Understanding Argentina / Artikel, engl.

verfasst von JüKü, 28.05.2002, 19:35

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<font face="Verdana" size="1" color="#002864">http://www.mises.org/fullstory.asp?control=965</font>
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<font face="Arial" size="2"><font face="Verdana" color="#002864" size="5"><strong>Understanding Argentina</strong></font>
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<font size="4">by Joseph T. Salerno</font>




[Posted May 28, 2002]




The Analyst<em>, published by the Institute of Chartered Financial Analysts
of India (</em><em>ICFAI</em><em>),
interviewed Joseph T. Salerno, editor of the&nbsp;</em>Quarterly Journal of
Austrian Economics, concerning the financial and banking chaos in Argentina:



[img][/img] Q:
Are proposed reforms enough to justify having the IMF lend a helping hand to
Argentina?




SALERNO: To begin with, it was the IMF that is responsible for the
disaster that has befallen Argentina.&nbsp;By publicly approving and assisting
Argentina’s switch to a currency board regime in 1991, the IMF gave an
implicit bailout guarantee to international investors in the Argentine public
debt.




This precipitated an influx of foreign capital into Argentina, induced by
the prospect of high interest returns with little default or currency risk.&nbsp;These
funds were absorbed by the Argentine government and utilized for a huge and
unproductive expansion of the public sector, including an enormous growth in
national and provincial spending, public-sector employment and salaries, and
financing of projects and programs that benefited big businesses and other
constituencies with political connections.




In the meantime, investment in productive small and medium-sized businesses
in the private economy, especially in export industries, stagnated and
eventually diminished.&nbsp;This unhealthy and unstable fiscal regime directly
promoted by IMF policies is revealed in the stunning fact that one quarter of
international holdings of debt from emerging market nations consists of
Argentine provincial and national debt.




Q: What steps are required for the restoration of fiscal health and
economic prosperity?




SALERNO: First, the Argentine government must shun any further
advice or assistance from the inept and fumbling bureaucratic elites of the
IMF.




Second, it must openly admit its insolvency and unilaterally repudiate all
previously issued public debt.&nbsp;This will permit the national government
to immediately rid itself of its debt service burden, enabling it to cut its
budget by 20 percent and approximately balance its budget.&nbsp;Since
international capital markets will now be closed to new issues of Argentine
public debt, the national and provincial governments will be forced to operate
within the salutary constraints of balanced budgets.




However, this will also temporarily scare off prospective investors in
Argentine private-sector debt, so that Argentina will need to implement
policies to revive domestic saving and investment.&nbsp;Hence, the third step
is to reduce the absorption of investment funds by the public sector by
implementing an additional 20-percent balanced cut in the spending and tax
revenues of the national government, with the cuts focused on regulatory
agencies and public employment.&nbsp;This will free up the business sector and
provide it with much-needed capital and labor resources, while also serving to
reverse the expansion of the State sector that occurred in the 1990s.




Q: The president's talks with the IMF and the U.S. Treasury
secretary produced only the news that the IMF might be able to put together a
rescue package only by the end of June. Is Argentina's currency, as well as
the government, in a position to wait that long?




SALERNO: Argentina cannot afford to wait for an IMF rescue package,
which will only prolong the current unsustainable monetary regime.&nbsp;It
must act now to reform its paralyzed monetary and financial system.




Fortunately, there is a program that it can implement unilaterally that
will permit its currency to quickly return to circulation as a medium of
exchange, especially among its poorer citizens, and at the same restore
confidence in domestic financial institutions and markets.&nbsp;This involves
recognizing the effective bankruptcy of all banks and handing their assets
over to their depositors.




Specifically, the demand liabilities of each bank, which include savings as
well as checking accounts, should be written down to the level of its cash
reserves and prorated among its depositors according to the size of their
nominal checking and saving deposits.&nbsp;Since they now will be effectively
backed 100 percent by cash, depositors will then be able to freely redeem
their deposits in currency or continue to access them by check or debit card
without threat of a contagion of bank collapses.




In addition, ownership of the loan and investment assets of each bank will
be transferred to the depositors by distributing equity shares to them, the
number of nominal shares received by each individual to be equal to the
original quantity of pesos in his bank deposit minus his quota of the banking
system’s cash reserves.&nbsp;The value of these shares, which will be
saleable on the market, would be determined by the market value of the asset
portfolio and would fluctuate according to market conditions, falling more or
less below the value of a peso, depending on the quality of each fund’s
asset portfolio.




