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Argentina: Duhalde's Desperation Behind Peso Peg Plan
March 29, 2002
Summary
The recent sharp fall in the Argentine peso has led President Eduardo Duhalde to consider re-pegging the peso to the dollar. Such a decision would require the imposition of even stricter capital controls and eliminate any chance of quick support from the International Monetary Fund. But the government may see it as the only way to fend off hyperinflation, the most immediate threat to its survival.
Long queues have not deterred Argentines from dumping their pesos.
Image Credit: The Associated Press
Analysis
Despite public denials by Argentine President Eduardo Duhalde, Argentine daily Clarin and the Financial Times are both reporting that the president is considering re-pegging his country's currency, the peso, to the dollar in an attempt to head off further devaluations and hyperinflation in the country. The peso has slid 70 percent versus the dollar since it was devalued in January, and it dipped as low as four pesos to the dollar March 25.
The government floated the peso Feb. 11 after pegging it on a one-to-one ratio with the dollar in 1990. Re-pegging it now not only would be economically unwise but also would signal that the government's tendency to favor short-term damage control at the cost of long-term stability has yet to change. The need for decisive action is clear.
A strong peso is Duhalde's political lifeblood, and the government only halted its slide this week by intervening in currency markets, establishing new capital controls, reducing the hours exchange houses could be open, stationing riot police at banks and limiting both the rights of banks to hold dollars and individuals' access to them.
A weak currency stokes inflation and social unrest. Argentines keenly remember 1989, when inflation briefly hit 5,000 percent; grocery stores would reveal sudden price changes over their PA systems. To head off a resurgence in inflation, the government has banned utility-rate hikes and flirted with price controls.
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(Story Source)
(c) 2002 Stratfor, Inc.
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Dan
Argentina: Duhalde's Desperation Behind Peso Peg Plan . . .