>From: "Macdonald Stainsby" <[EMAIL PROTECTED]> >Reply-To: [EMAIL PROTECTED] > >STRATFOR.COM Global Intelligence Update >9 March 2000 > >Argentina: Dialing For Dollars > >Summary > >Central bank chiefs from Argentina, Brazil and Mexico attended a >conference sponsored by the Dallas Federal Reserve in the United >States on March 6-7 to examine the benefits that dollarization >could bring to their economies. Dollarization - adopting the U.S. >dollar as a country's sole currency - in the Argentine case could >well solve many of that country's economic problems. While >Argentine President Fernando de la Rua has not committed his >country to outright dollarization, his actions suggest such a move >is in the cards. > >Analysis > >Argentina is toying with the idea of dollarization - adopting the >U.S. dollar as its sole currency. Central bank chiefs from >Argentina, as well as Brazil and Mexico, attended a meeting >sponsored by the United States Federal Reserve board in Dallas >March 6-7 to examine the benefits of dollarization. While this >policy has its pros and cons, in the case of Argentina it is >economically feasible, even desirable - and therefore expected. > >Argentina's new President Fernando de la Rua - still on his >political honeymoon - has the political clout to manage the >dollarization process. Prior to taking office on Dec. 10, 1999, he >boldly promised a growth rate of least 4 percent for 2000. But in >order to increase growth, De la Rua must increase Argentina's >access to capital and decrease the cost of doing business. >Dollarization is an option for achieving these goals. > >Perhaps the most alluring aspect of dollarization for the Argentine >government is the degree to which it would hitch its economy - >which is in recession - to the soaring U.S. one. Such a direct >linkage would permanently force Argentina's at times robust >inflation in line with U.S. norms. Establishing a single currency >regime would lower the cost of trade with the United States. This >expanded trade would trigger an economic expansion that >recessionary Argentina desperately needs. > >More important than increased access to the U.S. market, however, >is increased access to U.S. capital - both in the form of direct >investment and lending. With the cost of exchanging currency >shrinking to zero, North American businesses would have a powerful >incentive to sink their resources into the Argentine economy. >Furthermore, lending rates to Argentina would drop to U.S. norms, >sharply reducing interest rate fluctuations. The reduced cost of >borrowing - and increased investor confidence - would spur domestic >economic growth throughout the Argentine economy. Cheap, long-term >loans would also be available to small businesses and homeowners - >something almost unheard of outside of the world's richest, and >most stable, economies. > >There is, however, a potential downside to dollarization. Argentina >would have to abandon all pretense of holding an independent >monetary policy, subjecting the country fully to the winds of >globalization. This is often perceived as a harsh surrender of >national sovereignty. Yet small countries that have dollarized, >such as Panama, have seen the sacrificing of monetary policy work >in their favor. Moving monetary policy from a heavily politicized >domestic authority to an independent foreign authority lessens the >threat of politically motivated economic intervention, such as >artificial currency devaluations. The idea of U.S. Federal Reserve >Chairman Alan Greenspan managing a stable and predictable monetary >policy, instead of a local political crony managing a politically >expedient one, is attractive to businesses throughout Latin >America. This is also true for foreign investors - especially the >North American investors who revere Mr. Greenspan as the patron >saint of money. > >Perhaps the largest leap of faith for countries seeking to >dollarize is the loss of a lender of last resort in case of >economic crisis. If Argentina dollarizes and surrenders its >monetary policy, and then later suffers a crisis, it would be >forced to appeal directly to the United States, or more likely the >International Monetary Fund, for emergency funding. While still >able to run account deficits, the government could no longer print >currency as a means of raising revenues. Yet, since printing >currency would trigger inflation and capital flight as it has in >Russia, this perceived "restriction" is a benefit in disguise. > >This does not mean that Argentina would lose control of its economy >- far from it. To maintain successful dollarization Argentina would >need to hone its fiscal policy as it could no longer depend on its >monetary tools. While Argentina already has one of the world's >freest economies, losing monetary policy would necessitate an >incredibly effective fiscal policy. Tax laws would need to become >more efficient and government funding schemes more transparent. >Otherwise Argentina simply would not be able to deal with any >external economic - or internal political - shocks. > >Taking the final step to full, official dollarization would be >relatively easy for Argentina. Argentina