Argentina devalues peso 30 percent

BUENOS AIRES, Argentina (CNN) -- Argentina has devalued it currency, the peso, by nearly 30 percent in an attempt to tackle the growing economic crisis.

The devaluation, announced on Sunday by Economic Minister Jorge Remes Lenicov, is the latest blow to the country's crippled economy as new president Eduardo Duhalde was granted sweeping powers to remedy the financial situation.

Global investors bought stakes in Argentinian utilities in recent years on the proviso that their fees would be indexed to the dollar, and they'll now see about a 30 percent loss in potential revenues with the devaluation.

VIDEO CNN's Lucia Newman describes the impact Argentina's newly devalued peso is having on businesses throughout the country (January 7) Play video (QuickTime, Real or Windows Media) Argentina devalues the peso in a bid to offset an economic crisis. CNN's Lucia Newman reports (January 7) Play video (QuickTime, Real or Windows Media)

And that, in turn, could jeopardize future international investment in Argentina.

"Our economy has totally collapsed," Lenicov said.

He asked foreign investors in Argentinian utilities, such as Spain's Telefonica, for their understanding and solidarity.

Lenicov said the country wanted to honor its commitments, but had to think about its own people first.

The minister said when he went to Washington, he and other Argentinian officials would try to renegotiate the country's foreign debt and that owed to multilateral lending institutions.

When asked how much money he would ask for in Washington, Lenicov said "We'll ask for however much we need to get out of the hole we are in -- 15 billion or 20 billion -- I can't tell you exactly."

He expressed confidence that the multilateral organizations would again lend the country money, based on its new austere budget and its sustainable economic plan, which he predicted would begin to show results in the next few months.

The bill granting emergency power to Duhalde cleared the Senate after it passed the Chamber of Deputies earlier.

Approval was expected because Duhalde's Peronist Party controls both houses of Congress.

The rescue plan includes a devaluation of the peso, which since 1991 has been pegged one-for-one with the U.S. dollar.

Lenicov announced the official devaluation rate, which puts the peso at a value of 1.4 to the dollar or 28.6 percent devaluation.

Another, parallel, rate will be announced soon. Lenicov believes that rate -- which will be used to purchase dollars and for tourism -- will not vary too much from the official rate.

The minister said the government would work on a new budget, which would be announced in three weeks, and which would include strict austerity measures.

Lenicov would not describe those measures, other than to say they would be "austere."

Argentina's government realized it had an $11 billion budget deficit for 2001, nearly double what it had originally forecast, due to a sharp drop in tax revenue caused by the severe recession.

Lenicov said he believed inflation rates would be kept down because there was so little money in circulation and because of the recession, which would prompt strong competition for people's money.

The minister said he would travel to Washington later this month to talk with U.S. government officials, as well as authorities from multilateral financial organizations such as the World Bank.

Political instability

The devaluation has Argentinians, already weary from four years of recession, bracing for new hardships, including the possibility of inflation and higher unemployment as the currency plunge forces businesses into bankruptcy.

On Sunday, many people took whatever pesos they had and flocked to stores to buy imported goods, particularly electronics, before the devaluation causes their prices to soar.

To prevent a run on the banks, the government had previously restricted how much money people could withdraw from their accounts.

Lenicov promised those restrictions -- allowing people to withdraw only $1,000 a month in cash -- would be eased over the next six months.

The economic mess in South America's second-largest economy has led to serious political instability.

Duhalde, a former vice president and provincial governor, is the fifth president in two weeks.

The country's elected leader, Fernando de la Rua, was forced to resign midway through his term last month after violent rioting.

Three other caretaker presidents came and went.

Pegging the peso to the dollar was intended to cure the hyperinflation which plagued Argentina, and it worked over the past decade.

But in recent years, some economists have blamed the dollar peg for exacerbating the country's recession by making Argentina uncompetitive in the world economy.

The county has also run up a $141 billion debt, and it is now in default to international lenders after the International Monetary Fund refused to extend any more assistance.

The IMF has harshly criticized the Argentinian government for spending beyond its means while debt continued to pile up.

The devaluation, along with reforms in the banking system, regulation of consumer prices and protection of Argentina's basic industries, are part of Duhalde's plan to try to revive the economy while trying to keep the lid on social unrest.

The new president has appealed to business owners not to raise prices to make up for the devaluation, which could trigger a spiral of inflation that would further erode Argentina's standard of living.