Argentina closes foreign exchanges as peso goes it alone

The IMF's role is facing criticism, writesConor O'Clery, International Business Editor, on Wall Street

Following the sudden end of its decade-long link with the US dollar, Argentina yesterday closed foreign exchanges for two days and appealed to retailers not to raise prices to help maintain calm on the streets.

President Eduardo Duhalde decoupled the peso from the dollar on Sunday to cheapen exports and increase the money supply, in what is a desperate measure to end public unrest and prevent a three-year recession from deepening.

Supermarkets have promised to mark up only imported goods, bus companies have agreed not to raise fares, and building societies and banks which hold loans in dollars will convert them into pesos, Economy Minister Jorge Remes Lenicov promised.

In Argentina wages are paid in pesos, but 80 per cent of debts are held in US dollars. Banks and building societies say they will lose $15 billion (€16.8 billion) converting debts under $100,000 to pesos and returning dollar savings in full, but Mr Lenicov estimated their losses at just $6 billion and said they would be compensated by a tax on oil exports.

The measures have raised fears among foreign investors that Argentina is returning to a regulated protectionist economy - without the openness of recent years that allowed foreign companies to invest freely in the nation's infrastructure.

Buenos Aires was reported to be calm yesterday after the turbulence of the past two weeks, which saw the presidency change hands four times before the confirmation of President Duhalde, a 60-year- old Peronist Party leader.

Before the peso and dollar were linked in 1991, inflation in Argentina soared to 5,000 per cent and analysts fear that it could now return - after several years at zero or less.

However, the dollar peg kept exports expensive and prolonged the recession, and last week Argentina was forced to default on its $141 billion (€157 billion) public debt.

The crisis was sparked when the International Monetary Fund, which provided $22 billion in loans last year, withheld $1.3 billion in December after the Buenos Aires government spent more than had been approved by the IMF.

The devaluation of the Argentine peso - its new official rate is now 1.40 to the American greenback, while a 100 peso note buys only 71 dollars' worth of imported goods in the shops - has called into question the severe lending policies of the IMF, which Argentina had followed faithfully for decades.

Mr David Malpass, chief economist at Bear Stearns, said the Washington-based Fund supported economic policies that "would never be tolerated in the US", and that it "gives countries bad economic advice, then lends heavily to them, allows them to waste the new funds, and watches as the government's popularity plummets".

The IMF is however depicting the crisis as Argentina's fault. The Fund's managing director, Mr Horst Koehler, said yesterday "the crisis at its root is home-made", and warned that the country would not emerge from it "without pain".

That pain is not being felt by the global financial system. International contagion has been avoided, because the markets long ago factored in the likelihood of devaluation and default. While the official peso rate is 1.40 to the dollar, it will be allowed to float on unofficial markets.

Mr Lenicov said it was necessary to disengage the economy from the dollar because there was no other way to "brake and reverse the crisis".

He said the IMF had objected to the dual exchange rate plan and that IMF officials told him they preferred that the peso float freely. Mr Koehler said the IMF was ready to work with Argentina's new rulers, but he told a meeting of central bankers in Basel, Switzerland, that the onus was on Buenos Aires to resolve its "home made" financial crisis.