Dollarisation might save Argentina

As has been widely reported, Argentina has become an economic basket case. Just last week, the government imposed controls on bank withdrawals in order to stem a run on the banks. Economists say Argentina's only way out is either crippling devaluation or dollarisation of its currency.

The International Monetary Fund expanded Argentina's standby loan agreement in August – but the U.S. has put its foot down against any further assistance.

  • The passage of Argentina's peso convertibility law a decade ago rescued the country from years of inflation and trade protectionism, economists say.

  • It set up an effective currency board – tying the Argentine peso to the dollar and leaving no possibility for the country's central bank to manipulate the peso.

  • Although the peso was stabilised and trade revived, the politicians in Buenos Aires never controlled public spending – resulting in an accumulation of $132 billion in debt as the government borrowed more and more money.

  • Any solution now requires a restructuring of this debt, a reduction of the public deficit and a return to peso credibility.

    Argentina wants still more international cash. But economists say at this late stage, only dollarisation may be enough to restore peso confidence.

    Source: Editorial, Don't Cry for Argentina, Wall Street Journal, December 4, 2001.

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    For more on International Currency Issues

    FMF Policy Bulletin\11 December 2001

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