MercoPress. South Atlantic News Agency

Peso as strong as the Euro and the dollar

Argentina's super Economy minister Domingo Cavallo has once again shaken financial markets with his latest initiative: changing the current convertibility system of one Argentine peso-one US dollar, by making it extensive to one Euro.

However the catch is that the change is "long term", and will effectively take place only when the Euro recovers its value and is equivalent to one US dollar. According to Mr. Cavallo the driving idea behind the initiative is to establish a better balance with Argentina's trade partners, Europe represents a growing 30%, and 19% of the country's debt is in Euro bonds.

Once the two currencies are equivalent, the Argentine peso will quote according to a 50/50 mix, convertible into either dollars or Euros. But in spite of Mr. Cavallo's assurances not everybody is convinced and some even believe it could lead to a devaluation of the Argentine currency, since both the dollar and Euro will remain floating.

What happens if the Euro suddenly drops? "The same is valid for the dollar, and the peso would then be even stronger that the US currency", replied Mr. Cavallo. Actually when the European currency first started it cost almost 1,30 US dollar, but after falling consistently it dropped to less than 80 US cents and now is laboriously recovering just above 90 US cents.

Argentina's Central Bank president Mr. Pedro Pou, and no darling of Mr.Cavallo, stated in an open letter to President De la Rúa that it's not wise to meddle with the current convertibility system because markets "are very itchy about Argentine financial assets", and warned that "markets indicate that the future value of the dollar is 20/30% above its current one peso-one dollar parity".

"I believe it's not a pressing problem, businessmen have not asked for it and the main task now is to get Argentina moving out of its 30 months long recession", stressed Mr. Pou. Argentina's industry and farmers, particularly since its main trade partner Brazil devalued its currency 50% in January '99, are demanding a competitiveness boost, which could also mean a less rigid, more flexible exchange rate system.