To: Hawkmoon who wrote (5181 ) 12/4/2001 8:52:02 AM From: John Pitera Read Replies (1) | Respond to More on Argentina:maintain convertibility at the expense of the credibility of its banking system, a move that we believe will haunt the country for years to come given the aversion foreign investment holds towards capital controls . This weekend, the government introduced measures to limit the ability of depositors to gain access to pesos or dollars in their bank accounts. For the next three months, depositors will only be allowed to withdraw $250 a week from their accounts, meaning that any transactions over the $250 limit, must be facilitated via the use of either credit and debit cards or checks. Not to be outdone, the government decided to outlaw the use of peso loans , while interest rates on peso deposits can no longer be higher than on those deposits with dollars. The measures, which also include limits on the availability of currency for tourism and imports are not surprisingly intended to encourage dollarization in an attempt to thwart a further run on the country's banks.Dollarization would have some immediate benefits , as it would remove the devaluation concerns that have led to a run on peso deposits. Once this obstacle is out of the way, lower interest rates would help to stimulate investment and perhaps more importantly, reduce the burden of debt service. The logistics of dollarization are also supported by the fact that since the inception of convertibility in 1991, peso and dollars have been used interchangeably on a 1 to 1 basis. In addition, the pronounced shift from peso-denominated to dollar-denominated deposits clearly suggests that the public is more comfortable with the dollar, a dynamic that eliminates any social backlash. Of course, dollarization also works when considering that reserves in Argentina exceed the monetary base. unleash a deflationary spiral in Argentina that would only exacerbate the current slowdown. This gets back to our thoughts that one of the most influential drivers of weakness in Argentina has been the rigidity of the peso peg, particularly when considering the fallout surrounding the devaluation of the Brazilian real back in early 1999. Argentina's economy has contracted some 6% since the devaluation of the real, as domestic output has been crowded out by cheaper production platforms in Brazil. more than 100 manufacturers in Argentina , including Ford and Fiat, have shifted operations to Brazil in an effort to lower costs. Not to be outdone, Fate SAIC, Argentina's largest tire maker, has recently been forced to shift its exports away from Latin America and towards Europe. Such shifts have wreaked havoc on internal confidence as capacity cuts have filtered down to the end user level. This trend is only likely to intensify going forward when considering our recent focus surrounding the heightened push of multinationals to protect profits by shifting production to countries such as Mexico, Poland, Hungary and China, where lower input costs offer some reprieve at the margin
