Once-Proud Patacon Reissued as Local Scrip in Argentina

By Anthony Faiola
Washington Post Foreign Service

LA PLATA, Argentina--The sterling patacon, the official coin in Buenos Aires Province until the adoption of the Argentine peso in the late 1800s, was once a
symbol of pride for the nation's most populous and prosperous region. But last week, a paper patacon began a bizarre comeback alongside the national peso as a
sort of secondary currency -- this time as a symbol of economic desperation.

This patacon is a bond issued by the cash-strapped provincial government because it doesn't have enough money to pay its suppliers, pensioners and 180,000
employees. Only instead of selling these bonds to willing buyers, the government is using them as legal tender to cover its expenses. Officially, they have a one-to-one
exchange rate with the peso and are redeemable at 7 percent interest when they mature a year from now.

Officials here insist that the provincial government has no choice but to issue patacones -- essentially printing its own money -- to meet its financial obligations.

Yet less than a week after its debut, the patacon is trading for about 15 percent less than the peso. Angry workers have taken to burning patacones in trash cans in
protest. Furious teachers have kept the province's 4.5 million students out of school during three weeks of strikes.

"You try waking up one day and finding out that part of your salary is being paid in some new, weird currency that many merchants refuse to accept," said Raul
Daroqui, a 52-year-old teacher. "And then tell me how you'd feel about it."

The patacon is the latest of five such "provincial currencies" in recession-plagued Argentina, where several local governments are on the verge of insolvency. The rise
of provincial currencies represents an unusual economic experiment in a nation that has a tough road ahead despite an anticipated $8 billion bailout announced last
week by the International Monetary Fund. The rescue package came as economists feared that Argentina's brush with default on its national debt could spark a new
bout of financial chaos in emerging markets.

Essential to Argentina's ability to emerge from its economic morass, experts say, is the capacity of the federal and provincial governments to maintain pledges to the
IMF to dramatically slash public spending and eliminate deficits by year's end. That will be painful in a nation already suffering a third year of recession, but especially
hard on regional governments.

The provinces owe about $22 billion in debt, far less than the $128 billion owed by the federal government. But many provinces have disproportionately high
numbers of residents in public jobs, making cost-cutting more difficult. And the federal government, hemmed in by its promises to the IMF, is saying no to emergency
requests for provincial assistance. It is even trying to cut the portion of tax money that goes to Argentina's 23 provinces.

Meanwhile, foreign lenders have shunned the bond sales once used by provinces to raise cash. So the provincial governments are essentially issuing IOUs to their
citizens, hoping to make good on them either when the economy recovers and tax receipts rise or when international lenders turn friendlier.

Currency experiments are by no means new in Latin America's third-largest economy. In a bold move to stem hyperinflation in 1991, the Argentine peso was pegged
to the U.S. dollar at a one-to-one rate. That brought unprecedented strength to a national currency once more valuable as wallpaper. But it also imposed tight
monetary restrictions that has kept the peso overvalued and prevented the government from printing new bills to prod the economy and cope with financial crises.

No such laws restrict the provinces.

Some see forcing bonds on the citizenry as a draconian approach to fiscal balance, especially because the new currencies follow severe cuts in public salaries and
pensions for retirees. Others, however, say they could help create an exit to the crisis if used correctly.

"If this is used as a fiscal cushion to help make ends meet while the provinces undergo serious fiscal restructuring, then this is a good thing," said Martin Redrado,
chief economist for Buenos Aires-based Fundacion Capital. "But if they rely on these as long-term ways to avoid tackling corruption or fighting high deficits, this
could turn into a big problem."

Carlos Ruckauf, the province governor of Buenos Aires, insisted last week that he simply "could not have paid" workers, retirees or contractors without issuing part
of the payments in patacones. Buenos Aires Province, stretching from the limits of the capital to the edge of arid Patagonia, has been delaying payments to workers
and suppliers as it struggles with a projected $2 billion budget deficit.

Now, he argues, the patacon will help energize the economy in his province in the same way that minting new cash can spur economic activity in sovereign nations.
Ruckauf even suggested this week that the federal government should consider issuing such bonds on a national scale, creating a dual national currency system.

But state workers such as teacher David San Millan, 40, argue that the provinces are essentially creating an unfair, two-tiered monetary policy. Inside the local
teachers union in the provincial capital of La Plata, San Millan held out his paycheck stubs. The philosophy teacher, who works 14 hours a day in three teaching jobs,
normally earns 1,800 pesos a month. In his July paycheck, received just last week, provincial budget cuts had wiped away 600 pesos, while the rest of his salary was
split roughly 50-50 between patacones and pesos.

Now, he is desperate. He can pay a maximum of only 30 percent of his utilities, such as telephone and electricity, in patacones. The local Wal-Mart and many large
grocery stores in the province are also accepting a maximum of only 30 percent of the value of purchases in bonds. Worse, the bank where he pays debts on his Visa
card, which he used last month to make major repairs to his cars, will not accept patacones at all.

"I feel as if we've gotten the short end of the stick because the government knew we were the easiest targets," he said.

Along the streets of La Plata, many merchants, searching for respite in the recession, have posted signs advertising they will accept bonds for 100 percent of
purchases. McDonald's has launched the PataCombomeal, which can be paid in patacones. But other signs advertise that some merchants will not accept the pretty
pieces of paper bearing the bearded founder of La Plata on background shades of pink and baby blue. And most of those who do accept bonds will not provide
change in pesos.

With the recession killing sales, Marcelo Di Lorenzo, owner of Booz men's clothing store, has been accepting bonds for 100 percent of his client's purchases since
they were launched last week. But since he can't pay his suppliers in the city of Buenos Aires with bonds because they have no value there, he uses the bonds for
personal expenses.

"I'm using them to buy food and to pay parts of my electricity and phone bills at home when I can," he said. "But I'm not holding on to them. I take them in, then try to
unload them as quickly as possible. I still have faith in the peso, but there's no telling what a patacon is really worth."

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