All banks will thus be split into two independent institutions--a
100-percent deposit bank and a no-load mixed-asset mutual fund.&nbsp;Argentine
depositors of all income levels will now have unimpeded access both to&nbsp;a
medium for making current exchanges and to their savings.&nbsp;The deposit
banks will be under court mandate to retain 100-percent reserves for all
deposits, and the system will be able to issue additional peso-denominated
demand deposits one-for-one in exchange for deposits of peso currency.




Every mutual fund will be empowered to redeem and sell its shares and to
buy and sell financial assets on the open market, as well as to originate
loans. Initially, court-appointed trustees will be put in charge of operating
these institutions, defraying the costs of operation by assessing user fees on
depositors and mutual fund shareowners.




It is true that this program will involve a sharp, one-time deflation of
the money supply to the level of the monetary base, that is, the currency held
by the public plus the cash reserves of the deposit banks. However, the very
celerity and pervasiveness of the monetary contraction--all demand deposits
will be reduced overnight by the same percentage--will facilitate the swift
adjustment of prices and wages to the level consistent with the new money
supply.




Meanwhile, once this has been accomplished and the Argentine central bank/currency
board has disbursed its hoard of cash reserves to the deposit banks, it will
be barred from purchasing any additional assets and the money supply will
become permanently frozen at the existing level. The central bank will be
restricted to exchanging new currency notes for worn ones at a one-to-one
ratio and issuing and receiving token coins for currency notes of equal
denomination.




This program will revive monetary exchange and economic calculation
throughout the economy, especially the retail sector, and together with the
reduction of the fiscal burden of the public sector, will stimulate a recovery
>from the current depression.




It should be noted that this program is only a preliminary step on the road
to monetary reform, which must eventually entail the sale to private investors
or institutions, foreign or domestic, of the deposit banks and the managed
mutual funds.




Q: Considering that no one wants to hold the devalued pesos, will
dollarization solve the problem? Or, will it create a new set of problems? Is
there no panacea for the debt-ridden country?




<strong>SALERNO:</strong> Dollarization is a gimmick that differs only
formally from the currency board regime that resulted in Argentina’s current
fiscal and monetary crises.&nbsp;Moreover, it does not address the immediate
problem of giving Argentines immediate and full access to their money holdings
and savings currently frozen in the banking system.




The program I outlined above would not only arrest the devaluation but
would also enormously strengthen the external value of the peso.&nbsp;As noted
above, the initial monetary contraction will cause prices in Argentina to
decline sharply, causing a corresponding rise in the domestic purchasing power
of the peso.




With the central bank barred from any further open market or foreign
exchange operations, peso exchange rates will be driven upward to reflect the
currency’s increased purchasing power, as foreigners scramble to get hold of
the pesos needed to buy Argentine products that will be extremely cheap at
prevailing (devalued) exchange rates.




Even after the external value of the has been adjusted upward in the
immediate aftermath of the one-shot monetary contraction, the peso will
continue to gently appreciate vis-à-vis other currencies, as Argentina’s
economy recovers >from depression and real output begins to expand, causing
prices to fall and the purchasing power of the peso to rise further.




<strong>Q</strong>: Roberto Lavagna, Argentina's latest economy minister,
has his task really cut out. What are the first things that he should address
as he tries to bring some semblance of sensibility into the country's flailing
economy?




<strong>SALERNO</strong>: The first issue that the economy minister should
address is the meddlesome IMF.&nbsp;He should tell the IMF bureaucrats in no
uncertain terms that their advice and assistance have not served Argentina
well and are no longer welcome by the Argentine government.




He then must proceed swiftly, with the consent of the president and the
legislature, to proclaim the insolvency of Argentina’s national and
provincial governments and repudiate all Argentine public-sector debt, cutting
spending and taxes to balance the budget and stimulate domestic saving and
investment in the private sector.




Finally, he must restore full access to their money and savings of
Argentine citizens under the program I outlined above, in which ownership of
the insolvent banks is transferred to depositors.


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Joseph Salerno,
senior fellow of the Mises Institute and editor of the <em>Quarterly
Journal of Austrian Economics</em>, teaches economics at Pace University.
Send him&nbsp;MAIL, and see his
Mises.org&nbsp;Articles
Archive. See also Salerno's Study
Guide archive.


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• Understanding Argentina / Artikel, engl. - JüKü, 28.05.2002, 19:35