Re: Imposing the US Dollar on Canada

["eperez" <eperez@xxxxxxxxx>]

"The risk of default is zero." I really hope you are right
I hope that the fact that Argentina's risk rating increased yesterday and
that the govt decided to suspend the public bidding of gov´t bonds and
letters reflect only minor fears (and also the fact of being calssified in terms
of risk with Nigeria and Ecuador). It also
may be that Argentina's instability is due to the American slowdown.
But the Argentine economy grew in 1999
-3.4% GDP and -4.6% GDP per cápita).






Date sent:      	Tue, 24 Apr 2001 01:35:02 -0400 (EDT)
From:           	Diego Miranda <miranda@xxxxxxxxxxxxxxx>
To:             	eperez <eperez@xxxxxxxxx>
Copies to:      	pkt@xxxxxxxxxxxxxxxx
Subject:        	Re: Imposing the US Dollar on Canada

Esteban,

The risk of Argentina defaulting its debt this year is practically zero.
Between already arranged loan assistance by international donors, and
recent tax reforms, the Argentine government has enough dollars to cover
debt service this year, and part of the next year (see reports by Capital
Foundation at http://www.fcapital.com.ar/fcapital/).  If you want to know
who is arguing the opposite, I suggest you  look at three indicators:
the markets of futures for pesos, the financial to physical capital ratio
of firms and holdings operating in Argentina, and the investment
advice of 'especialistas de mercado' in Argentina during the last three
to four months. My bet is that the level  of doubt about the fiscal
capacity of the Argentine government is directly proportional to (a) the
distance between the parity contracted in the futures and the current 1
dollar 1 peso parity; (b) the size of the financial to physical capital
ratio of fimrs; and (c) the vehemence of negative assessments about the
likelihood of the Argentine government servicing its debt. Actors with
one or more of these characteristics are, in my opinion, most likely
to be the ones that today, defying hard evidence, would like to see their
prophecies fulfilled.  They are also the ones that are going to lose, big
time, money and clients who they lead to lose money.

As for your second point, that 'Argentina may de facto devalue (the euro
may again  depreciate relative to the dollar),' let me remind you that if
today the dollar were to be devalued vis a vis the ROW, Argentina would de
facto devalue as well.   By using a mix of dollars and euros to back up
the peso, Argentina earns back a stability that it has lost with the
slowdown of the American economy.  Moreover, it becomes independent of a
US cycle over which it has no control, avoiding parity  fluctuation with
respect to two economic giants (the US and the EU) that represent some 80
percent of world GDP, and over 60 percent of Argentine trade.  If such
modified rule had been in place since 1998,the  Argentine peso would have
 been overvalued by more or less 18 percent, instead of the 29 percent
at which it has actually been overvalued since then. Needless to say, that
would have made it easier for Argentine producers to compete, without need
for protection, with imports, or to export even more than they actually
did.

None the less, I think that such a reform of the convertibility law would
have two additional effects: first, it would make it more valuable to hold
pesos than dollars, which would result in a reduction of interest rates
for operations in domestic currency.  While this may perhaps be a concern
for business-persons who currently hold dollars (either at home
or abroad), it will certainly be positive for people depending on wages
and salaries denominated in pesos.  And also for those business-persons
who invested in the Argentine real economy.

Second, and relatedly, business-persons would find it advantageous
to hold pesos if they plan to operate in the Argentine real economy (since
they could convert them into dollars or euros at a fixed rate, while
having to face some uncertainty if they just hold euros or dollars). That
would result in an expansion of the formal economy, and a consequent
reduction of tax evasion. This is so because today, and for the foreseable
future, the Argentine central bank is the only significant holder of
pesos. If business-persons plan to invest, they would either  need to
exchange their dollars for pesos, or else assume the potential loss from
variations in th dollar-euro parity.  By buying pesos, however, they
become vulnerable to greater control on part of government agencies.

Facing this, of course, business-persons could decide not to invest, and
to keep their more or less legal (i.e.,  with a greater or lesser tax
evading component) dollars under the mattress or abroad.  But they are
currently doing that.  And I do not see any long term, sustainable-
development-promotign reason to facilitate their happy recycling of
their more or less legal dollars by allowing them to expand their
operations--as they have done for the last decade --in the informal
economy.

Let me add one final point.  If this reform is approved, it will be so by
Congress, that is, by the institution that put the convetibility law in
place, to begin with. Many an 'especialista de mercado' has argued that
such reform would open the door for future modifications. If touched once,
they argue, it could be touched again and again.  That line of argument
does not take into account, however,  that any reform requires the
formation of a legislative majority in both the Argentine House and
Senate.  And that in a functioning formal democracy such as Argentina, the
formation of any reformist legislative majority is difficult to achieve.
Legislative procedures in a bicameral system are likely to bias
policy-making towards the status quo.  The success of Argentina in
maintaining price and policy stability during the last ten years resides
precisely in that all major reforms were defined by law, and not, as it is
usually argued, by decree.

