Argentina: largest default in history

ARGENTINA - On Sunday Argentina announced the largest sovereign debt default in history, declaring it would stop paying its $155bn public debt. The new government headed by president, Adolfo Rodriguez Saa, said the country would resist pressure to devalue the peso and create a "third currency" in an effort to resuscitate the economy.
Argentina - On Sunday Argentina announced the largest sovereign debt default in history, declaring it would stop paying its $155bn public debt. The new government headed by president, Adolfo Rodriguez Saa, said the country would resist pressure to devalue the peso and create a "third currency" in an effort to resuscitate the economy.

In a speech to congress Mr. Rodriguez Saa said the third currency would allow funds to be channelled into social programmes to calm the social unrest which led to the collapse of Fernando de la Rua's government last Thursday and left 28 people dead.

"The payment of foreign debt has been prioritised over the debt this country has with its own people. We are going to take the bull by the horns. I announce that the Argentine state will suspend payments on the foreign debt," Mr Rodriguez Saa said. His declaration was greeted with roars of "Argentina! Argentina!" from the public galleries. He predicted the International Monetary Fund would look favourably on his plan and added that Argentina would eventually renegotiate outstanding debt.

The new currency, to be issued as negotiatable bonds, would float alongside the pesos and US dollars in circulation, he added. These new bonds will be used to absorb the numerous bonds that have been issued by local provinces to meet their spending requirements. The peso would remain pegged to the dollar at a one-to-one rate, under Argentina's decade-old "convertibility" system.

"Everyone wanted convertibility to remain, because it represented stability. However, the system has created a depression," said Peter West, Latin America economist at BBVA. "The only way out is a controlled shift to a more competitive currency."

"A devaluation would mean reducing the salaries of workers," the new president said. Instead, "we will propose the introduction of a third currency to inject liquidity [into the Argentine economy]. This will not hurt anyone and will bring a benefit to Argentine households."

With the new floating "third currency" the government will be able to print money to pay its bills. Controlling the printing presses will mean the difference between possible reflation of the economy and a return to the misery of hyperinflation.

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