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Dollarization
Days?
Mr. Malpass is the Chief International Economist
for Bear Stearns. |
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Tuesday, both Treasury Undersecretary John Taylor and sources from
the IMF expressedviews on Argentina's all-important dollarization/devaluation decision. An IMF source said that the Fund wanted Argentina to either dollarize or devalue and had written a letter to Argentina to that effect. In a CNBC interview, Taylor seemed to oppose devaluation. The Wall Street Journal's editorial page interpreted him as supporting dollarization, while not having the U.S. push for it. Such high-level pressure on Argentina to break the currency impasse is a positive development because it might result in dollarization before it is too late. The currency board has stopped working properly, and is delivering astronomical interest rates and capital flight. That the U.S. Treasury and the IMF are raising the possibility of dollarization is, by far, the better alternative. By eliminating currency risk and ending the uncertainty over the peso, Argentina would begin to see a return of flight capital. Interest rates would fall, leaving room for economic growth. Tax receipts would improve, because delinquency would no longer be valuable as a hedge against devaluation. Conversely, a devaluation would be devastating for Argentines and for Argentina's political and social fabric (given Argentina's decade long moral and legal commitment to the peso/dollar peg). It would push the banking system toward default and will further lower the value of debt and equities in both Argentina and Brazil, pushing Argentina quickly into default. The IMF recalled the head of its team from Buenos Aires to review the weekend's banking and capital control regulations. The team was in Buenos Aires to review the state of the country's IMF program and consider whether to approve a $1.27 billion loan installment. If the IMF is serious about forcing a currency decision, look for the IMF installment to be held up. Faced with the law and the high costs of devaluation, it looks like Argentina will choose to dollarize. |
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