Argentina braces for currency fall

Lawmakers were poised yestereday to approve a peso devaluation and other emergency measures.

Nostalgia runs deep in Argentina. Even before its faltering economy produced an epic-sized default, and the country was thrust into its worst crisis since democracy was restored in 1983, Argentines were obsessed with their past triumphs.

But now a different variety of nostalgia appears to be emerging. Some call it the Ford Falcon syndrome, a reference to the classic gas-guzzler that inefficient Argentine automakers continued to turn out in droves 20 years after it disappeared from US showrooms.

The man whom some economists say is leading the step backward in time is the country's new president, Eduardo Duhalde, Argentina's fifth in two weeks. After four years of crippling recession, Duhalde and others are questioning whether Argentina's decade-long pursuit of free market reforms is the right solution.

With his appointment by Congress last Wednesday to finish the two years left in the term vacated by ex-President Fernando de la Rúa, the Peronist Duhalde is now promoting a number of emergency measures that would turn back the clock on liberal economic reforms.

On Friday, President Duhalde asked Congress for broad new powers to end the country's decade-old currency regime that pegs the peso to the US dollar, to intervene in the banking system, to institute price controls, and to protect local industry and jobs. It was approved overwhelmingly by the lower house of Congress late Saturday and was expected to be passed by the Senate yesterday.

Everyone from the International Monetary Fund in Washington to the traditional protectionists in Buenos Aires thought devaluation was necessary, if painful. But some analysts are concerned that Duhalde will follow it up with a return to the protectionism and failed policies that dominated the country's economy for half of this past century, until ex-President Carlos Menem changed course last decade and ushered in an era of stability.

"He must think he can defy gravity, because he's pursuing the same crash course that Argentines and the rest of Latin America rejected a decade ago," says Christopher Ecclestone, head of investment boutique Buenos Aires Trust.

Duhalde's embrace of the past can be partly explained by the nature of the Peronists themselves, whom Argentine literary giant Jorge Luis Borges once referred to as neither good nor bad, just incorrigible.

The party, founded by Gen. Juan Domingo Peron in the 1940s, has long dominated Argentine politics, thanks to a deft mix of populist policies, nationalist rhetoric, and political patronage. A weekend poll by Aresco consultancy showed 52 percent of Argentines "highly" in favor of Duhalde's stated economic plans and another 34 percent giving him "medium" approval - an indication of public confidence.

But at a time when the country is desperate for investment and international aid to prevent an economic crisis from exploding further, it is unclear how far Duhalde could actually turn back the clock even if he wanted to.

For starters, there's a wariness among economists that an expected 30 to 40 percent devaluation could spark a return to the chaotic days of the late 1980s, when 5,000-percent inflation was rampant. Already, everything from bread to computer parts has been marked up by as much as 20 percent in anticipation of the devaluation.

To contain inflation and fill an expected $11 billion budget deficit this year, government officials say a rescue package of at least $15 billion is needed from the IMF and other lenders. Otherwise, the country's cash-strapped banks, which are being forced to accept lesser-valued pesos for loans made almost entirely in dollars, will collapse.

But few expect the government's plan for reviving the country's moribund economy to elicit much support abroad. In fact, quite the contrary.

Already a swarm of powerful lobbies representing foreign companies have descended on Buenos Aires to fight government plans to introduce price and capital controls. The government is also taking heat for its plans to violate privatization contracts signed a decade ago and unilaterally lower the rates mostly foreign-owned utilities can charge for public services like water and gas.

"He's not just steering the economy into disaster, but he's breaking fundamental concepts like right to savings and the rule of law," says Abel Viglione, senior economist at local think tank Fiel. "No matter what economic policy is in place, that sort of trust takes several years, if not an entire generation, to rebuild."

But the stiffest opposition may yet come from the Argentines themselves. Despite widespread fatigue caused by successive austerity drives, such as limiting bank withdrawals to $1,000 per month, the overwhelming majority of Argentines still prefer the stability of the current economic model - despite its many shortcomings - to the disorder of a closed economy.

Surveys show that more than 70 percent of the public opposes any changes to convertibility, as the currency regime is known.

"Those who want to devalue are shameless," says Maria Estevez, a schoolteacher who earns $600 a month. "They want to hold us hostage and force us to buy goods that can be bought cheaper and better quality imported."

Instead of blaming globalization, most Argentines point to corrupt politicians and indifferent institutions for precipitating the current crisis.

For such an ambitious economic program to work requires a strong leader with popular support to implement it. But that's exactly what Duhalde most lacks. Although he's so far successfully rallied the country's political class behind him, Duhalde, a former vice president to Menem and two-time governor of Buenos Aires province, has been dogged by allegations of corruption throughout his career. His reputation as an old-style party boss was behind his defeat at the polls in 1999, when he posted the worst showing ever by a Peronist presidential candidate.