A different view of Argentina's currency situation

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1st Official Post

    (This story will appear in the June 30, 2018 issue of Forbes. )



    CRY FOR ARGENTINA: THE IMF IS COMING


    ARGENTINA IS in economic trouble--again. But the country has an opportunity to turn the economic world upside down.


    Its conservative president, Mauricio Macri, is seeking a deal with the IMF for a $30 billion credit facility. Since his surprise win in 2015, Macri has been lackadaisical about tackling runaway spending, massive borrowing and rampant cronyism. Now the peso is under assault, as the government has been pressuring the central bank to buy more bonds with money created out of thin air--a surefire way to stoke inflation. Argentina has wrecked its currency time and again and seems on its way to doing so once more, the peso having lost 20% of its value this year.


    Macri is holding the rotten hand dealt by his two corrupt, tyrannical predecessors, Cristina Kirchner and Néstor Kirchner. But Macri won't find salvation with the IMF. Argentines loathe that agency, because during its last round of austerity measures, which were imposed 18 years ago, unemployment rose to 20%.


    There's a simple way for the beleaguered president to stop the currency rot immediately: Buy pesos in the exchange markets with the government's foreign reserves--about $50 billion at last count--until the peso recovers all the ground it has lost. In fact, with that war chest, the government could purchase Argentina's entire basic money supply.


    Critics scoff that such a move won't work. After all, Argentina already spent nearly $8 billion in exchange operations without stopping the slide. But these skeptics are missing a rather blatant error Argentina made: The central bank bought pesos, thereby reducing the supply, which was a good thing, but then it turned right around and increased supply by buying bonds. That's the equivalent of using a bucket to scoop out water at one end of a pool and then pouring it back in at the other end.


    Macri should send his central bankers a simple memo: Cease such nonsense immediately, and reduce the monetary base until the peso/dollar rate goes from 25-1 to 15-1.


    When the crisis passes, which it quickly would, he should consider something truly radical: Make the dollar Argentina's official currency. People would gladly turn in their pesos for dollars at a 15-1 rate. Given their country's sorry history of monetary mismanagement, Argentines know it's only a matter of time before the peso is vaporized again.


    Ecuador, Panama and El Salvador already use the greenback. Even though Ecuador was recently ruled by an anti-American leftist, he quickly gave up the notion of trying to reintroduce a local currency--the people wouldn't stand for it.

    • Official Post

    This is something I've been suggesting for quite a while, but people scoff at the idea, mainly Argentines of course who so far have come up with zero in the way of solutions.

    Ecuador is a prime example of this currency conversion actually working and their inflation rate is now minuscule. This bizarre dance with the peso has to come to an end and frankly I don't know why they continue.

    The other night we had another heated discussion at a family dinner and I suggested this, but the reaction was shock horror.

    Tangent: how is Ecuador's use of the dollar made possible? What kind of agreement does the country have with the US, to use the paper and metal currency? Which country pays for producing the bills/coins and replaces worn bills with new ones?

    This sudden devaluation makes the country again cheap for the majority of the members of this forum, (as I assume their incomes are in dollars). I am glad for this, at least some people could have a relief.

    I have not such advantage but I clearly believe that with this high value of the dollar we can be more competitive and increase our exports. By the way, I never see in my boyhood young people lavishly spending money going to exotic places like Polinesia, Indonesia and other strange countries exactly in our antiphodes. The normal young people were traveling only to USA or western Europe, where at least you can have a common language or at least you could understand the signs as they were in our common alphabet.

    The main issue is that if we shall keep the advantage of an overvalued dollar, inflation must not be automatically translated to the internal costs.

    • Official Post

    I earn in pesos, so that's me screwed lol.

    Ecuador doesn't print its own money any more and since its hyperinflation of over 90% in the late 90s, it's now down to around 5% and it seems that the benefits of dollarisation far outweigh the downsides.

    Here's a fascinating article on the subject.

    http://www.coha.org/examining-…dollarization-on-ecuador/

    But on the other side of the coin, due to the worldwide fall in the price of crude oil, the cost of living in Ecuador has increased considerably, since it's an oil producing nation.