Diego

On Mon, 23 Apr 2001, eperez wrote:

> The main problem with Argentina is wether it will
> default on its external debt. If the Euro
> reaches a hypothetical 1 to 1 parity to the dollar it does not mean that that it
> will stay at that level.
>
> Date sent:      	Sun, 22 Apr 2001 22:28:17 -0300
> From:           	Juan Jose Barrios <jota@xxxxxxxxxxxxxx>
> To:             	pkt@xxxxxxxxxxxxxxxx
> Subject:        	Re: Imposing the US Dollar on Canada
> Send reply to:  	pkt@xxxxxxxxxxxxxxxx
>
>
>
> "J. Barkley Rosser, Jr." wrote:
>
> >       In the Washington Post two days ago it was
> > reported that Cavallo, the new "super economics
> > minister" in Argentina, has pulled Argentina back
> > from dollarization.  Apparently the peso will now
> > be pegged 50-50 to the US dollar and the euro.
> > I do not know if they are still maintaining some kind
> > of currency board arrangement or not.
>
> Congress will approve a project that makes the peso convertible to a basket
> of two currencies: dollar and euro BUT NOT UNTIL THE EURO IS WORTH ONE
> DOLLAR. If this never happens, Argentina will still maintain the one
> peso=one dollar exchange rate and the current convertibility. The currency
> board will still be in place, but there are operational questions to be
> asked.
>
>
> >       There are some in Argentina who are upset at
> > this move, fearful that it signals a return of hyperinflation,
> > the defeat of which the currency board with the dollar
> > was associated with.
>
> hyperinflation? how could that be possible? you mean devaluation? the peso
> will fluctuate less than the dollar or the euro, and can go down or up
> depending on what happens with the two currencies.
>
>
> >  Certainly this is a defeat for
> > those who wanted full dollarization, which a major
> > faction did, probably including the "comprador" elements,
> > but probably not consisting only of them.
>
> yeap. It seems it is.
>
> >
> >       BTW, I think that Argentina is making a wise move
> > in this regard.  Clearly the currency board has not worked
> > out well for them.  I wish to make it clear, since I see below
> > that I am getting bashed on this issue, that I do not in
> > general support dollarization in most countries.
>
> As we are witness of a world recession (depression), Argentina and Brazil
> have decided to "temporarily" increase tariffs to imports of consumption
> goods and some other measures to boost domestic demand (argentine and
> brazilian) because the political and social chaos. Example: former
> President Menem seems to be involved in the selling of arms to Yugoslavia
> during the past war, only that those arms were supposed to go to Ecuador
> and Venezuela. As a consequence he went out to the press yesterday and
> suggested that citizens should buy as many dollars as they could because
> Cavallo only wants to devalue the peso to gain competitiveness.....Only in
> Argentina.
>
>
>
> Juan
>
>
>
> >
> > Barkley Rosser
> > ----- Original Message -----
> > From: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>
> > To: <phillp2@xxxxxxxxxxxxxxx>
> > Cc: "Post Keynesian Thought" <pkt@xxxxxxxxxxxxxxxx>
> > Sent: Friday, April 20, 2001 5:52 PM
> > Subject: Re: Imposing the US Dollar on Canada
> >
> > > Paul,
> > >       Well, it is not at all clear that the US gains
> > > very much from having other countries get
> > > dollarized.  Thus, although it has not fully
> > > dollarized, Argentina has a currency board,
> > > the next "best" thing to it.  Right now Argentina
> > > is in about its third year of recession, clearly
> > > not good for Argentina.  Is it good for any group
> > > in the US?
> > >      Well, there was a column in the
> > > Washington Post a few days ago by Robert
> > > Samuelson forecasting that Argentina is on
> > > the verge of having a full blown foreign exchange
> > > and debt crisis given its inability to service its
> > > $140 billion foreign debt.  Samuelson predicted
> > > that a bellyup by Argentina could trigger a full
> > > scale global financial collapse.  This is in the
> > > interests of US capitalists or anybody else?
> > > Even without a full-blown crash, recession in
> > > Argentina is not good for US capitalists because
> > > their companies there are losing money and it is
> > > difficult to export anything to them.
> > > Barkley Rosser
> > > ----- Original Message -----
> > > From: <phillp2@xxxxxxxxxxxxxxx>
> > > To: <pkt@xxxxxxxxxxxxxxxx>
> > > Sent: Thursday, April 19, 2001 11:43 PM
> > > Subject: Re: Imposing the US Dollar on Canada
> > >
> > >
> > > > I am quite amazed at the discussion of this topic.  It could only
> > > > occur on list that was dominated by  Americans who don't have the
> > > > slightest knowledge of, or appreciation of, dependent economies.
> > > > Poor Keynes must be rolling over in his grave in the utmost pain of
> > > > despair.  Alan's post was unbelievable.  Henry did something to
> > > > redress the balance but if this is the level of understanding of
> > > > monetary and macro economics, we must all weep and wail.
> > > >
> > > > Is this really the level of economic analysis and understanding of
> > > > PKT?  God!, I hope not.
> > > >
> > > > Paul Phillips,
> > > > Economics,
> > > > University of Manitoba
> > > >
> > >
> > >
> -------------------------------------------------------------------------------------------------
-------------------
> Esteban Pérez
> Economic Affairs Officer
> Economic Commission for Latin America and the Caribbean
> United Nations
> Av. Presidente Masaryk 29 12o Piso
> Col. Chapultepec Morales 11570 Mexico D.F.
> Phone   : 263-9681
> Fax     : 531-1151
> E-mail address: eperez@xxxxxxxxx
> Mexico ECLAC WEBPAGE:
> http://www.un.org.mx/cepal
> This message does not constitute official ECLAC
> correspondence; the organization is not responsible
> for the contents or the consequences of its use,
> not for inaccurate transmission or misdirection
> -------------------------------------------------------------------------------------------------
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--------------------------------------------------------------------------------------------------------------------
Esteban Pérez
Economic Affairs Officer
Economic Commission for Latin America and the Caribbean
United Nations
Av. Presidente Masaryk 29 12o Piso
Col. Chapultepec Morales 11570 Mexico D.F.
Phone   : 263-9681
Fax     : 531-1151
E-mail address: eperez@xxxxxxxxx
Mexico ECLAC WEBPAGE:
http://www.un.org.mx/cepal
This message does not constitute official ECLAC
correspondence; the organization is not responsible
for the contents or the consequences of its use,
not for inaccurate transmission or misdirection
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