Saturday April 14 9:39 PM ET
Argentina May Add Euro to Peso Peg

By Carlos A. DeJuana

BUENOS AIRES, Argentina (Reuters) - The Argentine government announced on Saturday it was readying a bill to incorporate the euro into its monetary system when the European currency reaches parity with the U.S. dollar, a move that would break the peso's 10-year-old fixed peg to the greenback.

Economy Minister Domingo Cavallo said the bill, which could be sent to Congress as early as next week, would allow the government to fix the peso to an average of the U.S. dollar and euro. He said that would make the peso more stable and possibly give exporters a competitive advantage.

The move would only take place when the euro reaches parity with the dollar, a one-to-one exchange rate that some economists believe might be over a year away.

``Since they (the euro and the dollar) fluctuate so much between themselves, one way to further stabilize (our) currency is to peg ourselves to an average of the two, by which our currency would be much more stable than what the other currencies are to each other,'' Cavallo said at a press conference.

``This isn't a devaluation. All to the contrary. This is to give our currency more support and more stability.''

The euro is currently worth about 89 U.S. cents and a Reuters poll last month suggested the euro was unlikely to hit parity with the dollar over the next 12 months.

The Argentine peso meanwhile has been pegged at one-to-one to the dollar since April 1991 in a system known as Convertibility, which Cavallo implemented during his first stint as economy minister in 1991-96.

Although Convertibility wiped out years of four-digit inflation and ushered in a period of explosive growth, it has also made Argentina, Latin America's third largest economy, one of the continent's most expensive countries to live in and do business.

Cavallo regained control the reins of Argentina's economy last month amid a serious financial and political crisis, promising to kick start economic growth which has been stagnant for 33 months.

He said the peso would continue being pegged one-to-one to the dollar until the proposed law took effect or if Congress decided to reject the bill.

``The good thing about Convertibility is that there can't be any surprise decisions, no arbitrary decisions,'' he said.

Mixed Reaction To Currency Basket

The energetic economy minister has said the new system would make sense for some Argentine businesses like exporters, who do considerable with trade with Europe.

According to the Economy Ministry, the European Union was Argentina's second-largest trade partner after its Mercosur trade bloc partners with some $4.6 billion in exports last year. The United States, Canada and Mexico were third with $3.7 billion.

But some economists have said Cavallo is confusing Argentines and investors with his euro-talk at a moment when stability and confidence in the fragile economy are key.

The country has been under scrutiny by investors for weeks amid fears that its stagnant economy, heavy foreign debt financing needs and large budget deficit would impair its ability to make its debt payments. While those concerns have subsided somewhat, investors are still anxious to see signs of real growth in an economy that contracted 0.5 percent in 2000 and 3.4 percent in 1999.

-----