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Economists: Argentina's Bank Reforms Only Temporary Solution

Argentina's move to partially freeze bank accounts was prompted by a massive surge of withdrawals by Argentines seeking to convert their pesos into dollars. But economists say the measure is a temporary solution, and will not solve the nation's fundamental economic problems.

Economy Minister Domingo Cavallo addressed the nation Sunday, trying to reassure Argentines that the decision to limit cash withdrawals does not mean they will lose their money.

He said 'the money is yours, it remains in the bank at the same interest rate, and you can use it however you like, except that you cannot withdraw more than 250 pesos in cash a week.'

Mr. Cavallo went on to say the measures announced Saturday were necessary, to prevent Argentina from falling into "chaos".

Besides limiting cash withdrawals for 90 days, transfers abroad were limited to $1,000 a month. Argentines will be able to access their money by using debit cards, credit cards, or checks. They also will be able to convert their peso accounts into dollar accounts.

The government of President Fernando de la Rua enacted the measures in response to massive withdrawals in recent days by panicked Argentines seeking to convert their pesos to dollars. They were reacting to rumors that the government planned to freeze bank accounts and devalue the peso - which has been pegged one-to-one to the dollar since 1991.

An estimated $400 million were withdrawn from the banks last Friday. Since January, Argentine banks have lost $14.5 billion.

Most economists agree that the de la Rua government had little choice but to act. But economist Nicolas Caruso of Scotiabank Quilmes says Argentina's underlying economic problems will persist.

"This is a tool to solve a specific problem," he said. "Just like the debt swap was a response to Argentina's inability to repay its debt, the partial bank freeze is a response to keep the banking system afloat. It is not, by any means, a solution to Argentina's problems. The fundamental causes remain without being addressed."

Chief among those fundamental problems is a $132 billion public debt, and a recession that has lasted almost four years. Unemployment is at 16 percent, while the government continues to reduce pensions and public sector salaries in an effort to cut costs. Ricardo Delgado of the economic consulting firm, Ecolatina, says the latest measures may aggravate Argentina's recession over the short-term; especially in what is known as "the informal sector of the economy", which relies on cash transactions.

"The first impact will be a de-acceleration in some important economic sectors, especially in the informal sector, which represents 40 percent of the economy," he said. "These measures will generate a slowdown in economic activity, as well causing a reduction in spending by other sectors. But given the situation last week, it was the only decision to take to prevent a financial collapse."

Mr. Delgado and other economists say the government's decision to allow depositors to convert their peso accounts into dollars will further dollarize the economy. They say this may be the first step toward dropping the peso, and adopting the U.S. dollar as Argentina's currency as Ecuador did last year. By dollarizing, Argentina would avoid a devaluation and the hardship that would ensue since most Argentine debt is in dollars.

But even if Argentina dollarizes, Nicolas Caruso of Scotiabank says an economic recovery will take years.

"What has happened is that Argentina has gone back 10 years," he said. "We have gone back to having our bank accounts frozen, currency exchange controls, a debt default. The only thing we have avoided is hyperinflation. But the situation is very dark, and we have lost the past 10 years."

The bank measures are the latest attempt by the de la Rua government to avoid an economic collapse. It has already cut the interest payments it makes on much of its huge public debt, in a move international financial brokerage houses have characterized as a technical default. With 36 million people and South America's second-largest economy, a financial meltdown by Argentina would have serious repercussions in the hemisphere.