has maintained its peso at >parity with the U.S. dollar for nine years; dollarization would not >bring a price shock. Furthermore, maintaining this peg already >constrains Argentine monetary policy; a transfer to full >dollarization would not be as large a shock as it would be for many >other countries. Unofficially, Argentina has already dollarized; 80 >percent of bank loans are already in U.S. dollars. Finally, there >is the issue of capability. Argentina has large enough dollar >currency reserves to buy back all of the pesos in circulation; it >could dollarize at any time. It's merely a question of political >will. > >Another Latin American country, Ecuador, is also moving toward full >dollarization - although stumbling toward dollarization would be a >more accurate depiction. The Ecuadorian Congress voted March 1 to >proceed with President Gustavo Noboa's dollarization plan. While >Argentina has a stable economy and a responsible government, >neither Ecuador's financial or political houses are in order. >Ecuador, while technically having the currency reserves to undergo >the process, lacks the underlying economic and political stability >to pull off the feat without risking social collapse. > >Argentina has recently seen a massive redirection of Argentine >investment flow north to its largest trading partner, Brazil. >Partly this is due to the more developed nature of the Argentine >economy, but mostly it is due to the 40 percent currency >devaluation Brazil suffered in 1999 as part of the fallout of the >Asian financial crisis. Because the Argentine peso is pegged to a >surging U.S. dollar, the cost of doing business in Brazil is >currently lower. If Argentina does indeed adopt the U.S. dollar as >its sole currency, then its sometimes rancorous economic relations >with its Mercosur trading partners - Brazil, Paraguay and Uruguay - >should calm slightly. > >Argentine dollarization would provide a vast inflow of cheap >capital to offset the drain to Brazil and partially offset its >dependence on Brazil with stronger links to the United States. This >would in turn stimulate Argentina's recessionary economy. In the >long term a solid, dollar-denominated Argentine economy with its >low interest rates could tempt the rest of Mercosur into >considering dollarization as a potential option for their own >economies. Uruguay has already called for the adoption of a >Mercosur-wide currency. If Argentina dollarizes, the U.S. dollar >may well be the only option. > >The United States has played coy so far at the prospect of its >currency playing an ever-wider role internationally. On one hand, >U.S. policy makers would welcome Argentina in a de facto U.S.-led >currency zone. Such a move would lash Latin America even closer to >the United States and complicate the European Union's bid to sign >an association agreement with Mercosur. Yet U.S. Treasury Secretary >Larry Summers and Federal Reserve Chairman Allen Greenspan have >stated that the United States will not take the situations of other >countries into account when drafting monetary policy and will not >micromanage their economies. > >The real - and unspoken - U.S. concern, however, is what if the >rest of Mercosur and Mexico actually follow the Argentine lead? >Argentina's economy is less than 4 percent of the United States'; a >dollarized Argentina will not significantly affect the United >States. But Mercosur and Mexico together amount to almost 20 >percent of U.S. GDP. While the expansion of U.S. economic power to >such a degree would be welcomed in Washington, such a wide "dollar- >zone" would create major headaches for North American monetary >policy - regardless of the official line. > >The issue comes down to President de la Rua's intentions. Official, >full dollarization would strip away the country's few remaining >monetary tools in exchange for increased trade, capital flows and >efficiency throughout the Argentine economy. While Argentina's >economic situation will not force De la Rua to dollarize, it is >certainly the fastest, most thorough and most permanent option >available for stimulating economic growth. The real surprise would >be if De la Rua decided - after nine years of unofficial >dollarization - not to complete the process and garner the full >benefits for Argentina. > > > >(c) 2000, Stratfor, Inc. http://www.stratfor.com/ > > >_______ >Macdonald Stainsby >----- >Check out the Tao ten point program: http://new.tao.ca > >"The only truly humanitarian war would be one against >undevelopment, hunger and disease." >- Fidel Castro > ><!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN"> ><HTML><HEAD> ><META content="text/html; charset=iso-8859-1" http-equiv=Content-Type> ><META content="MSHTML 5.00.2614.3500" name=GENERATOR> ><STYLE></STYLE> ></HEAD> ><BODY bgColor=#ffffff> ><DIV><FONT face=Arial size=2>STRATFOR.COM Global Intelligence Update<BR>9 >March >2000<BR><BR>Argentina: Dialing For Dollars<BR><BR>Summary<BR><BR>Central bank >chiefs from Argentina, Brazil and Mexico attended a<BR>conference sponsored by >the Dallas Federal Reserve in the United<BR>States on March 6-7 to examine the >benefits that dollarization<BR>could bring to their economies. Dollarization - >adopting the U.S.