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Wednesday, 9 January, 2002, 23:41 GMT
Argentina currency fears mount
Buenos Aires bank queue
Savers queue up outside a Buenos Aires bank
Argentina is bracing itself for the resumption of currency trading on Thursday, amid growing uncertainty over how its controversial new dual exchange rate system will bear up.

Analysts say the government's failure to explain clearly how the new system will work has stoked fears that the new system will unravel when the foreign exchange rate markets reopen, causing a surge in inflation.

"The lack of new economic announcements has allowed rumours surrounding the strong devaluation of the peso to gain dangerous ground and will without doubt increase investor nervousness," analysts Argentine Research wrote in a note to investors on Wednesday.

Confidence in the new system, which some analysts regard as fatally flawed, received an initial dent on Tuesday when the central bank said it was suspending the foreign exchange markets for a further 24 hours.

Exchange rate turmoil ahead?

Argentina's foreign exchange markets have been suspended since 21 December in a bid to limit the instability afflicting the country's crisis-hit economy.

If prices spike up it could set in place a vicious circle of inflation forcing the currency further and further down

Philip Poole, ING Barings

The new system fixes the peso at a rate of 1.4 to the dollar for international transactions, down from its old one-to-one conversion rate, while forcing ordinary Argentines wishing to buy dollars to do so at a freely floating exchange rate.

It is designed to make Argentine exports more competitive on international markets, while preventing the price of imported goods from rising in an inflationary spiral.

Importers will be entitled to exchange pesos for dollars at a rate of 1:1.4 in order to pay for foreign goods, while exporters will be forced to convert their hard currency earnings at the same rate.

Some exporters are welcoming the devaluation, anticipating a sales boost.

"This devaluation will be positive in terms of the exports for Argentina," Jose Zuccardi, president of wine maker La Agricola told the BBC's World Business Report.

La Agricola exports 60% of its produce to 20 different countries.

But analysts fear that false invoicing by both importers and exporters will make the system untenable.

This would force the Argentine government to devalue the official peso exchange rate further, potentially fuelling inflation.

"If prices spike up it could set in place a vicious circle of inflation forcing the currency further and further down," said Philip Poole, head of emerging market research at ING Barings.

The devaluation of the official peso-dollar exchange rate has already led to an increase in some retail prices.

Businesses in trouble

A proposed tax on oil exports aimed at compensating banks for an enforced conversion into pesos of most private dollar-denominated debt at the old rate of 1:1 has also shaken investors' confidence.

The private debt-conversion scheme, like the dual exchange rate system, is a populist measure designed to cushion the Argentine people from inflation and a sharp rise in debt servicing costs.

Interim president Eduardo Duhalde's policies have helped to avert a recurrence of last month's violent street protests, during which 27 people died.

Argentine President Eduardo Duhalde
Eduardo Duhalde: A populist President?

But with many local companies still bearing dollar denominated debt but generating revenues only in heavily devalued pesos, corporate Argentina is set to feel the pinch.

"We believe that (the new policies) will deepen the economic crisis, heighten political risk, and put a recovery further out of reach," investment bank Credit Suisse First Boston wrote in a research note.

Some businesses are also worried that any benefit gained from a devalued peso will be offset by the downgrading of Argentina's economic image abroad.

"You have to understand that the general economic situation and how Argentina is perceived is going to be also an obstacle in terms of obtaining financing, so I don't think that the gains for traditional exporters will be that clear cut," Marcelo Iricibar, managing director of Argentine owned Tenaris, told BBC Radio 4's Today programme.

Cash withdrawal limits eased

On Tuesday, deputy economy minister Jorge Todesca told local radio that he plans to raise a monthly limit on private cash withdrawals from 1,000 pesos to 1,500 pesos for some account holders, without providing further details.

The cash withdrawal curbs, imposed last month, are designed to prevent a run on the Argentine banking system amid growing public alarm over the country's economic crisis.

But by increasing the financial hardship facing the Argentine people, the banking restrictions are helping to stoke popular protests which have already forced two interim governments to step down.

They have also exacerbated Argentina's economic contraction by limiting ordinary citizens' ability to buy goods and services.

The BBC's David Willis
"Some analysts believe it could plummet in value"
See also:

08 Jan 02 | Business
IMF sees more pain for Argentina
07 Jan 02 | Business
Q&A: Argentina's economic crisis
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