    "Some shoppers come from as far as Quito, a five-hour drive south of the border. Ecuadorians purchase goods in Colombia en masse due to a simple fact: prices in Colombia have become significantly cheaper. For example, a 50-inch TV costs $1,300 USD in Ecuador, but less than $800 USD in Colombia."

    "I earn in pesos, so that's me screwed lol."

    I am sorry for that, I believed that you, as a British expat, were earning in Pounds.

    But anyway, the example of Ecuador, as you quote, has been already done in Argentina during the 1990's when a Peso was a dollar. This experiment failed and since our expenses were always more than the incomes (a permanent illness in Argentina economy), all exploded in 2001, when De la Rua did not devaluate a small quantity. He stubbornly alked loans to the IMF and finally the situation exploded in the worst way.

    The only way is the adjustment through sweat, sacrifice and a keen, straight administration. No miracles in the economic field.

    • Official Post

    One to one is not quite the same as dollarisation.

    Anyway, reading through the history of the convertibility plan that eventually went bad, the same arguments over the Argentine economy were being tossed about then and since.

    https://en.wikipedia.org/wiki/Convertibility_plan

    It would take a brave president to propose total dollarisation, bearing in mind this history. But if you took the peso out of the equation completely?


    This extract from the wiki piece is worth reading, if only to highlight that there are certain rules that should be abided by:


    The main qualities of an orthodox currency board are:

    • A currency board maintains absolute, unlimited convertibility between its notes and coins and the currency against which they are pegged, at a fixed rate of exchange, with no restrictions on current-account or capital-account transactions.
    • A currency board's foreign currency reserves must be sufficient to ensure that all holders of its notes and coins can convert them into the reserve currency (usually 110–115%).
    • A currency board only earns profit from interest on reserves (less the expense of note-issuing), and does not engage in forward-exchange transactions.
    • A currency board has no discretionary powers to affect monetary policy and does not lend to the government. Governments cannot print money, and can only tax or borrow to meet their spending commitments.
    • A currency board does not act as a lender of last resort to commercial banks, and does not regulate reserve requirements.
    • A currency board does not attempt to manipulate interest rates by establishing a discount rate like a central bank. The peg with the foreign currency tends to keep interest rates and inflation very closely aligned to those in the country against whose currency the peg is fixed.

    The Argentine currency board violated all these rules at one time or another, except that of a fixed exchange rate. Full convertibility with the U.S. dollar became jeopardized upon implementation of exchange rate controls that provided a preferential exchange rate for exports. The currency board was allowed to hold up to one-third of its dollar-denominated reserves in the form of bonds issued by the government of Argentina. It acted as lender of last resort and regulated reserve requirements for commercial banks. And it engaged in monetary policy activities. The impact of all this was to reduce the credibility of the Argentine government's intent, and to put speculative pressure on the peso, despite the peg.

    Macri does at least project the right image to the rest of the world however I'm afraid very little will change for the better in the long run. What's stopping this country from advancing is its location.

    Quote from Rice

    How so, UK Man ? I'm not following the idea that geography is destiny.

    I'm no expert but I just think S America as a whole has the wrong image not only on the economic front but all the other dodgy stuff that goes on in this part of the world.


    I know a chap who works for a German engineering firm who would have to fly over several times a year to the factory based in the province. He loved the country but hated his work visits because of the mess he would always have to fix.....mostly production issues and union matters. He said it reminded him of the way things used to work in Europe 30+ years ago. Needless to say the factory was eventually sold after the company got fed up having to deal with the issues and decided to invest elsewhere....as far away from S America as possible. :D

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    Quote from UK Man

    Needless to say the factory was eventually sold after the company got fed up having to deal with the issues and decided to invest elsewhere....as far away from S America as possible. :D


    I am not at all surprised by this account. Some years ago, I met online an Italian lady who was sent to manage operations of a company located near Bahia Blanca, in a small town. She was offered this position as a promotion, but she had a hard time during the two years she was here and eventually resigned and burned out. Nobody was paying attention to her orders, because of various reasons: she was a woman, she was not Argentine, her Spanish was not taking off and just because everybody turned their back when it was time to work.


    She had to walk a fine line between getting the job done and not upset local worker unions. She did not survived. She went back to Italy and was desperate to find another job, as moving back on her own proved very expensive.




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