BUENOS AIRES (Reuters) -- Talk by Argentina's government of adopting
the dollar should not be taken lightly, according to experts who say it would
resolve questions about peso devaluation and would not be hard to do.
Since Brazil devalued the real currency last week, an increasing number
government officials and economists have suggested the best thing for
Argentina would be to get rid of the peso.
President Carlos Menem proposed last week that his economy minister
study the possibility of adopting the dollar as the common currency, first in
the Mercosur trade bloc and then in all of the Americas.
For Argentina, that option is very real because its currency board has
pegged the peso to the dollar since 1991.
"Its possible," said Gustavo Canonero, head of research for Mercosur at
Deutsche Bank Global Markets. "If there is confidence in the banks, it could
basically be done overnight."
Under Argentina's currency board system, the Central Bank can only print
as many pesos as it has dollars in reserve. The more dollars in reserve, the
more pesos in circulation and the more loans available to fuel growth.
What would make the switch to dollars possible right now is that foreign
currency reserves are at record levels, meaning a wholesale exchange of
pesos into dollars by the population could be achieved. And without the
peso, large dollar reserves would be unnecessary.
"Basically what you need is to have enough foreign reserves to exchange
liabilities of the Central Bank, which is what you have now," said Canonero.
Argentina's history of runaway hyperinflation in the 1980s had already
it an economy where the dollar is widely used as a store of value. Few
Argentines can remember when contracts to buy or rent property were not
carried out in dollars.
With the currency peg to the dollar, the level of "dollarization" has increased
with some economists estimating that more than 60 percent of financial
transactions are carried out in dollars. Cars are now bought in dollars and
mortgages are rarely taken out in pesos.
Standard & Poor's, the credit-rating agency, already has taken note.
given several Argentine firms investment-grade ratings because their
revenues are mainly in dollars. This makes their chances of defaulting on
foreign debt lower than the government's.
"The proposal of dollarization has two virtues," Gabriel Rubinstein, head
Duff & Phelps Credit Rating Co's Argentine office, wrote in business daily
Ambito Financiero Tuesday. "As a minimum, it (the proposal) reaffirms the
commitment to the peg and as a maximum it optimizes the peg by definitively
leaving behind the ghost of devaluation."
The advantage for Argentina in adopting the dollar is that it would finally
the incessant speculation that has followed every recent currency crisis in
Latin America-- the flight of capital.
Brazil's devaluation leaves Argentina as the only major Latin American
economy not to devalue its currency at some stage since economic reforms
swept across the region at the beginning of the 1990s.
Copyright 1999 Reuters.