Argentina ponders Dollarization of their economy - WSJ:
Argentina Mulls Impact of Ceding The Reins of Monetary Policy
By DAVID WESSEL, CRAIG TORRES and JOSE DE CORDOBA
Staff Reporters of THE WALL STREET JOURNAL
After 18 months of watching one currency after another succumb to global speculators, Argentina is talking about taking the ultimate step: getting out of the national currency business altogether.
President Carlos Menem is asking his finance ministry to study the wisdom of forcing Argentines to rely exclusively on the U.S. dollar for everything from paying for groceries to making mortgage payments.
To Americans, junking one of the most tangible symbols of nationhood is as unimaginable as flying another nation's flag over the Capitol. But then, few Americans can comprehend the Argentines' horror of ever again experiencing the hyperinflation of the late 1980s, and their willingness to pay a heavy price -- economically and in national pride -- to avoid a recurrence.
President Menem's suggestion and the global financial crisis that prompted it highlight the shortcomings of the existing hodgepodge of currency arrangements. Countries such as Brazil, which had hoped neither to fix its currency rigidly to the dollar nor to let it float freely, have discovered that it may be impossible to maintain the middle ground. Brazil failed to prevent the market from pushing its currency outside of a set range, and now appears to be doing what Thailand, South Korea and Indonesia have had to do: letting the markets move their currencies freely.
The allure of the other extreme is demonstrated in Europe, where
Germany, France and nine other countries this month formally began replacing their national currencies with the euro. "If European Monetary Union succeeds, there probably will be a shift toward ... more currency unions and fewer currencies," Stanley Fischer, deputy managing director of the International Monetary Fund, predicted earlier this month.
Having rigidly fixed the peso to the dollar and neutered its central bank, Argentina already has subjected itself to all the economic disadvantages of lashing its economy to the U.S. and the Federal Reserve. Argentina's central bank cannot cut interest rates to resist recession, and it cannot serve as a lender of last resort to its banking system. That doesn't much matter to the Fed, given that it already has to worry about the international ramifications of anything it does.
"It's a small nuisance to have people 'central bank' to us as long as they decide that we make the monetary-policy decisions and don't care about them," says Alan Blinder, a Princeton University economist and former Fed vice chair.
In fact, a decision by Argentina to declare the dollar its sole currency would make surprisingly little difference to the U.S. Already, two-thirds of the $472 billion of U.S. currency in existence circulates outside U.S. borders. That hasn't posed many problems for the Fed, which manages the money supply more by buying and selling Treasury bills than by distributing currency. Technically, all the Argentine pesos on bank ledgers and the like would instantly become U.S. dollars, but that wouldn't matter much to the supply and demand for credit in the U.S., the Fed's primary concern.
Still, very few countries make the dollar their only currency. Panama adopted the dollar in 1904, and has enjoyed one of the lowest inflation rates in Latin American for nearly a century as a result. The down side, of course, is that Panama -- like Argentina with its fixed exchange rate -- is hostage to U.S. Fed decisions but has no say in Fed policy. "It would be only a slight exaggeration to compare Panama's control over its money supply to that of New Jersey's," says Fernando Monfredo, former administrator of the Panama Canal Commission.
And Panama is vulnerable in ways that other small countries aren't: In 1988, the U.S. tried to block the flow of new greenbacks to Panama to weaken Gen. Manuel Antonio Noriega. Panamanians got by with ratty, worn-out bills, but a scarcity of dollars contributed to chaos and deep recession. (In 1995, faced with heavy demand for physical dollar bills after Mexico devalued its peso, Argentina asked the U.S. Treasury for a speedy shipment of $400 million in cash.)
For the U.S., the major logistical problem that would be posed by Argentina's adopting the dollar would be exporting paper, but even that is manageable. The Fed's regional banks already ship tons of $100 bills to other countries, usually working through commercial Argentina would be relatively easy. The country has about $16 billion of peso notes and coins in circulation today. The Treasury's Bureau of
Printing and Engraving this year plans to produce 11.4 billion new bills worth $261.5 billion.
Economically, the U.S. benefits modestly from the widespread use of its currency abroad. To get dollars from the U.S., foreigners have to trade something of value -- marks, gold, oil, tequila. In return, the foreigners get a piece of paper that costs four cents to manufacture. This swap amounts to an interest-free loan to the U.S. government. It saves the U.S. government about $14 billion in interest payments, roughly the size of the total U.S. foreign-aid budget.
If Argentina, which now holds interest-bearing U.S. Treasury bills, were to rely exclusively on the dollar, it would have to buy paper currency (on which the U.S. pays no interest) by exchanging $16 billion worth of Treasury bills (on which it does pay interest). That would save the U.S. another $750 million or so in interest costs.
Argentina's history makes talk of adopting the U.S. dollar as its own more than just idle chatter. Disgusted by its central bank's inability to prevent hyperinflation, Argentina eight years ago put the central bank out of the business of printing money, created a new peso worth $1 each and passed a "currency board" law requiring the government to hold enough dollars in reserves so that every peso can be exchanged for a U.S. dollar. Inflation went from a peak of 5,000% in 1989 to roughly 1% today, an achievement as popular in Argentina as a World Cup victory in soccer.
The walls of El Portugues, a Buenos Aires steakhouse, offer a quick course in the country's sorry economic history. Framed on the wall are one-million-peso bills from the late 1980s that are worthless today, a 1,000-peso bill stamped "1 austral" on its face from an unsuccessful 1985 attempt to stabilize the currency, and the austral bills themselves, bitter reminders of the hyperinflation of the late 1980s.
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--Jonathan Friedland in Mexico City and Thomas T. Vogel Jr. in
Caracas, Venezuela, contributed to this article. |
