Argentina to ditch dollar peg

ARGENTINA is preparing to abandon its currency peg to the US dollar as the ten-year-old experiment ends in crisis and political confusion.

To save face it will not - at least initially - devalue the official currency, the peso. Instead the government will print a new currency, the argentino, pump it into the economy by using it to pay public sector wages, and then let it devalue instead.

Banks, which are short of dollars, will issue cash withdrawals in argentinos. The authorities believe this may soon enable a lifting of the $1,000-a-month limit on cash withdrawals.

New finance secretary Rodolfo Frigeri said last night he was preparing an 'orderly exit' from the disastrous currency peg. Moving too quickly could cause widespread bankruptcies, as most Argentines earn in pesos but have dollar debts. He said: 'This will allow us to begin an orderly exit from convertibility and give us a tool to boost economic recovery.'

Shopkeepers and businessmen were marking up prices - even before the announcement - as they anticipated inflation.

Coming just days before the launch of the euro, the Argentine disaster is a reminder of Britain's own disastrous foray into an artificial currency peg, the Exchange Rate Mechanism, which ended in fiasco nine years ago.

Tying the peso to the dollar initially squeezed out inflation in Argentina - and then imposed vicious deflation while the country ran up huge deficits trying to maintain the link. The economy has not grown for four years and one fifth of workers are unemployed. Last week the financial crisis erupted in riots which left 27 dead. Government tax revenues this year will be down 23%.

New president Adolfo Rodriguez Saa, who took office on Sunday and immediately suspended all payments on the country's £91bn overseas debt, spent Christmas Day huddled with advisers working on an emergency economic package.