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. Last Updated: 07/27/2016

Central Bank Gets Set for Work

BUENOS AIRES, Argentina -- Dormant for a decade, central bankers in their offices at 266 Calle Reconquista, have woken up to find they have a job to do: steering Argentina's monetary policy as the peso is freed from its 10-year peg to the U.S. dollar.

Their success or failure in keeping the currency on an even keel and halting a slide back to the hyperinflation of the 1980s will make or break efforts to save South America's No. 2 economy from all-out collapse. Already, the country is broke by nearly four years of recession.

To succeed, analysts say the central bank must be hawkish on inflation and resist any government attempts to print money wantonly -- a tough test in a country where politicians have a track record of printing banknotes to spend their way out of difficulties.

Such profligacy in the 1980s sparked 5,000 percent inflation, killed only by anchoring the peso to the dollar in 1991.

Since then, each Argentine peso in circulation had to be backed by one U.S. dollar, putting the central bank in a straitjacket by forbidding it to print money or shift interest rates like its counterparts elsewhere.

Whatever monetary tack the U.S. Federal Reserve took automatically became Argentine policy. Central bankers here spent most of their days keeping the banking system supplied with cash and doing the national accounts.

But the dollar peg collapsed last week after Argentina -- on its fifth president in two weeks -- finally defaulted on its staggering $141 billion public debt.

The new government of President Eduardo Duhalde, who wants to reactivate the economy by devaluing the peso, announced Sunday it was easing the dollar exchange rate to 1.4 pesos for import, export and large business transactions.

Ordinary Argentines must buy any hard currency they want on the open market, meaning that when banks open, the central bank will again be controller of money supply, watcher of inflation and lender of last resort. That won't happen until at least Friday after the central bank announced the "banking holiday," which began amid an outburst of social unrest last Dec. 21, would not be lifted as scheduled Thursday.

Authorities late Wednesday did not elaborate, but said more time was needed to finalize details before fully reopening the banks.

As perhaps could be expected, the bank's offices and corridors were abuzz with excitement and apprehension Wednesday, as its president, Roque Maccarone, and a team of technocrats put the finishing touches on their new statutes.

Preserving one tradition hallowed by central bankers the world over -- speaking to the press only off the record, one top official described the mood as "frenetic."

"The central bank is at the epicenter of the success or failure of what Duhalde is trying to do," said Chip Brown, chief economist at Santander Central Hispano in New York.

On Wall Street, analysts' concerns focus on Duhalde's track record as a traditional, big-spending populist. During two stints as governor from 1991 to 1999, he virtually bankrupted Buenos Aires province, leaving it with a massive deficit, bloated payroll and $4.6 billion in debt.

It is not yet clear whether Maccarone will stay on as central bank chief.

But Brown said whoever fills the position "will need the hide of a rhinoceros and must be as independent as can be" to resist widely expected pressure from Duhalde to print reams of new banknotes.

Local media has reported that the government plans to print 4 billion pesos ($2.85 billion) and another 2 billion federal bonds ($1.4 billion) to pump up the deflated economy.

"If they print money like that, it will go straight onto the country's waistline as inflation," said Brown. "And then it will be very hard to keep the currency steady. Markets tend to be more agile than governments."

Ricardo Hausmann, a former World Bank chief economist, also urged a tough anti-inflationary stance in an interview Wednesday with the El Cronista business daily.

"I am worried there is no clear definition of the new monetary regime," he said. "Inflation is controlled with a sustainable monetary target and clear rules. Announcements so far have promised everything but that."

John Welch, chief Latin American economist at Barclays Capital in New York, said "the central bank must act immediately to pin down inflation."

But even with a firm hand at the central bank helm, Welch predicted the peso will slip to 2.4 to the dollar by year end, taking inflation to as high as 27 percent for the year.