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To: paul ross who wrote (41150)	9/27/1999 5:32:00 PM
From: Alex	Respond to of 116944

After Stalling for Time, Colombia Finally Floats Its Currency Bogota--Sept. 27--After a grueling two-week battle to defend its exchange rate, Colombia's central bank capitulated on Saturday, scrapping its crawling peg exchange band system and allowing the peso to float. U.S. analysts applauded the decision, saying it would facilitate more flexible monetary policy. But they warn that the peso is likely to overshoot to between 2,100 and 2,200 per dollar in the near term before stabilizing. For many in the foreign exchange market, the announcement brought a sigh of relief as the market had been rife with speculation about a float. Greg Anderson, financial economist at BankBoston foreign exchange, notes: "It allows [the government] to pursue monetary policy that is appropriate for the country without having to worry about what it will do to the band. This should give the central bank the ability to cut rates without having to worry about the effect on the band." Anderson believes that the peso will close the week at around 2,000 per dollar. Juan Pablo Chavez, Latin economist at IDEAglobal.com, expects the peso to weaken to around 2,150 per dollar near term. "The decision [to float] is appropriate and could help the central bank to start an easing cycle on interest rates, which will support domestic activity and the banking sector," he says. The benchmark DTF interest rate has hovered around the 18% mark for the past few months, down from the lofty level of around 37% last November. The sharp rise in rates last year has been blamed for squeezing economic activity and exacerbating the country's sharp downturn. Lower rates would also ease the government's debt service payments and help stimulate domestic activity. The International Monetary Fund announced today that it will provide a $2.7 billion financial aid package to Colombia. In conjunction with this program, the World Bank, the Inter-American Development Bank, the Andean Development Corporation, and the LatinAmerican Reserve Fund will provide $4.2 billion to help Colombia battle its steep recession. Analysts say the peso may be cushioned by this news as well as upcoming central bank sales of dollar-linked Treasury bills (TES). The central bank announced that it will auction on Tuesday $100 million TES, which will enable investors to hedge against currency depreciation. What has confounded many analysts is why the central bank stalled the flotation for so long, eroding its credibility in the process. Anderson explains that while the central bank has lost some credibility from saying "no, no, no, no, yes," the lesson learned from Brazil's devaluation of the real earlier this year is that when the flotation rumor circulates in the market for some time, it encourages financial institutions and corporations to hedge. And when Brazil ultimately devalued, there wasn't a banking sector crisis. "I'm sure Colombia watched this," Anderson says. "The best thing to do is to drag it out so that information is in the market and financial institutions can protect themselves from the risk. [The central bank] has lost credibility, but if it saved the banking sector from financial crisis, then it was worth it." By Lauren Foster, BridgeNews businessweek.com