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Re: DOLLARIZATION, Argentina may want to adopt the Fed as its own as well.
Chapman, Spira & Carson - Disscusion

From: New York Times, Clifford Krauss, Buck Doesn't Stop: Now Argentina May Adopt it
Date: 5/5/99
Time: 8:58:09 AM
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Argentina is talking about really pegging the dollar to its currency, I mean, making the gringo dollar their owwn, something only Liberia and Panama have seen fit to do to date.

While this may sound revolutionary, it is only the abject failure of the euro that has not caused substantial interest in regional monetary policy. Some are even calling for a NAFTAized dollar to combate the edge that Europe may get.

We don't think that Europe is in any postion to compete with its economic house a mess. In the meantime the day may come. Argentina may be looking at the future which well could be now. Robert A. Spira Chapman Spira and Carson LLC

February 25, 1999

Buck Doesn't Stop: Now Argentina May Adopt it

By CLIFFORD KRAUSS

UENOS AIRES, Argentina -- A month after President Carlos Saul Menem first floated the idea of trading the Argentine peso for the U.S. dollar, U.S. and Argentine officials are considering the complexities of making the Federal Reserve the central bank of both countries.

But officials of both countries say there is a long way to go before negotiations take hold and actually produce a treaty. Still, no one is completely dismissing the idea that dollars could become the currency of Argentina and the Fed could become the lender of last resort.

Menem also went a step further by suggesting that neighboring Brazil resolve its economic crisis by pegging the value of its currency one-to-one to the dollar, just as Argentina did in 1991. That, too, would be a move toward replacing Brazil's currency, the real, with the dollar.

Argentine officials say that once Argentina and Brazil converted their currencies to the dollar, they could move the entire Western Hemisphere decisively toward a regional currency like Europe's new euro. More than likely, the officials say, Mexico would also follow Argentina's lead, and the hemispheric currency would inevitably become the greenback.

"It's a shocking novelty for a country like Argentina to make this kind of a proposal," said Carlos Fedrigotti, president of Citibank in Argentina. "President Menem has started the debate and it has to do with the future of not only Argentina but of the entire continent, which will have to eventually fall under the influence of the dollar in trade, capital flows and ultimately in geopolitics."

The dollar is already omnipresent in Argentina. Most cab drivers and restaurants accept dollars. ATM machines offer both dollars and pesos. Virtually all mortgages and apartment rental contracts are drawn up in dollars. Even cellular phone bills are stated in dollars and customers are free to pay in in either U.S. or Argentine currency.

As of Feb. 15, $36.9 billion in Argentine certificates of deposit were denominated in dollars compared with $13.6 billion in pesos. Nevertheless Menem's proposal to totally replace the peso with the dollar has been greeted by sneers by much of the Argentine opposition and the news media. Brazil has said it has no interest in the idea, although that could change if its currency continues to slide.

Federal Reserve chairman Alan Greenspan has expressed skepticism. Argentine private sector enthusiasts and government economists say the idea is probably years away from fruition, even as they argue that replacing the peso with the dollar would lower interest rates and boost foreign trade and investment.

But with only 10 months remaining in his term, Menem has made what he calls "dollarization" of the economy his top economic and diplomatic priority. Senior Argentine officials have begun informal talks with officials at the U.S. Treasury Department and Federal Reserve, and Deputy Treasury Secretary Lawrence H. Summers has encouraged the Argentines to make a formal treaty proposal.

"Dollarization could be just a good idea that disappears in a few months because of politics," Miguel A. Kiguel, Argentina's undersecretary of finance, said in an interview. "Or, it could be a good idea that will generate its own positive momentum. My guess is Argentina could be a very important pilot case that would open the door to other countries, mostly in Latin America, to adopt the dollar."

Today only Panama and Liberia, two tiny countries with long historical attachments to the United States, use the U.S. currency as their own. (Panama ran short of the greenbacks several years ago but generally it has had enough of them to go around.) And in no country in Latin America is the dollar exchanged anywhere nearly as freely as it is here.

Argentine economists note that in technical terms, converting Argentina into a dollar economy would be no large feat. Under the 1991 convertibility scheme, all peso notes issued by the Argentine central bank are backed by dollar or gold reserves. In the last year, all government bonds, even those sold on local markets, have been denominated in dollars.

Menem has asked his senior economic advisers to draw up plans to pay government employees in dollars and collect taxes in dollars, moves that would speed a transformation to a dollar economy.

Argentines became attached to the dollar in the 1980s, when inflation galloped so fast that people converted their paychecks to dollars as fast as they could. Of the $5 billion in Argentine bank accounts in April 1991, when the peg was installed, nearly 40 percent were in dollars. The peg virtually ended capital flight, and Argentine bank accounts have grown to $78 billion, 57 percent of which are now held in dollar accounts.

"Our people already can freely choose whether they deal in pesos or dollars," noted Sen. Domingo Cavallo, a former economy minister.

But by publicly raising the issue of a future replacement of the peso with the dollar almost immediately after Brazil devalued the real six weeks ago, government officials said Menem was sending a powerful signal to the international investment community that Argentina had no intention of following Brazil's example. They said Menem would convert Argentina into a dollar economy by emergency decree should the peso come under a severe speculative attack.

Menem's move succeeded in reducing the difference in interest rates between Argentine bonds and the lower rates on U.S. Treasury bills over the last month. And in another sign of renewed confidence, Argentine commercial bank accounts have accumulated funds since Menem first spoke of "dollarization."

Argentine officials said they want to negotiate a treaty with the United States that would make the Federal Reserve the lender of last resort in case an Argentine bank should fail. They also want the U.S. government to compensate the loss Argentina would sustain of $750 million in yearly interest earned from the U.S. Treasury bills the Central Bank currently holds. That interest would be automatically lost once the Central Bank sold its dollar reserves to the public to take pesos out of circulation.

To entice Clinton administration officials -- and eventually U.S. senators whose approval would be needed for any treaty negotiated -- Menem's advisers are drawing up a series of proposals. One would give the Federal Reserve a strong supervisory role over Argentine financial institutions. Another would guarantee that the Argentine government would control its fiscal and current account deficits. And a third would liberalize the Argentine private sector's ability to fire employees to make local businesses and products more competitive on international markets.

"The Fed and the Treasury," Kiguel, the undersecretary of finance, said, "are taking an interest."

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