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					MR, THE NEW YORK TIMES, EUA, June 19, 2001

Argentina Moves to Overhaul Peso's Peg to the Dollar

The Associated Press

Domingo Cavallo announced new policies last week aimed at pulling Argentina out of its slump.

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B UENOS AIRES, June 18 — Argentina has announced a complex set of new economic policies, including the installation of multiple exchange rates, a move that effectively amounts to a devaluation to help the country's exporters. But the plan was met by sharp criticism on Wall Street and roiled markets. Faced with new indications that industrial production and consumption remain stalled after three years of recession, Economy Minister Domingo Cavallo announced late on Friday night a number of new tax and trade measures that are intended to increase the expendable income of the middle class and to lower costs for businesses. The most important measure, at least symbolically, was a decision to overhaul a decade-old policy of pegging the peso one-to-one to the dollar without resorting to an outright devaluation. A floating exchange rate will now be applied to exporters and importers basing the value of the peso on the average of the value of the dollar and the euro. This means that Argentine exports will be 8 percent cheaper on Tuesday than they were last week, which should help Argentina's competitiveness in Brazil, Chile and Europe, the markets for nearly two-thirds of its exports. While imports will be more expensive because of the weaker peso, the impact will be somewhat diminished by a reduction in import tariffs on consumer goods. Nevertheless, there will be strong incentives for Argentine consumers and businesses to buy locally produced merchandise, a development that is likely to increase tensions with Brazil. Mr. Cavallo chose to make the announcement at the beginning of a three-day holiday weekend to limit panicky bank withdrawals and turbulence on Argentine markets. He sought over the weekend to make the case that the move was not a devaluation. "This is not a departure from convertibility,` Mr. Cavallo told reporters. "From a monetary point of view, a peso continues to be worth one dollar." But reaction from abroad was swift and harsh from many economists and investors who warned that tinkering with the currency peg would only raise the likelihood of an eventual devaluation. Others noted that multiple exchange rates in countries like Brazil and Venezuela have produced inefficiency and fraud. "The market was looking for additional spending cuts, a reform of the pension system, downsizing of the public sector and a new round of labor reform," said Walter Molano, head of research for BCP Securities, a Connecticut brokerage firm. "Instead, the government introduced a set of distortions that will provide political relief with few economic improvements." Argentine bond yields soared. The floating-rate bond due in 2005 fell 3.6 percent in price, pushing its yield, which moves in the opposite direction, up to 16.2 percent. "We expect the latest measures to leave interest rates and bond yields too high to allow growth," Bear, Stearns said in a report released today. "We think Argentina's trade changes, whether considered a two-tier exchange rate system or a differential taxation-rebate regime, are an important step backward." In Brazil, the currency tumbled and the stock market in Brazil fell 4.2 percent, in a continuing sign that the nation's economy is being hurt by the Argentine economic crisis.

Mr. Cavallo first began toying with altering the currency exchange peg — a policy known as convertibility — in April, shortly after he took office, by introducing a bill to Congress pegging the peso to a combination of the euro and the dollar as soon as the two currencies reach parity. Investors then sent interest rates on Argentine bonds soaring. But the bill has since stalled in Congress, and the euro has slid further away from parity, making the proposed shift more remote and hypothetical. Interest rates, meanwhile, have been coming down substantially after a $29.48 billion debt swap two weeks ago, deferring $16 billion in debt to the end of 2005 and forestalling a possible default. But the economy remains in the doldrums. A recent release of economic data showed that industrial production in May was 2.8 percent below the month last year, while the unemployment rate continued to hover around 15 percent. The Economy Ministry tried to reassure investors today by releasing a statement arguing that the new measures were intended to improve competitiveness at a time of sliding currencies among Argentina's global competitors while strengthening public accounts. The reaction from Argentine leaders was generally positive, particularly among producers of autos, shoes, steel and farm products, which will not only experience a rise in the value of their exports but also a rise in the costs of the imports they compete with. "This is an excellent measure," said Cristiano Ratazzi, president of the Association of Automobile Manufacturers. "It will make Argentine industry more efficient competing with Brazil and equalize the situation given the lower value of the real." Included among the other initiatives announced by Mr. Cavallo was a measure allowing homeowners to deduct mortgage interest payments from their income taxes. Gasoline taxes will be reduced, while taxes on diesel fuel will be raised. Mr. Cavallo said the government would reduce value-added taxes to 16 percent from 21 percent in two years and reduce tolls on rural highways to bring down transportation costs in the coming weeks.

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