Argentine Economic Crisis - End of Fixed Exchange Rate

End of Fixed Exchange Rate

Further information: Fixed exchange-rate system and Floating exchange rate

After much deliberation, in January 2002 Duhalde abandoned the peso–dollar parity that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional "official" exchange rate was set at 1.4 pesos per dollar.

In addition to the corralito, the Ministry of Economy dictated the pesificación, by which all bank accounts denominated in dollars would be converted to pesos at an official rate. This measure angered most savings holders and attempts were made to declare it unconstitutional.

After a few months, the exchange rate was left to float more or less freely. The peso further depreciated, which prompted increased inflation (since Argentina depended heavily on imports, and had no means to replace them locally at the time).

Inflation and unemployment worsened during 2002. By that time the exchange rate had reached nearly 4 pesos per dollar, while the accumulated inflation since the devaluation was about 80%; considerably less than predicted by most orthodox economists. The quality of life of the average Argentine was lowered proportionally; many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.

Since the supply of pesos did not meet the demand for cash (even after the devaluation) complementary currencies kept circulating alongside them. Fears of hyperinflation as a consequence of devaluation quickly eroded their attractiveness, originally stated in convertible pesos. Their acceptability now ultimately depended on the State's irregular willingness to take them as payment of taxes and other charges.

While the Patacón was frequently accepted at the same value as the peso, Entre Ríos's Federal was among the worst-faring, discounted by an average 30% as even the provincial government that had issued them was reluctant to accept them. There were also frequent rumors that the Government would simply banish complementary currency overnight (instead of redeeming them, even at disadvantageous rates), leaving their holders with useless printed paper.