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Monday, 7 January, 2002, 14:54 GMT
Argentina peso plan 'to hit borrowers'
Obelisk in Buenos Aires
Argentina changes direction
Argentina's reaction to the devaluation of the peso, announced over the weekend by newly-elected president Eduardo Duhalde, has been mostly calm.

The government set a fixed rate of 1.4 pesos against the dollar, breaking the two currencies' ten-year-old one-to-one link, in a bid to lift Argentina out of a four-year-old recession through increased exports.

There has so far been no repetition of the violent street protests that have forced two interim presidents to step down in quick succession during the last month.

A poll at the weekend showed a majority of Argentines backed the peso devaluation rate plan.

But there are widespread fears that the move, which cuts the peso's value against the dollar by 29%, will increase debt servicing costs and further undermine foreign investors' confidence in Argentina.

Panic buying

A pharmacy in Buenos Aires
Some shops have already raised prices

The devaluation was widely anticipated, with many Argentines rushing to buy big-ticket items such as computers or washing machines last week, pre-empting a surge in retail prices.

With cash withdrawals limited to $1,000 a month and the credit card payments system largely suspended, most Argentines will feel the devaluation almost immediately.

Black market currency dealers reacted to the news by raising the dollar exchange rate, and many shops have already put up their prices.

Shock absorber

Local banks and businesses, meanwhile, face a sharp increase in their debt servicing costs.

Since a high proportion of Argentina's public and private debts are denominated in dollars, loan repayments are up by 30%.

The government has pledged to convert dollar debts under $100,000 into pesos at the old one-to-one rate in order to cushion the middle class and small businesses from the full impact of the devaluation.

But bigger companies with foreign debt are likely to default.

Multinationals with subsidiaries in the troubled Latin American country can also expect earnings from their Argentine operations to fall sharply.

The poor have already made an effort and we are asking for the collaboration of the rich

Jorge Remes Lenicov, economy minister

The latest package of reforms also prevent utility companies from charging in dollars, and ban them from putting up their prices in order to cover their losses.

They look set to be the main losers from the peso devaluation.

Populist move

President Duhalde
So far Mr Duhalde has appeased protesters
In a move unheard of in Latin America in last decade, the new government this weekend refused to answer phone calls from indignant foreign executives, while economy minister Jorge Remes Lenicov told firms to show solidarity with the poor.

"The poor have already made an effort and we are asking for the collaboration of the rich," the minister said.

Although the country's trade unions have called for mass demonstrations against the new measures, the reform package commands the support of most Argentine political leaders.

We are only at the beginning of a very difficult adjustment for Argentina

Lenora Suki, Santander Investment

"I am absolutely convinced that this is the solution we needed, because what we are doing is to (suspend) convertibility, which has been very useful in other circumstances but today was no longer effective", Jose Luis Gioja, a Peronist senator said.

Banks uncertain

But local investors are not so sure. They regard the measures as an unwelcome return to Argentina's tradition of state interventionism and populism.

They are particularly keen to hear how the government proposes to fight the strong inflation which many regard as an inevitable side-effect of the devaluation.

"We are only at the beginning of a very difficult adjustment for Argentina," said Lenora Suki, a sovereign strategist at Santander Investment.

"The companies and banks and individuals who owe dollar debt abroad are likely to go into default. This will deepen the economic contraction in Argentina."

And if the government puts a foot wrong during the difficult balancing act that lies ahead, Argentines are sure to take to the streets again, banging pots and pans in the spontaneous protests that have come to symbolize their disgust with their politicians.

See also:

07 Jan 02 | Business
Argentina devalues the peso
02 Jan 02 | Americas
Argentina seeks world help
02 Jan 02 | Americas
New man takes helm in Argentina
01 Jan 02 | Media reports
Press lambasts Peronist 'infighting'
01 Jan 02 | Business
Argentina faces grim economic future
31 Dec 01 | Americas
Argentina's toughest job
03 Jan 02 | Americas
Argentine cabinet takes shape
23 Dec 01 | Business
Q&A: Argentina's economic crisis
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