At the Mercy of the Markets

Argentina, Latin America's second largest economy, has abandoned its policy of pegging its currency, the peso, to the dollar.

The already devalued currency is floating freely for the first time in a decade after a week-long closure of Argentina's banks and currency markets.

On Monday, Argentina’s central bank opened currency exchange houses and loosened controls on bank deposits.

It is a last-ditch attempt to stave off complete financial collapse. Argentina has defaulted on public debts amounting to 141 billion dollars.

Voting with their feet

"The real test for this policy will be on Wednesday, when the bank holiday ends," said Omar J Borla, a senior economist with Santander Investment in New York.

"The government is trying to force the population to accept the peso when it is obvious that the population prefers dollars. So we can expect strong pressure on the peso", said Borla.

The central bank says it has the reserves to defend the local currency, and that there will also be restrictions on the sale of dollars on the open market.

But observers doubt that the government has sufficient foreign currency reserves to prevent the peso from sinking like a stone.

Argentina, the government called for urgent help from the International Monetary Fund.

And the move to float the peso was designed to get international support and new loans from the IMF. Jorge Remes Lenicov, the economy minister is due to travel to Washington for talks with the fund.

A crumb of comfort

The G7's final communique threw Argentina a crumb of comfort by welcoming its latest policy measures as "steps in the right direction."

But the G7 stressed that Buenos Aires needed to work closely with the International Monetary Fund in achieving conditions that are conducive to growth before it releases any more money.

Analysts warned yesterday that foreign-owned banks, already nervous about the imploding economy and political unrest, may decide to cut their losses and pull out of Argentina altogether.