BUENOS AIRES, Argentina — Argentina's banking curbs aimed at avoiding economic collapse were under threat in the courts Wednesday, compounding the bleak outlook of welling civil unrest and a currency slide.
Vice Economy Minister Jorge Todesca warned the creaking financial system could collapse if the Supreme Court overturns unpopular limits on cash withdrawals and a freeze on savings that have enraged the recession-weary Argentine public.
The Central Bank stepped in to prop up the newly devalued peso on Tuesday just three days after it began floating freely on the foreign exchange market for the first time in a decade, while angry crowds smashed offices of banks and foreign-owned utilities in the north to protest the cash crunch.
President Eduardo Duhalde, two weeks into the job as the fifth president since December, met his Cabinet on Wednesday to discuss the 2002 budget and relaxing the banking curbs.
Ministers also mulled using troops to guard frontiers and distribute humanitarian aid to free up civilian police to patrol streets under threat of looting and rioting.
"But there won't be soldiers on domestic security issues," said Duhalde's spokesman Eduardo Amadeo. The constitution bans the military from domestic security unless the police are overwhelmed and the president seeks their help. The armed forces have made it clear they want no home security role.
But with problems on the home front mounting, there was some support from abroad. The International Monetary Fund said it was encouraged by plans to eventually scrap the current dual exchange rate system, which has an official fixed peso rate for exporters alongside the floating rate for general use.
"Obviously the Supreme Court has (the curbs) under analysis," Todesca told local radio. "The effect would be that people would go and take their money out of the banks . . . And it would bankrupt the banking system."
The government last week stiffened already stringent banking curbs introduced to head off a bank run by nervous investors, decreeing banks must change some checking and savings accounts into fixed term deposits and only start returning dollar deposits to savers from January 2003. In an extension of measures to protect banks from a massive bank run by panicky savers, all checking accounts above $10,000 and all savings accounts above $3,000 have been turned into fixed-term deposits, untouchable for at least a year.
Savers meanwhile can still only withdraw up to 1,500 newly devalued pesos from bank machines a month.
Duhalde has described the bank curbs as a "time bomb" but says rising poverty, with a million people joining the ranks of the poor in the 1990s and 650,000 falling into poverty around Buenos Aires alone last year, is the greater evil.
Riot police dispersed protesters smashing bank branches in the town of Casilda in Santa Fe province north of Buenos Aires with tear gas on Tuesday in scenes reminiscent of rioting and supermarket looting that toppled the elected government last month and left 27 dead.
With foreign exchange and partial banking holidays rolled over for weeks, there was nothing savers could do to protect their money before the government devalued the peso by 29 percent for exports and floated the peso on foreign exchange markets for transactions by the general public.
But while contagion to other emerging markets has been deemed limited by governments and markets alike, multinationals with major investments in Argentina have taken serious hits.
General Motors Corp. said on Wednesday an "unfavorable effect" from Argentina's crisis had impacted on its earnings.
Argentine telecom Impsat has defaulted on its bonds after a 30-day grace period on interest payments had lapsed.
The Buenos Aires stock market was closed again on Wednesday due to a liquidity squeeze stemming from the banking curbs. Traders said the deposit freeze left most investors without money to cover transactions, making trading nearly impossible.
The market has been closed for most sessions since Dec. 20 when Fernando de la Rua resigned as president amid street riots and financial chaos.
The newly floated peso for large-scale transactions in the foreign exchange market opened at 1.85/1.90 (buy-sell rate) to the dollar on Wednesday, with the sell rate implying a 47 percent fall from the old one-to-one rate to the dollar that reigned for a decade.
Duhalde promised on Tuesday to float the currency altogether within five months, breaking the dual exchange rate system that fixes the peso at an official rate of 1.40 pesos to the dollar for exports alongside the free-floating rate.
Some, however, expect the government to be forced to ditch the fixed rate peso sooner.
"Our view is that FinMin (Jorge Remes) Lenicov will be forced to float the currency in the short-run (by the IMF and the market), and that the peso will necessarily show the first wave overshooting behavior that the market is expecting (perhaps by going above 3/USD)," IDEAglobal said in a research note.
An IMF technical mission is currently in Buenos Aires advising the government, while a full mission from the Fund—which extended $22 billion in credit between late 2000 and end-2001—is due to visit at the end of the month.
Argentina has said it could ask international lenders for another $15 billion to $20 billion to help dig it out of a hole after it partly defaulted on its $141 billion public debt.