New Plan to Bolster Argentina

President Duhalde's plan envisages a devaluation of the peso, a dual currency system, "sharp" spending cuts and possible limits on the prices of goods and services to prevent an inflationary burst.

On Sunday, the lowest house of Argentinea's congress pulled him one step closer to that plan, approving sweeping powers allowing Duhalde to undertake vast economic reform. The Senate will debate the bill Sunday night, but is expected to approve it by the end of the day.

With the new plan, Duhalde, Argentina’s fifth President in two weeks, plans to end a decade-old, one-to-one peg of the peso to the dollar. The peg had been blamed for the four-year slump as the country formally entered into default on a $ 141 billion public debt.

Dual exchange rate

Sen. Oscar Lamberto, touted to become Treasury Secretary said that a free-floating exchange rate system would exist alongside an official fixed exchange rate. But he did not specify how much the currency fixed rate would be devalued from the one-to-one peg of the peso to the dollar. One of Duhalde's top aides has said the plan is to devalue the peso by around 30 percent.

"The idea is that there be two (currency) markets," Lamberto said. "An official market, established by the monetary authority ... and a free market, for non-priority transactions in which the currency will fluctuate according to market (forces)."

But it remained unclear how the dynamics of the twin exchange rate would work and whether banks would quote the official or the floating rate.

In accordance with the demands of the International Monetary Fund and the US government, the Argentinean government also plans a "sharp" reduction in public spending, and expected to see "favourable results" in six months, Lamberto told a local radio station.

Panic reaction

But the word "devaluation" had already set alarm bells ringing throughout the recession-struck country.

Even before the official announcement, several shops began raising prices to hedge against devaluation. Medicines such as insulin became increasingly hard to get. Duhalde is now forced to ask neighbouring Brazil for emergency drug shipments.

Devaluation - necessary pain?

But economists say that devaluation will further throttle the flagging Argentinean economy in the initial stages.

It will lead to wage cuts and slash the savings of millions of people, lead many companies into bankruptcy and raise the prices of basic goods from flour to gasoline and radios.

Worse-hit will be those millions of Argentineans, who earn in pesos but hold debts in dollars – such as for cars and mortgage payments.

But the government plans to soften such a blow by converting dollar debts into pesos at the current exchange rate. This measure is hoped to shield the average Argentine from the worst effects of the devaluation,

The Peronist government hopes devaluation will only be a short-term sacrifice for Argentina's 36 million people, eventually boosting growth in Latin America's third largest economy by reducing labour costs and making exports cheaper.

Earlier Bank of England Governor, Eddie George told the BBC, "I think it's very difficult to see how a devaluation can be avoided and although it may cause short-run pain, I think in the medium- to longer-term, it may prove to be helpful for the Argentine economy" .