- The Washington Times - Monday, January 14, 2002

Argentina took a necessary yet precarious step last week, when it devalued its currency, the peso. The move makes a break with an honored 11-year-old monetary policy, which pegged the value of the peso to that of the dollar. Yet the change doesn't seem to have rattled markets in the region, since the government was largely expected to abandon the unsustainable currency peg. Still, for Argentina, preventing a chaotic free-fall of the peso in wake of the devaluation will surely be a challenge in coming months. The drop in the value of the peso could help energize the ailing Argentine economy by making its exports cheaper around the world. Had Argentina abandoned the peso peg with the dollar before a full-blown economic crisis had struck, its prospects for orchestrating an orderly and gradual devaluation would have been considerably better, and the country's descent into economic mayhem may have been avoided. In view of the government's recent debt default and Argentina's social unrest, investor confidence in the country has been badly shaken, and the value of the peso will surely reflect this soon enough.
The decision by Argentina's new interim president, Eduardo Duhalde, to introduce two new currency rates is also unfortunate, since it could create a burgeoning black market, and therefore increased corruption precisely the last thing Argentina needs. In theory, the government will set the exchange rate that applies to export and import transactions at 1.4 pesos to the dollar, which represents a devaluation of 29 percent, while the rate for other transactions will be determined by free-market forces. Mr. Duhalde has said his government's ultimate goal is for the peso to float freely, which is fine enough. But in the meantime, this arrangement will foster the kind of hand-greasing and lawlessness which have been chief causes of Argentina's problems. Another danger is that Mr. Duhalde will attempt to solve Argentina's budget shortfalls in the worst of Latin American traditions, which is to indiscriminately print money with no regard for the inflation such a spike in the money supply would cause. A free-floating currency, while giving the economy a competitive edge, would also make it easier to slip into this kind of regressive policy.
Accompanying the devaluation was new legislation proposed by Mr. Duhalde that seeks to limit the fallout of the devaluation on Argentines, particularly the middle class. Under the new law, bank loans of less than $100,000 can be paid back in pesos, with each peso given the value of $1 for the effects of debt payment, despite the devaluation. Credit-card debt will also be similarly changed into pesos. While this will clearly limit the impact of the devaluation on many Argentines, it will also take its toll on the already shaken banking industry. Argentina's devaluation is clearly fraught with risks, but it frees the country from a currency peg that sapped its competitive potential. Hopefully, the government will stay clear of the temptation of printing its way out of this morass.

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