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It Was Supposed to Float - Not Sink!
Subject Devaluation, Economic Growth
Topic International Finance Monetary Policy
Key Words Devaluation, Exchange Rates, Default, Economic Growth
News Story

The value of Argentina's national currency, the peso, plummeted throwing the country into a deeper financial crisis. Increasing concern over the failing currency and domestic economic problems caused Argentines to dump the peso, dropping a record 25 percent in one day. The International Monetary Fund and the U.S. Treasury are reluctant to provide additional aid to Argentina until it reduces government spending and adopts other reforms. Argentine President Eduardo Duhalde is losing popular support and unless he can stop the peso's fall, his ability to govern is questionable.

Argentina dropped the 1-to-1 dollar to peso peg in January and allowed the peso to float as a means of determining its value. Since the peso was freed from its dollar peg, it has lost 74 percent of its value. The dollar peg was in effect for a decade and was established as a means to control the country's hyperinflation. Inflation in Argentina in the 1980s was so high that prices for many goods changed by the hour. Eliminating the peg has revived fears of hyperinflation especially as the floating peso has already led to price hikes.

Argentina's peso problem is a part of an economic crisis that is sweeping the country. A country that was once the wealthiest in Latin America, has suffered from a devastating four-year recession and a massive debt default. One out of every four Argentines are unemployed and half of the population is living on less than $2 a day. As incomes fall, the decline in the value of the peso has increased prices and made it more difficult to purchase needed goods.

The government has tried to stop the peso's freefall, but without success. Argentina's central bank has spent more than 15 percent of its dollar reserves in the past two months to prop up the peso. It now has only $12 billion in reserves left and has decided to stop intervening in the currency market.


(Updated May 1, 2002)

Questions
1. What is hyperinflation? What did Argentina hope to accomplish by pegging the peso to the dollar?
2. Why has the fall in the value of the peso resulted in increased prices?
3. Many Argentines are lining up in front of exchange agencies to buy dollars. What are they hoping to accomplish? Does this help or worsen the peso crisis?
Source Anthony Faiola, "Argentine Crisis Deepens as Peso Plunges," The Washington Post, March 26, 2002.

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