NY Times. Argentine Leader Vows to Retain Currency Peg to Dollar
September 14, 1998
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By CLIFFORD KRAUSS
UENOS AIRES, Argentina -- It has become almost a daily
ritual. President Carlos Saul Menem and his chief economic
advisers take every opportunity to promise that they will not retreat
from the government's fixed exchange rate that pegs the value of the
Argentine peso to the American dollar one to one.
Such pronouncements have often preceded huge devaluations in Latin
America.
But most Argentine economists and Wall Street analysts are taking
Menem at his word, at least for now, despite concerns that the
currency peg could push up interest rates and unemployment.
"I think it will hold," said Jorge Mariscal, chief investment strategist for
Latin America at Goldman, Sachs. Before devaluing, Mariscal said,
Argentina would, in a severe crisis, probably "dollarize" its economy
as Panama has for decades -- replacing its currency with dollars.
In part, the cautious optimism that Argentina will not have to devalue
comes from the slight strengthening in the Japanese yen in recent
weeks. That has relieved concerns that China will have to devalue,
which in turn has helped Hong Kong sustain its currency peg to the
American dollar. But if the yen slides again, or the Brazilian real
suddenly collapses, Argentina could face deep financial trouble.
"At this point the only way I could foresee a change is if capital flight
were so massive it would mean everyone would convert their pesos
into dollars," said Martin Redrado, a former Menem adviser who runs
an economic research center here. "But so far the Argentine banks
have weathered this crisis very well."
Indeed, the Argentine program has attracted global attention recently,
with Indonesia and Russia considering similar policies. Indonesia
rejected a peg to the dollar while Russia has yet to adopt a rescue
plan.
All five presidential candidates vying to replace Menem in elections
next year have promised not to replace the peg because of fears that
a change of policy could mean a return to economic mismanagement.
Faced with an inflation rate of 2,300 percent and a run on the banks,
Menem installed the currency peg in 1991. Within weeks, the inflation
rate plummeted and has stabilized at around 1 percent in the last three
years.
Currency stability and an aggressive government program of
privatizing public agencies drew a flood of foreign investment, which
in turn stimulated strong economic growth rates that peaked at 8
percent last year.
The currency peg is set by a law that prohibits the government from
printing new pesos unless they are backed by dollars or gold reserves
in the central bank. Other laws require private banks to keep 25
percent of their reserves in the central bank. And as added insurance,
the government has negotiated lines of credit with a number of
investment banks, including Goldman, Sachs; Morgan Stanley and
Lehman Brothers.
Despite the growing economic crisis in Venezuela and Brazil, the
Argentine government reports that it has $24.5 billion in reserves in
the central bank, slightly more than the total amount of pesos in
circulation. Even more impressive, local economists note, is that
private bank deposits actually grew last month by five-tenths of a
percent despite the bad news from Asia and Russia.
"The tangible economic gains from the convertibility program argue
heavily in favor of retention of convertibility despite any ill
consequences," said Lawrence Goodman, chief economist at
Santander Investment, the investment banking arm of Banco
Santander.
Goodman noted that when faced with a similar economic crisis after
the Mexican devaluation in 1994, Menem did not budge from the peg
despite rising interest rates and an unemployment rate that climbed as
high as 18 percent. Unemployment has since fallen to 14.2 percent.
Still, convertibility has a price. Since it is linked to a strong dollar,
Argentine exports are expensive and are dropping. According to the
latest government statistics, Argentina's trade deficit in July climbed to
$741 million, more than double the amount of the month before. Since
30 percent of Argentina's trade is with Brazil, a devaluation and
deepening recession there over the next several months would only
make the Argentine deficit grow faster.
Copyright 1998 The New York Times Company |
