January alongside the peso and the dollar.

Officials said the move is a way to inject needed money into the nation's bruised economy without dismantling a law that pegs the peso at one-to-one parity with the dollar. More immediately, it would put cash in the hands of Argentines hardest-hit by a nearly four-year recession and 18 percent joblessness.

But the announcement raised fears of a currency devaluation that could return Argentina to the spiraling inflation that tore apart South America's second largest economy in the 1980s.

The new government of President Adolfo Rodriguez Saa, formed by left-leaning members of the Peronist Party, is anxious to check discontent that last week erupted in looting and street riots, driving then-President Fernando de la Rua from office.

The protests were triggered by restrictions, including a partial banking freeze, imposed by the old government. The new leaders have maintained the restrictions and on Wednesday extended a "banking holiday," meaning Argentines again could not change pesos for dollars. With financial transactions limited, the stock market stayed closed.

New interim President Adolfo Rodriguez Saa promised trade union activists the Argentino would be "the currency that will allow us to reactivate the productive sectors."

He rejected claims the government could print so much of the new money, it would spark inflation.

"Some say we will do something irresponsible. They are wrong," he said. "We will back the Argentino."

The backing would include "all assets of the ... state," including its embassies, the congress building and even the Casa Rosada government house, he said.

The new currency is technically a bond that functions like cash. People can use it to "pay everything, from salaries to taxes, goods and services," interim Finance Minister Rodolfo Frigeri told local radio stations.

He insisted there would be no devaluation of the peso, since the bonds would not be convertible into dollars or pesos.

But in an interview with the daily Clarin, Frigeri acknowledged the new currency would allow "a controlled departure" from the dollar peg. "We don't rule out the possibility that, with time, it will depreciate," he said.

Already, some Argentine businesses were believed to be marking up prices by up to 30 percent based on rumors of devaluation, moves sharply criticized by Chamber of Commerce President Osvaldo Cornide.

Chip Brown, head of economic research at Santander Hispano Central in New York, said the move will lead to a devaluation "in everything but name."

"I'm greatly concerned we'll be seeing Gresham's Law at work in Argentina," Brown said, referring to a tenet, named for a 16th century English economist, that states "bad money drives good money out of circulation."

"The dollar will be considered better than the peso, the peso better than the Argentino," said Brown. "Dollars will be hoarded, then pesos will be hoarded."

Economists said printing new currency could help kick-start consumer activity, but too many could spark a return to inflation and knock the country's books further out of sync.

News reports Wednesday said the government was renegotiating its next installment of some $500 million in domestic debt, taking the country a step closer to all-out default on its $132 billion public debt.

While pegging the peso to the dollar helped control inflation, it has made Argentine businesses less competitive on foreign markets and further pushed the nation into recession.

In Buenos Aires, street reaction was mixed to the announcement of the new currency.

"They say the peso will stay the same value as the dollar and that the Argentino will be the same as a peso, but I'm not so sure," said Mariano Beglenzoni, a young accountant waiting to deposit a check at a Citibank branch.

"Maybe this (new currency) will help us," said Alejandro Lopez, an unemployed construction worker who had earned just 4 pesos all morning by hawking four copies of a magazine for the homeless and unemployed.

"All I know is people need money to buy bread."