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Argentine lower house sets peso devaluation in motion

Measure gives Duhalde broad reform powers

SHARE Argentine lower house sets peso devaluation in motion

BUENOS AIRES, Argentina — Argentina's lower house of Congress gave approval late Saturday to an emergency economic plan in a key vote granting President Eduardo Duhalde broad powers to devalue the peso and try to rebuild the shattered economy.

The Chamber of Deputies voted overwhelmingly to approve the general outlines of the bill in an early victory for Duhalde, who took office Wednesday as Argentina's fifth president in two weeks. The lawmakers then went line by line over the bill, preparing to submit it to the Senate — where Duhalde's Peronist party holds a majority — on Sunday. Senate approval was virtually assured.

The legislation would grant Duhalde special powers to ease the peso's decade-old one-to-one peg with the dollar, reform the banking system, control prices and protect local industry and jobs. It marks a sea change in economic policy, shifting Argentina away from a fixed currency regime and unbridled free market practices.

Although the bill did not specify a new peso rate, government officials have indicated there would set a fixed rate of around 1.4 pesos to the dollar for finance and business transactions. Ordinary Argentines would have to buy hard currency on the open market, probably at a higher rate.

The Senate was expected to begin considering the bill Sunday, clearing the way for Duhalde's government to devalue the peso. Both houses of Congress are dominated by the president's Peronist Party.

Presenting the bill Friday, Duhalde told lawmakers he needed special powers to rebuild the crumbled economic foundations of a country whose banks, currency and political institutions have been devastated by nearly four years of withering recession.

In their marathon debate Saturday, the lawmakers received new proof of the calamitous state of the nation's finances: The 2001 budget deficit is now expected to top $11 billion, nearly twice the target agreed to last year with the International Monetary Fund.

Cabinet Chief Jorge Capitanich said plummeting tax revenues from an economy in a tailspin were to blame for "the shocking figure."

Declaring a "public emergency in economic, financial and exchange rate" policies, the bill before Congress aims to "create conditions for sustainable economic growth" that will allow the government to renegotiate Argentina's staggering $141 billion debt.

Mired in nearly four years of bitter recession, Argentina last week defaulted, missing a $28 million payment on a foreign bond for the first time. The emergency plan seeks to spread the pain of devaluation across all sectors of the economy.

Moving to protect indebted Argentine families, Duhalde wants loans up to $100,000 to be switched into pesos at the old parity rate of one peso to the dollar. Also helping families to pay their bills, he ordered power, water and gas bills currently denominated in dollars to be switched to pesos at the one-to-one rate.

The plan also called for a 180-day freeze on job layoffs, and companies firing staff during that period will have to pay double compensation.

Meanwhile, banks could lose out from the devaluation as loans converted to pesos spell big dollar losses for them. But they are to be compensated with government bonds issued in hard currency and backed by a new tax on oil exports.

Perhaps the plan's most controversial point is the extension of a partial freeze on Argentines' bank accounts, introduced by ousted President Fernando de la Rua on Dec. 1 to prop up the financial system after savers yanked $2 billion in one day in a run on banks. The plan counts on using citizens' hard currency savings as a temporary reserve cushion.

Penned by Economy Minister Jorge Remes Lenicov, the plan is also expected to include a tricky dual exchange rate, widely criticized by economists.

"In the past, these policies of multiple exchange rates and price controls have never worked," said Fernando Losada, Latin American economist at ABN-Amro in New York. "But in fact, there's no such thing as a plan yet, until they give us a clue on what they will do with fiscal policy," Losada said. He said the government's budget proposal would be "crucial."

With an $11 billion hole in the accounts, balancing the budget will likely be impossible without assistance from the IMF, which cut off Argentina's funding Dec. 5 after the previous government failed to deliver on balanced budget promises.

Many Argentines fear a return of the currency chaos and hyperinflation of the 1980s, when money changers stood on nearly every street corner. Many businesses already were hiking prices to cover an expected jump in import costs while appliance stores, pharmacies and supermarkets raised prices as much as 20 percent.