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Social backlash forces political adjustment, default and devaluation
Severe social backlash to the economic regime of the
De la Rúa administration forced the President to resign from office on
21 December. Two days later Adolfo Rodríguez Saá became the new
President of Argentina, following his election in a special National
Assembly vote by a majority of the Peronist Party (PJ, Partido
Justicialista). The Sáa administration, however, lasted just one week
forced into resignation by further popular unrest to economic measures
adopted by the new government. The resignation brought Peronist Eduardo
Alberto Duhalde to the presidency. Duhalde was vice president in the
Menem administration and two time governor of Buenos Aires. The new
President represents the more populist wing of the Peronist party and in
the past had urged on proposals to renegotiate external debt.
In his inaugural speech on 2 January, Duhalde
announced his intention to cease payment on foreign debt and to devalue
the Peso. Furthermore, the government has acted quickly under the
command of the new Economy Minister, Jorge Remes Lenicov to formalize
its economic policy. Default was officially entered into on 3 January,
when Argentina failed to make a US$ 28 million 2007 Italian lira bond
payment. Devaluation followed as part of the Public Emergency and
Reform of the Exchange Rate Regime Law adopted by Congress on 6
January. The comprehensive package includes:
- New exchange rate regime.
The bill lifts the convertibility law, which governed exchange rate
policy since 1991 and pegged the US$ to the Peso at a rate of 1:1. The
government adopted a new monetary and exchange rate regime by decree,
which consists of an official exchange rate of 1.40 Pesos to the US$ for
export, import and capital transactions and another free floating
exchange rate for tourism and other transactions. The official exchange
rate devalues the Peso by 28.6%.
- De-dollarization of financial
system.
The government has decided to convert all dollar denominated mortgages,
as well as certain consumer and small business loans below US$ 100,000
into Pesos. For loans exceeding US$ 100,000 the government has
announced that it plans to develop a plan to lower interest rates or
extend maturities on outstanding debt obligations.
- Public service tariffs.
All public utility tariffs will be renegotiated and converted from US$
to Pesos at a one to one exchange rate, while indexation to US inflation
of contracts related to telephone, electricity, gas and transportation
services will be lifted.
- Credit card balance
redenomination.
Only expenditures made outside of the country can be expressed in US$
and all existing US$ balances will be converted to Pesos at a rate of
one to one.
- Central Bank responsibilities
reformed.
The Central Bank will be required to maintain reserves sufficient to
back the monetary base but will no longer be legally mandated to sustain
a specific technical ratio. In addition, the government intends to
modify the Central Bank statute to allow the institution to function as
a lender of last resort to local banks.
- Further easing of Peso deposit
withdrawal restrictions planned.
The government intends to maintain the current withdrawal restrictions
that limit depositors from withdrawing more than 300 US$ or Pesos from
their bank account per week or in the case of accounts tied to salaries
1,500 Pesos a month. The government hopes to gradually ease the
controversial restrictions imposed by the De la Rúa administration on 3
December (Decree 1570), since the controls were a key cause of the
social and political backlash experienced in the last month. The
government will eliminate restrictions completely but will begin
gradually by raising the withdrawal limit from its current level and
allowing more large scale withdrawals in instalments according to a
predefined schedule. In the lower end of the scale, the calendar for
withdrawals permits individuals with accounts below 10,000 Pesos to
begin to draw down deposits in four monthly instalments beginning March
2002. The drawdown schedule for higher balances exceeding 30,000 Pesos
expands the monthly withdrawal instalments out to two years and begins
in December 2002. Depositors will be paid a nominal interest rate of
7%.
- Tightening US$ deposit controls.
Holders of US$ accounts, which as of 9 January accounted for 69.6% of
total deposits, will not be able to withdraw funds until the beginning
of 2003. For account holders with balances below US$ 5,000, depositors
will be able to draw down funds in 12 equal monthly instalments
beginning in 2003. On the upper end of the scale, all account holders
with balances exceeding US$ 30,000 will not be able to access funds
until September 2003 and will be authorized to withdraw funds in equal
instalments over a period of 24 months. The nominal monthly interest
rate paid to depositors will be 2%.
- Price controls.
The government has been authorized to temporarily implement price
controls on goods and services “to protect consumer interests” but has
not yet decided to impose any price controls to diminish the impact of
the devaluation on salaries.
- Oil sector tax levy.
The government will levy a 25% tax on oil exports to help finance banks’
balance sheet losses related to the Peso conversion of loan assets. Oil
firms have reacted strongly to the measure and are lobbying the
government to avoid the tax and to accept a direct one time payment
instead.
- Rent redenomination.
Housing rents denominated in US$ will be paid for 180 days at an
exchange rate of one to one and all contracts will be renegotiated.
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