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To: long-gone who wrote (32721)	4/28/1999 3:31:00 PM
From: Jim McMannis	Read Replies (2) \| Respond to of 116759

RE:"last list I had (around a year ago) showed Echo Bay." Looks like they were dropped along with ASA and PGU.

To: long-gone who wrote (32721)	4/29/1999 6:35:00 AM
From: Alex	Read Replies (1) \| Respond to of 116759

Dollars, Dollars, Everywhere Argentina's dollarization proposal puts currency competition on the table Competition between currencies has been proposed by some free market economists and was actually put forward by the British government as an alternative to a single European currency. It has been given a new relevance by Argentina's proposals for "dollarising" its currency. Currency competition is already a reality judged by the amount of foreign currency notes held for domestic purposes around the world. It is known as dollarisation because the vast bulk of such currencies consists of dollars. But it can apply to any currency. A recent International Monetary Fund study - Monetary Policy in Dollarised Economies - suggests that over half of all the $470bn of dollar notes are held abroad. Average foreign currency holdings of countries that have borrowed from the IMF since 1986 are equivalent to over 16 per cent of total "broad money" - banknotes plus bank deposits. Some individual countries hold very much more. The highest is Bolivia where 82 per cent of all money consists of dollars. Even in the UK over 15 per cent of broad money consists of foreign currencies. The IMF does not like foreign currency holdings because they complicate the setting of domestic monetary objectives. But the study tries to dissuade members from making dollar holdings illegal, as this would drive them offshore. Its main message is the long familiar one that dollarisation is a product of lack of confidence in domestic policies. It admits however that dollarisation has remained and even increased in several countries after "successful stabilisation". One halfway house is the currency board. This is based on an old British colonial system, but has been adopted by independent countries, of which Argentina is a prominent example. It has suffered less speculation against its currency than Brazil. Under a pure currency board the whole of a country's note issue and reserve deposits by banks have to be covered by holdings of dollars or other specified hard currencies. Countries with currency board features include Estonia, Lithuania, Bulgaria, Hong Kong and Bosnia. The most enthusiastic academic exponents of currency boards, Steve Hanke and Kurt Schuler, complain that Argentina does not have a pure currency board.* It has a central bank with limited independence in monetary policy and up to one-third of the monetary base can be backed by Argentine government bonds. There is of course always some chance that a currency board will be abolished by a future government. Because of this risk interest rates in currency board countries are higher than in the US. In Argentina this premium has recently been running at around 2½ percentage points on short-term interest rates and it was much higher during Mexico's "tequila crisis" of 1995. Carlos Menem, Argentina's president, would like to get rid of the premium to stimulate the country's economy which has recently been flagging. He proposes replacing the peso altogether by the dollar. He claims that this would add 2 percentage points to the underlying growth rate. The official preference is for a negotiated agreement with the US, which might be take two or three years to implement. The Hanke paper proposed unilateral dollarisation of the Argentine currency within 30 days. Although not official policy, this is welcomed in Buenos Aires as a reminder that Argentina could go it alone if necessary. This would be technically possible quite soon as Argentine dollar reserves are already more than sufficient to cover the existing holdings of pesos and bank reserves. The operation is further simplified by the fact that the exchange rate is one peso to one dollar. Some 27 small countries, including Panama and Puerto Rico, are already dollarised in the Argentine manner sense and the idea is under discussion in Hong Kong. But dollarisation by Argentina, which has a population of 36m, would be an altogether bigger move. Prof Hanke claims that growth has been 50 per cent faster in 1953-1993 in countries which are dollarised or have currency boards than in countries with orthodox central banks, and that fiscal deficits have been 40 per cent less. Nevertheless, action in Argentina is unlikely until after the October presidential elections for which Mr Menem is not eligible to stand. It is far from clear what a successor would do, but at the very least the currency board features would be retained. The US is obviously wary. Larry Summers, US deputy Treasury secretary, has warned that the Federal Reserve would continue to base policy on US domestic needs without taking into account Argentina. The Fed would not be prepared to act as a lender of last resort. How tragic would these limitations really be? The position would be similar to that of a European country which had adopted the euro but had no seat on the European central bank. The ECB does, irrespective of voting, have to take into account conditions in the whole euro-zone. But countries such as Ireland or Portugal - which individually account for a small proportion of the euro-zone's gross domestic product - do not find their interests mattering much anyway. Curiously, Prof Hanke denounces orthodox central banking as a form of central planning. But dollarisation also depends on a central banker - the Fed. The legitimate reply is that the Fed has a better record at providing low inflation and economic and financial stability than the great majority of emerging economies. Current proposals do not provide for any monopoly of the dollar. Argentina is already one of the most liberalised financial economies in the world and its citizens can hold any currency they desire. The dollar's lead comes from the fact that this is what peso deposits and notes would initially be converted into. Its legal tender status would merely mean that contracts would have to be settled in dollars if the currency of settlement was unspecified. The main calculable loss from dollarisation would be "seigniorage", that is state profits from the note issue. This only represents however about 0.2 per cent of GDP. It is also objected that dollarisation would conflict with proposals for a "Mercosur" currency for Latin American nations. The simple reply is that adoption of the dollar is a more promising prospect. Could an economic Eurosceptic who opposed British membership of the euro because he did not believe in a "one-size fits all" monetary policy logically support dollarisation by Argentina? He just about could. For he could say that the operationally independent Bank of England has by now established a good monetary track record. There is therefore an alternative domestic route to low inflation which has gained credibility. The same could not yet be said even of the more successful emerging countries. The implications of widespread dollarisation are sweeping. If Argentina were to make a successful move, other countries would be likely to follow. US leaders can say that they would take no notice of Argentina in formulating monetary policy. But they could no longer be indifferent if the greater part of the world's effective supply of dollars - not merely currency notes - were held outside the US. We would in practice then be near a dominant world currency and the Fed would become a world central bank. This is not an honour to which it aspires, but it will still need to think about it - as we all will. *A Dollarisation Blueprint for Argentina, Cato Institute, Washington The Financial Times, April 29, 1999