[stop-imf] NYT: Who Pays if Argentina Devalues Its Currency?

[Robert Weissman]

December 23, 2001

ECONOMIC VIEW

Who Pays if Argentina Devalues Its Currency?

By LOUIS UCHITELLE

Argentina's long-running financial crisis has finally become unbearable.
Stores are being sacked in eruptions of anger and frustration. People are
hungry. Unemployment approaches 20 percent. Recession is turning into
depression. And day after day, the endless debate over how to restart the
economy comes to dead ends.

Consider devaluation. It looms as a necessary measure, made more
necessary by
all the chaos last week. By law, the peso and the dollar have equaled each
other, one to one, for 10 years. But Argentina's economy is far less
efficient than America's, so costs, in dollars, have surged. A daily
newspaper, for example, now sells for the equivalent of $1.50. Even products
from Argentina's vast cattle herds — once the source of so much wealth —
are
losing ground. Leather shoes are being imported from Brazil, and some
cuts of
meat are, too.

Manufacturing is decimated. Argentine companies once made most of the toys
sold in the country. Now most toys are less expensive imports. Import
competition is similarly closing factories in other fields, and owners and
workers are crying, in unison, for relief through devaluation. Even many who
favor the chief alternative, "dollarization" — exchanging pesos for American
dollars — would devalue as a first step. That would lower costs before less
valuable pesos were exchanged for fewer dollars.

Devaluation, then, seems to an outsider like a necessary, straightforward
step in reducing the hardship that brought so many Argentines into the
streets last week, provoking the declaration of a state of siege, the
resignation of the economy minister, Domingo Cavallo, and then the president.
In an earlier government, Mr. Cavallo wrote the law that tied the peso
to the
dollar — making Argentina a magnet for foreign loans in the booming early
years of the link, then a pariah as the government tried to siphon money from
a shrinking economy to repay debt. "Now we know that our rigid system of
linking the peso to the dollar works against us in a recession," said Julio
Nudler, an economist and journalist.

Devaluation offers obvious relief. But visit Buenos Aires, as I did this
month before the street protests erupted, get into conversations, and
suddenly devaluation is not so straightforward after all. Up close, it comes
in several flavors, each one producing different winners and losers. In the
heated public debate over what to do next, only the imperative to
devalue is
obvious. But none of the alternatives seem to come out on top.

The unions, for example, favor devaluation, although they have opposed
it in
the past, arguing that devaluation dilutes wages. This time, generating jobs
is more important. Still, many Argentines, including union members, have
acquired debts denominated in dollars: car loans, mortgages, credit card
debt. Repaying dollar debt in devalued pesos is not fun. So there is a big
constituency for devaluing debt, too.

That bothers the creditors, of course. They offer a couple of alternatives.
Bank deposits these days are denominated in dollars, although the government,
to prevent bank runs, permitted very little withdrawal of bank savings
in any
currency. In one alternative, $100 in deposited savings would become 100
pesos worth, say, only $50. The devalued deposits would offset bank losses
from devalued loans.

In another alternative, the $100 deposit would become 200 pesos — still
worth
$100. Debts would not be devalued, but each depositor would have to pay a
special 30- or 40-centavo tax for each peso withdrawn. This tax would be used
to subsidize debtors, a disguised devaluation of debt. Argentine companies
with revenue in pesos and debts in dollars to foreign companies would
especially benefit from the subsidies.

Then there is the carrot approach. A $100 bank account becomes 100 pesos
worth $50. But the depositor has options. He can accept the devaluation or
acquire a bond with a face value of $100 payable with interest in the future,
when times, he hopes, will be better. The difficult choices posed by these
options help to explain why some middle-class Argentines sympathized
with the
protesters, or joined them.

Finally, the government owes tens of billions of dollars in public debt to
foreigners. Many of the "foreigners," it turns out, are Argentines with
dollar accounts in New York who bought their government's dollar bonds
in the
1990's, collecting more than 8 percent annual interest. As the bonds come
due, the holders are being told that the government wants to delay repayment
of principal for three years and to lower rates for the additional years
to 7
percent or less.

The bondholders can object and sue, in which case the government would
be in
formal default. Or they can accept the new terms, as many are, thus
acquiescing to backdoor, de facto devaluation.


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