Argentina's peso trades again

Protests toppled the previous administration

The International Monetary Fund (IMF) has said Argentina will have to introduce a "coherent" economic recovery plan before it offers the country any more assistance.

The comments came on the day trading in the Argentine peso restarted after a three week break.

The rate for international money transfers has been fixed at 1.40 pesos to the US dollar.

The very lack of dollars in the country will possibly make sure that the dollar-peso rate does not go too high

Pedro Perez
Barclays Capital

But trading in the free floating rate saw the peso weaken immediately, and by the close of trade it took 1.70 pesos to buy one dollar.

Speaking to reporters, IMF First Deputy Managing Director Anne Krueger said the new dual exchange rate system was "unsustainable" in the medium term, and that the IMF would prefer a fully floating currency.

But she said that if the government were to introduce the right polices, the Fund may be able to offer more help.

The IMF is to travel to Buenos Aires on Monday for talks.

More unrest

The Argentine government halted foreign exchange trading just before Christmas, to give itself more time to work out an economic reform plan.

But only hours before trading restarted, riots had erupted again on the streets of the capital Buenos Aires.

Demonstrators overturned cars, lit fires in the streets and threw stones at police, who responded with tear gas and rubber bullets.

Nothing to sell

Although trading has resumed, very little business is actually going on.

"The very lack of dollars in the country will possibly make sure that the dollar-peso rate does not go too high," Barclays Capital's Pedro Perez told the BBC's World Business Report.

But that still leaves the economy in a difficult situation.

Few banks were ready for the reopening of the markets, and most would have preferred to wait till Monday. "It's been very hastily done, but I guess the government had other political priorities," Mr Perez said.

To prevent a run on the peso, the government has frozen bank deposits and well-stocked current accounts, rendering them untouchable till 2003.

"There's a massive lack of confidence in the financial system and the political system... that's one of the reasons why they can't lift the deposit restrictions," he said.

New peso

Trading in the devalued peso had been due to restart on Thursday but the central bank said the government had been too slow in implementing the last details of its economic plan.

New banking measures

Banks must switch current accounts above $10,000 and savings accounts above $3,000 into fixed-term deposits

Dollar deposits will only be returned to savers from Jan 2003

Smaller accounts will be able to convert dollars into pesos at the official exchange rate of 1.4 pesos to $1

Smaller accounts can be accessed, but will be subject to withdrawal limits

Bank loans and mortgages of less than $100,000 will be converted into pesos

Banks must re-negotiate a cut in interest rates on all foreign currency loans

Currency operations were suspended and banking restrictions introduced when president Fernando de la Rua resigned at the height of protests over austerity measures aimed at ending the economic crisis.

A rapid turnover of presidents followed, which observers said was a result of intense factional infighting within the ruling Peronist party.

The political struggle was underlined by a paid advert in Buenos Aires daily Ambito Financiero inserted by former president Carlos Menem, whose government launched the dollar peg in 1991 but whose downfall in 1999 came amid corruption scandals and overspending.

"This monetary devaluation is a grave strategic mistake of those who took power," Mr Menem's advert said. "This strategic error is a death blow against economic stability... From now on, we need to take into consideration a worsening of the Argentine crisis."

Easing the pressure

Devaluation is expected to ease pressure on Argentina's exporters by making their products more competitive on the international markets.

Importers, however, will be hurt by the 30% devaluation of the currency - although the controlled exchange rate is designed to prevent the price of imported goods from rising in an inflationary spiral.

The government will allow people to convert any dollar loans or mortgages under $100,000 into pesos to protect them from the devaluation.

But for ordinary Argentines, the near future looks bleak.

"If the government doesn't solve this situation soon, there will be violence," said Irene Fernandez, 43, a social assistant among the protesters in Buenos Aires.