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Devaluation Forces Argentines to Trade Dollars - 2002-01-26

Argentines are lining up daily to buy or sell dollars at currency exchange houses, following the devaluation earlier this month of the peso. The currency had been fixed one-to-one to the U.S. dollar for over 10 years. People feel angry, betrayed and fearful as they watch their savings lose value and face the prospect of hyperinflation.

In cautious undertones, black market currency traders offer to buy and sell dollars to those waiting in long lines to trade money at legal currency exchange houses. These black market traders - known as "arbolitos" or little trees because they stand around waiting for customers - have reappeared again on certain downtown streets of Buenos Aires, after a long absence.

This is because the Argentine peso, which had been fixed to the U.S. dollar at a one-to-one rate since 1991, was devalued early this month. Now the demand for dollars is high.

The government of President Eduardo Duhalde set up a two-tiered exchange rate system - fixing an official rate for the peso for external operations, while letting the currency float on the domestic market.

So Argentines line up every day at the exchange houses - to either buy dollars as a hedge when the rate is low, or sell their dollars when the rate is higher to get more pesos to pay their bills. Banking restrictions limiting deposit withdrawals, which have been gradually loosened since being imposed in early December, also have forced many Argentines to exchange their currency.

Raul Limes, a merchant who stood in line one day this week, says buying dollars is a form of protection against the danger of hyperinflation.

He said, "it's a form of protection, so that you can keep something, but we all lose from a devaluation because as an economist once said 'a bad currency always chases away a stable one.'"

The government of President Eduardo Duhalde abandoned the peso-dollar parity because it was increasingly viewed as one of the factors hindering an economic recovery. The exchange rate regime, in which each peso in circulation was backed by a dollar in the Treasury, was set up in 1991 as a way to end hyperinflation and create economic stability.

And for a number of years it worked. While Argentines were paid in pesos, they became accustomed to using their currency interchangeably with dollars. Banks opened up dollar-denominated savings accounts, and most loans were made in dollars.

By the time the peso was devalued, 80 percent of Argentine debt was in dollars, while two-thirds of the country's bank accounts were dollar-denominated.

President Duhalde, who took office on January 1 following unrest that forced the resignation of two Presidents in December, originally pledged to pay holders of dollar accounts in dollars, despite the devaluation. But the Duhalde government now says there are not enough dollars in the financial system to honor the pledge - and that the money will probably have to be returned in devalued pesos.

This acknowledgement has pleased the banks, some of which are foreign-owned. But it has dismayed many Argentines already frustrated and angered by the continuing regulations limiting bank withdrawals.

A young professional woman, Veronica, blames Argentina's politicians and the banks for deceiving the Argentine people. With her money frozen in a dollar account which is now worth much less, she says she will never trust Argentina's banking system again.

"Never again. I put my money in a foreign bank because I thought it would be safer, and I know that a lot of people did the same thing. I put my money in dollars because I thought it would be safer for me, because its all I have. It's like a lot of, no never, because there is no law, that's what you feel there's no here. So I will never trust them again, and unfortunately a lot of people think the way I do," she says.

Economist Aldo Abram, of the consulting firm Exante, says this is a natural reaction, and warns this does not bode well for an economic recovery.

"It's very difficult to recover the confidence of the people if you defraud them. And people feel robbed, and they have been robbed. They feel that the government has made them lose money, lose their earnings. They measure their earnings in dollars, they feel poorer - so why will they invest more in Argentina, why will they consume more? It's impossible to get people to increase their consumption, and increase their investment," he says.

Mr. Abram predicts hyperinflation is inevitable under the current circumstances.

But the Duhalde government says it is doing all it can to prevent this. The Argentine Central Bank has been intervening by selling dollars in the markets this week, to prop up the value of the peso as it floats domestically. It has succeeded in bringing the currency to 20 cents over the official external rate of 1.4 pesos to the dollar. Central Bank officials say the government can continue doing this for as long as it takes to maintain stability. Argentines, with memories of the bitter experiences of the past now vividly reawakened, are hoping against hope the government is right.