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.

For text http://interactive.wsj.com/articles/SB1007431618681455280.htm
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FMF Policy Bulletin\11 December 2001