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Wednesday, 20 June, 2001, 11:51 GMT 12:51 UK
Argentine currency fears grow
Argentine economy minister Domingo Cavallo
Cavallo: Unconcerned about adverse market reaction
Argentina's financial markets have come under severe pressure, as investors worry about the effects of recent currency reforms.

Last Friday Domingo Cavallo, Argentina's economy minister, relaxed the regime under which the Argentine peso is pegged against the US dollar.

Amid fears that the move was an effective devaluation, Argentine inter-bank interest rates ballooned on Tuesday, and the stock market lost nearly 5% of its value.

The outcome is being closely watched abroad, in case an Argentine financial crisis could spread into other emerging markets.

Some analysts are even warning of an impact on the euro and the dollar, as companies in Europe and the US are highly exposed to Latin America.

Unconcerned

Argentina's government is sanguine.

Mr Cavallo has blamed the markets' reaction on ignorance about the nature of his currency reforms, which allow Argentine importers and exporters some leeway in the peso-dollar rate they use.

But overnight inter-bank interest rates in Buenos Aires doubled to 10% on Tuesday, prompting complaints that the government has not done enough to explain its policies to the markets.

The currency reform was part of a wider package of measures to stimulate Argentine business, including a series of tax cuts.

"Locally, the idea is that the measures could improve the economy," said Juan Plett, a trader for Mackintosh brokerage.

"The problem is that it creates more uncertainty in an environment that is already very tense."

Argentina's economy has been in recession for three years.

Contagion fears

Some are now speculating that Argentine instability could filter through to the euro and dollar.

The US currency is traditionally a safe haven at times of uncertainty in Latin America, but many large American firms have major investments in Argentina.

"Short-term this is leading to a rise in risk aversion that should benefit the dollar," said Mitul Kotecha, head of foreign exchange research at Credit Agricole Indosuez.

European exposure may be even greater.

Shares in Telefonica, the Spanish telephone company which is Latin America's biggest foreign investor, fell by 3% on Wednesday - their fifth straight fall in a row.

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See also:

19 Jun 01 | Business
Argentina switch rattles currencies
22 Mar 01 | Business
Argentina embarks on tax reform
21 Mar 01 | Business
Argentina vows to end recession
04 Mar 01 | Americas
Political turmoil in Argentina
24 Nov 00 | Business
How Argentina's revival went wrong
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