<BR>dollar as a country's sole currency - in the Argentine >case >could<BR>well solve many of that country's economic problems. >While<BR>Argentine >President Fernando de la Rua has not committed his<BR>country to outright >dollarization, his actions suggest such a move<BR>is in the >cards.<BR><BR>Analysis<BR><BR>Argentina is toying with the idea of >dollarization >- adopting the<BR>U.S. dollar as its sole currency. Central bank chiefs >from<BR>Argentina, as well as Brazil and Mexico, attended a >meeting<BR>sponsored >by the United States Federal Reserve board in Dallas<BR>March 6-7 to examine >the >benefits of dollarization. While this<BR>policy has its pros and cons, in the >case of Argentina it is<BR>economically feasible, even desirable - and >therefore >expected.<BR><BR>Argentina's new President Fernando de la Rua - still on >his<BR>political honeymoon - has the political clout to manage >the<BR>dollarization process. Prior to taking office on Dec. 10, 1999, >he<BR>boldly promised a growth rate of least 4 percent for 2000. But >in<BR>order >to increase growth, De la Rua must increase Argentina's<BR>access to capital >and >decrease the cost of doing business.<BR>Dollarization is an option for >achieving >these goals.<BR><BR>Perhaps the most alluring aspect of dollarization for the >Argentine<BR>government is the degree to which it would hitch its economy >-<BR>which is in recession - to the soaring U.S. one. Such a direct<BR>linkage >would permanently force Argentina's at times robust<BR>inflation in line with >U.S. norms. Establishing a single currency<BR>regime would lower the cost of >trade with the United States. This<BR>expanded trade would trigger an economic >expansion that<BR>recessionary Argentina desperately needs.<BR><BR>More >important than increased access to the U.S. market, however,<BR>is increased >access to U.S. capital - both in the form of direct<BR>investment and lending. >With the cost of exchanging currency<BR>shrinking to zero, North American >businesses would have a powerful<BR>incentive to sink their resources into the >Argentine economy.<BR>Furthermore, lending rates to Argentina would drop to >U.S. >norms,<BR>sharply reducing interest rate fluctuations. The reduced cost >of<BR>borrowing - and increased investor confidence - would spur >domestic<BR>economic growth throughout the Argentine economy. Cheap, >long-term<BR>loans would also be available to small businesses and homeowners >-<BR>something almost unheard of outside of the world's richest, and<BR>most >stable, economies.<BR><BR>There is, however, a potential downside to >dollarization. Argentina<BR>would have to abandon all pretense of holding an >independent<BR>monetary policy, subjecting the country fully to the winds >of<BR>globalization. This is often perceived as a harsh surrender >of<BR>national >sovereignty. Yet small countries that have dollarized,<BR>such as Panama, have >seen the sacrificing of monetary policy work<BR>in their favor. Moving >monetary >policy from a heavily politicized<BR>domestic authority to an independent >foreign authority lessens the<BR>threat of politically motivated economic >intervention, such as<BR>artificial currency devaluations. The idea of U.S. >Federal Reserve<BR>Chairman Alan Greenspan managing a stable and predictable >monetary<BR>policy, instead of a local political crony managing a >politically<BR>expedient one, is attractive to businesses throughout >Latin<BR>America. This is also true for foreign investors - especially >the<BR>North American investors who revere Mr. Greenspan as the >patron<BR>saint >of money.<BR><BR>Perhaps the largest leap of faith for countries seeking >to<BR>dollarize is the loss of a lender of last resort in case of<BR>economic >crisis. If Argentina dollarizes and surrenders its<BR>monetary policy, and >then >later suffers a crisis, it would be<BR>forced to appeal directly to the United >States, or more likely the<BR>International Monetary Fund, for emergency >funding. While still<BR>able to run account deficits, the government could no >longer print<BR>currency as a means of raising revenues. Yet, since >printing<BR>currency would trigger inflation and capital flight as it has >in<BR>Russia, this perceived "restriction" is a benefit in >disguise.<BR><BR>This >does not mean that Argentina would lose control of its economy<BR>- far from >it. >To maintain successful dollarization Argentina would<BR>need to hone its >fiscal >policy as it could no longer depend on its<BR>monetary tools. While Argentina >already has one of the world's<BR>freest economies, losing monetary policy >would >necessitate an<BR>incredibly effective fiscal policy. Tax laws would need to >become<BR>more efficient and government funding schemes more >transparent.<BR>Otherwise Argentina simply would not be able to deal with >any<BR>external economic - or internal political - shocks.