Argentine State Bank Backtracks on Dollar Limits

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08/03 14:09

Argentine State Bank Backtracks on Dollar Limits (Update4) By David Plumb

Buenos Aires, Aug. 3 (Bloomberg) -- Banco de la Nacion, Argentina's largest bank, reversed a day-old decision to sell fewer dollars at a one-to-one rate to the peso, even after several branches ran out of the U.S. currency.

Banco de la Nacion, the only bank in Argentina that sells dollars at the official exchange rate, said customers can exchange as much as 1,000 pesos at that rate. Yesterday the state-owned bank lowered the maximum allowed to 300 pesos. Higher fees for exchanges above that limit remain in place.

Several of Banco de la Nacion's branches have run short of dollars daily as Argentines hoard the U.S. currency on concern the government will be forced to give up a decade-old fixed exchange rate and devalue the peso. In and around the capital city, Argentines say they've had trouble finding dollars.

``Every time I went to the banks, they had excuses,'' said Elsa Castaneda, who was unable this week to buy dollars with the money she earned from selling her car. ``We don't want to hold any pesos.''

Limiting access to dollars or increasing the fees charge for exchanges may be the only way for the government to maintain a currency system it started a decade ago by fixing the peso one-to- one to the dollar. The government wants to keep that exchange rate to help avoid default on $130 billion of debt, as a devaluation would drive up the cost of servicing foreign debt.

The government's benchmark floating rate bond rose 0.188 to an offer price of 69.438 to yield 30.5 percent after the U.S. indicated it would back an acceleration of loans from the International Monetary Fund to Argentina to help the country cover its obligations.

U.S. Treasury Undersecretary John Taylor began two days of meetings with Argentine officials today in Buenos Aires.

Currency System

Argentina tied its currency to the dollar in 1991 to tame inflation after the rate climbed above 5,000 percent. The currency system, known as convertibility, requires the country to hold one dollar for every peso in circulation.

A surge in demand for dollars has effectively devalued the peso at local exchange houses, which bought pesos in the past month for as little as 95 cents.

Banco Nacion yesterday increased the exchange rate to 1.006 pesos per dollar from 1.003 for transactions over 300 pesos. By reversing its policy today, the bank's new exchange rate now applies to transactions over 1,000 pesos.

Private banks such as Citigroup Inc.'s Citibank NA sold dollars for about 1.012 pesos at Buenos Aires, or just under 99 cents per peso.

`Shortage'

Many banks such as ABN Amro continue to offer their clients one dollar for every peso in electronic transactions over $1 million, said Marcelo Nicoletti, who manages about $400 million for ABN Amro Asset Management.

``There's a shortage of physical bills from so much demand,'' Nicoletti said.

Argentines have stepped up withdrawals from banks, with deposits falling by $5.8 billion in July, or about 7 percent of the total, the biggest one-month drop in six years.

Cash and gold reserves fell by $4.39 billion to $16.69 billion during July in part as Argentines forced the central bank to retire pesos from the financial system. Reserves are down 33 percent, or $8.46 billion, so far this year.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial%20News&s1=blk&tp=ad_topright_topfin&T=markets_bfgcgi_content99.ht&s2=ad_right1_topfin&bt=ad_position1_topfin&middle=ad_frame2_topfin&s=AO2roxhSIQXJnZW50

-- Martin Thompson (mthom1927@aol.com), August 03, 2001

Answers

A 33% decline in the nation's financial reserves? Hard to believe. Man, that's a killer of a drop. The IMF had better hurry up with their latest rescue package.

-- Wellesley (wellesley@freeport.net), August 03, 2001.

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