BUENOS AIRES — Ending agonizing days of uncertainty, Argentina finally embarked on a new economic path Sunday night, ending its 10-year experiment with a dollar-based currency by declaring an immediate devaluation of nearly 30%.
As expected, the nation is also stopping payment on $135 billion in public debt, the biggest default ever by a country.
The government of new President Eduardo Duhalde finally acted Sunday night after the Argentine Congress granted him sweeping powers to reshape the economy and at the same time nullify the Argentine peso's one-to-one peg to the U.S. dollar. That was the economy's blessing, then its bane.
The introduction of a dollar-pegged peso in 1991 ended Argentina's nightmarish cycles of hyper-inflation because it immediately restricted the nation's ability to print money to the number of dollars it had in reserve. But that became a handicap after Brazil, the country's chief trading partner--and economic rival--devalued its currency in 1999, making Argentina's products less competitive at one fell swoop.
The emergency plan follows a month of civil disturbances that left 27 people dead and forced the resignation of two presidents.
After a weekend free of the demonstrations and violence that had caused the crisis in Latin America's third-largest economy to deepen, the nation today awaits the popular verdict on the new economic measures. In the short term, they seem sure to cause pain, including inflation and wage cuts, especially among government workers whose salaries have already been reduced.
It also remains to be seen whether the government can successfully maintain the new exchange rate of 1.40 pesos to the dollar. History has shown that a devalued currency finds its own equilibrium and that government attempts to support a certain level of value usually fail.
The plan calls for all dollar-denominated loans and contracts of up to $100,000 to be converted to pesos--a measure that could prompt a banking crisis. Facing billions of dollars in loan losses, Spanish banks that have established themselves here in recent years were said to be threatening to shut their doors and leave the country.
U.S. investors who bought privatized government banks, utilities and energy companies here in the 1990s are also being exposed to huge potential losses because the terms of such contracts, on services ranging from electricity to telephones, are also being converted to pesos.
