Argentina's Economy Minister Jorge Remes Lenicov announced the devaluation of the peso Sunday night, saying Argentina's currency will now be pegged at 1.40 to the $1. The de-evaluation ends 11 years of the fixed exchange rate, that pegged the peso at one with the U.S. dollar.
The Economy Minister declared Sunday night, "We all know, and the president said when he was sworn in, that Argentina is in bankruptcy. We've had four years of a growing recession, every day that goes by the activity level is less, and also a situation where poverty and unemployment have grown. The truth is our economy has collapsed."
Mr. Remes was telling Argentines the obvious: their government is bankrupt and their economy near collapse. The country's budget deficit soared to $11 billion in 2001 and tax collection rates fell 33 percent in December alone. Days ago the government defaulted on its $141 billion debt when it missed a $28 million payment. As a result, the government had no other choice but to take drastic measures to jumpstart the economy.
Mr. Remes said the government's first move would be to overturn the 11 year old Convertibility Law and work with the Central Bank to set a new monetary policy.
Mr. Remes also confirmed that dollar loans under $100,000 would be converted to pesos, in order to protect average Argentines from the steep devaluation. In recent days banking stocks on the local exchange have lost ground, because the nation's financial institutions are expected to post sharp losses. The government said that banks will be compensated for their losses by hard-currency government bonds, financed through a new tax on oil exports, over the next five years.
The Economy Minister also confirmed the government decided to switch all utility contracts to pesos, despite enormous pressure from the privatized utilities to keep the contracts in U.S. dollars. When Argentina's utilities were sold off in a round of free market reforms in the early 1990s, European companies picked up the bulk of the telephone, energy and waterworks facilities.
Spain alone has invested around $30 billion in Argentina and public and private sector officials have been lobbying particularly hard to avoid such a move. Mr. Remes confirmed that Spanish Prime Minister Jose Maria Aznar phoned Argentine President Eduardo Duhalde to press him not to adopt the measures.
Mr. Remes said that despite strong pressure from foreign interests, the critical situation in Argentina required that everyone make an effort. He said for a long time the poor in Argentina had been the ones to make the effort and that today the government was looking for a collaboration from the rich and powerful.
Mr. Remes' announcement came only hours after the Argentine legislature had passed the emergency economic plan, authorizing the moves. It was approved by both the Lower House and Senate after lengthy debates. The bill drew widespread support from across party lines, with most members of the Peronist, Radical and Frepaso parties voting in favor. The multi-party support gave Mr. Duhalde a major victory, less than a week after his swearing-in ceremony.
The Economy Minister said he would soon ask multi-national lenders for aid to help Argentina dig itself out of the deep hole the country is in. Foreign leaders from French Prime Minister Jacques Chirac to U.S. President George W. Bush have expressed their willingness to work with Mr. Duhalde, once he has presented a viable economic plan.