MEXICO CITY — Stocks across Latin America and in Spain plunged Monday after Argentina stunned the financial community with a new policy on exchange rates that some analysts saw as a de facto devaluation.
The policy changes, announced over the weekend, obliterated much of the confidence earned when Argentina exchanged $29 billion in debt this month, a move that seemed to give the country some breathing room from worried creditors. But the nation's ongoing political turmoil and worsening economy apparently forced it to take drastic new steps.
Effective immediately, the government said it will fix the peso's exchange rate for trade purposes at the mid-point between the U.S. dollar and the euro. It amounts to a 7% devaluation in all such transactions, based on the euro's value Monday of 86 U.S. cents.
Until the announcement, Argentina's peso was worth one U.S. dollar. The switch is a partial abandonment of the dollar peg that Argentina adopted in the early 1990s in a successful bid to end hyper-inflation that crippled the economy for much of the decade.
Although Argentina has tamed the inflation beast, its goods and services have suffered in foreign and domestic markets. Argentina has opened its economy to foreign investment but it suffers from bloated government payrolls and inefficient health and pension systems that effectively drain income from government coffers.
Despite a $40-billion international bailout in December, Argentina has been hamstrung by a three-year recession and political resistance to further austerity measures demanded by the international community to stabilize the economy.
The government presented the new plan as a package of economic and trade incentives designed to boost domestic consumption of home-grown products because imports are now more expensive. But many economists weren't buying that, seeing it instead as a possible precursor to a general devaluation.
"This could be the first step in a more profound change in the currency regime," said Jose Carlos Faria, an economist with Deutsche Bank in Sao Paulo, Brazil.
Argentina's stock market was closed for a national holiday Monday but its bonds were clobbered in international trading with yields rising on some issues by more than 2 percentage points. All eyes will be on Argentine banks when they reopen today to see whether depositors try to protect their savings by withdrawing pesos while still convertible to dollars at an equal rate.
