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Mix-Ansicht- Crying for Argentina - leibovitz, 12.12.2001, 14:13
Crying for Argentina
A peg in a poke
Crying for Argentina: The tragedy engulfing Argentina ought to convince economists once-and-for-all of the folly of pegged exchange rates. As a result of its misguided policy of fixing its currency rigidly to the dollar, the Latin American country now faces two extraordinarily unpalatable alternatives. One is to devalue the peso. That will allow the economy to recover - eventually. But, in the process, large swathes of Argentine business will go bust because they borrowed in dollars.
The other alternative is to adopt the dollar lock, stock and barrel as the official currency. That may avoid large-scale private-sector defaults. But linking Argentina to an economy thousands of miles away with which it does little trade at an artificially high exchange rate will just perpetuate the four-year slump. And it won’t stop the government from defaulting on its debts. It is not as if it can magic into existence $135bn of hard cash.
Meanwhile, as it tries to avoid these ghastly outcomes, the government has been forced into ever more desperate counter-measures. Last week started with it preventing people from taking out more than $250 a week from their banks in an attempt to stop a run on the banks. It may have succeeded, but only at the expense of further spreading panic and gumming up the whole payments system. The week ended with the state raiding local government pension funds in an attempt to get cash to pay its bills.
Haven’t we been here before? Russia, Brazil, South Korean, Mexico. They all had to abandon unsustainable pegged exchange rates in the 1990s.
Oh no, say Argentina’s apologists. It is different. Argentina doesn’t just have a peg; it has a currency board. That means it always has enough hard currency to back its money supply. A currency board is an extremely rigid form of peg that is supposed to be fool-proof against devaluation.
Well, it all depends on how much pain you are prepared to take. Argentina isn’t nearly as flexible as say Hong Kong, which also has a peg. So when its neighbour Brazil devalued, Argentina’s costs didn’t fall rapidly enough to restore its competitiveness. It just sank further into depression. And a currency board doesn’t do anything to stop the government overspending. When it couldn’t raise enough money through taxes, it went on a borrowing spree. The inability to service those debts is the proximate cause of the current problems.
Pegging exchange rates can be extremely tempting, especially when a country has been suffering from hyperinflation. After Argentina adopted its peg a decade ago, inflation was squeezed out of the system. But at what a terrible price.
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