“Argentino Likely to Spark Ultra-Inflation“

The Argentina`s interim government decided to issue new currency, `Argentino`, in order to revive the nation`s bruised economy, but its announcement raised fears of a currency devaluation that could spark the inflation.

The economic experts admitted that new currency would promote the consumer activity, but at the same time they warned that it could return Argentina to the spiraling inflation, which tore apart South America in the 1980s with the inflation rate of 5,000 percent. They point out that it is very obvious that the over-issued new currency would bring on the spiral inflation rather than the revival of economy and the promotion of consumption.

Considering such fear, the Argentine government plans to prudently pursue the new currency policy in order to prevent the oversupply of new currency.

Interim Finance Minister Rodolfo Frigeri told on 26th that "the new currency would allow a controlled departure from the dollar peg, which drove the domestic economy into the worst crisis. The government will increase gradually the amount of new currency for preventing the oversupply of new currency."

New interim President Adolfo Rodriguez Saa turned down the possibility of inflation, saying "we will back the Argentino with all assets of the state, including its embassies, the congress building and even the Casa Rosada government house."

In spite of such a public declaration, it is a dominant opinion that if Argentino will be circulated in the market, there will be a devaluation of new currency by 30-50 percent against dollar. Such fear was aroused by the fact that since the Argentino is not affected by the conversion law under which the existing peso is traded with dollar at 1:1 ratio, the Argentine government can issue the needed amount without securing the dollar.

The Argentine government also said that new currency would not be under the conversion law unlike the existing peso, suggesting that it would not rule out the possibility of depreciation.

Some Argentine businesses were believed to be marking up prices by up to 30 percent based on rumors of devaluation. And if the inflation will be realized, the workers will demand on the additional increase of wage.

Chip Brown, head of economic research at Santander Hispano Central in New York, said that "with the issue of new currency, people will avoid the Argentino which cannot be traded with dollars. As a result, dollars will be hoarded, and then pesos will be hoarded because the peso will be considered better than the Argentino."

Jong-Dae Ha orionha@donga.com