<BR><BR>Taking the >final step to full, official dollarization would be<BR>relatively easy for >Argentina. Argentina has maintained its peso at<BR>parity with the U.S. dollar >for nine years; dollarization would not<BR>bring a price shock. Furthermore, >maintaining this peg already<BR>constrains Argentine monetary policy; a >transfer >to full<BR>dollarization would not be as large a shock as it would be for >many<BR>other countries. Unofficially, Argentina has already dollarized; >80<BR>percent of bank loans are already in U.S. dollars. Finally, there<BR>is >the issue of capability. Argentina has large enough dollar<BR>currency >reserves >to buy back all of the pesos in circulation; it<BR>could dollarize at any >time. >It's merely a question of political<BR>will.<BR><BR>Another Latin American >country, Ecuador, is also moving toward full<BR>dollarization - although >stumbling toward dollarization would be a<BR>more accurate depiction. The >Ecuadorian Congress voted March 1 to<BR>proceed with President Gustavo Noboa's >dollarization plan. While<BR>Argentina has a stable economy and a responsible >government,<BR>neither Ecuador's financial or political houses are in >order.<BR>Ecuador, while technically having the currency reserves to >undergo<BR>the process, lacks the underlying economic and political >stability<BR>to pull off the feat without risking social >collapse.<BR><BR>Argentina has recently seen a massive redirection of >Argentine<BR>investment flow north to its largest trading partner, >Brazil.<BR>Partly this is due to the more developed nature of the >Argentine<BR>economy, but mostly it is due to the 40 percent >currency<BR>devaluation Brazil suffered in 1999 as part of the fallout of >the<BR>Asian financial crisis. Because the Argentine peso is pegged to >a<BR>surging U.S. dollar, the cost of doing business in Brazil is<BR>currently >lower. If Argentina does indeed adopt the U.S. dollar as<BR>its sole currency, >then its sometimes rancorous economic relations<BR>with its Mercosur trading >partners - Brazil, Paraguay and Uruguay -<BR>should calm >slightly.<BR><BR>Argentine dollarization would provide a vast inflow of >cheap<BR>capital to offset the drain to Brazil and partially offset >its<BR>dependence on Brazil with stronger links to the United States. >This<BR>would in turn stimulate Argentina's recessionary economy. In >the<BR>long >term a solid, dollar-denominated Argentine economy with its<BR>low interest >rates could tempt the rest of Mercosur into<BR>considering dollarization as a >potential option for their own<BR>economies. Uruguay has already called for >the >adoption of a<BR>Mercosur-wide currency. If Argentina dollarizes, the U.S. >dollar<BR>may well be the only option.<BR><BR>The United States has played coy >so far at the prospect of its<BR>currency playing an ever-wider role >internationally. On one hand,<BR>U.S. policy makers would welcome Argentina in >a >de facto U.S.-led<BR>currency zone. Such a move would lash Latin America even >closer to<BR>the United States and complicate the European Union's bid to >sign<BR>an association agreement with Mercosur. Yet U.S. Treasury >Secretary<BR>Larry Summers and Federal Reserve Chairman Allen Greenspan >have<BR>stated that the United States will not take the situations of >other<BR>countries into account when drafting monetary policy and will >not<BR>micromanage their economies.<BR><BR>The real - and unspoken - U.S. >concern, however, is what if the<BR>rest of Mercosur and Mexico actually >follow >the Argentine lead?<BR>Argentina's economy is less than 4 percent of the >United >States'; a<BR>dollarized Argentina will not significantly affect the >United<BR>States. But Mercosur and Mexico together amount to almost >20<BR>percent of U.S. GDP. While the expansion of U.S. economic power >to<BR>such >a degree would be welcomed in Washington, such a wide "dollar-<BR>zone" would >create major headaches for North American monetary<BR>policy - regardless of >the >official line.<BR><BR>The issue comes down to President de la Rua's >intentions. >Official,<BR>full dollarization would strip away the country's few >remaining<BR>monetary tools in exchange for increased trade, capital flows >and<BR>efficiency throughout the Argentine economy. While >Argentina's<BR>economic situation will not force De la Rua to dollarize, it >is<BR>certainly the fastest, most thorough and most permanent >option<BR>available for stimulating economic growth. The real surprise >would<BR>be if De la Rua decided - after nine years of >unofficial<BR>dollarization - not to complete the process and garner the >full<BR>benefits for Argentina.<BR><BR><BR><BR>(c) 2000, Stratfor, Inc. <A >href="http://www.stratfor.com/">http://www.stratfor.com/</A><BR><BR></FONT></DI >V> ><DIV><FONT face=Arial size=2>_______<BR>Macdonald Stainsby<BR>-----<BR>Check >out the Tao ten point program: <A >href="http://new.tao.ca">http://new.tao.ca</A> </FONT></DIV> ><DIV> </DIV> ><DIV><FONT face=Arial size=2>"The only truly humanitarian war would be one >against<BR>undevelopment, hunger and disease."<BR>- Fidel >Castro</FONT></DIV></BODY></HTML> > > __________________________________ KOMINFORM P.O. Box 66 00841 Helsinki - Finland +358-40-7177941, fax +358-9-7591081 e-mail [EMAIL PROTECTED] http://www.kominf.pp.fi ___________________________________ [EMAIL PROTECTED] Subscribe/unsubscribe messages mailto:[EMAIL PROTECTED] ___________________________________
