Re: Keynesian Christmas!

[Diego Miranda <miranda@xxxxxxxxxxxxxxx>]

Some comments below

On Wed, 26 Dec 2001, Alan Cibils wrote:

> The Argentine govt. appears to be doing most of what Bill suggested:
>
> a) The current govt. is supposed to call elections on March 3, so it is
> therefore transitory. It will not abandon the peg,  but most analysts (from
> what I read in the papers) believe that the peso-dollar peg will be
> abandoned. The questions are, of course, when and how to abandon them. They
> seem to prefer, at least for now, to have an economy that is on its way out
> of the recession before floating, or broadening the peg to a currency
> basket which would include the real (Brazil). At any rate, Central Bank
> reserves right now are considerably less than currency in circulation,
> which de facto calls the peg into question.

]The last point is incorrect.  To myunderstanding, there  are 14 billion
dollars in reserves, against only 10 billion or so circulating + 3-4
billion dollars of bank reserves (hold by the central bank of Argentina).
What there is not is enough dollars to cover for more extensive
definitions of money (eg, M2, M3) but that is NOT what the convertibility
law guarantees, nor is the legal responsibility of government to cover for
bank liabilities in a run against the banking system.

As for broadening the peg, it is important to note that it has already
been broadened so as to include the euro ONCE the euro and the dollar
reach parity (which could happen, I guess, rather shortly, as the euro starts
circulating).  The idea of including the Brazilian Real in the basket is
interesting, but it would only make sense if brazil were to commit to some
form of fiscal discipline, preventing continuous devaluation of the Real.
And there is nothing so far indicating Brazil's willingness to do so.
Brazilian people and business-persons have shown an incredible capacity to
absorve the losses devaluation has imposed in their real income.  I
seriously doubt their Argentine correlates will be so accomodating to
government design.

> b) One very debated proposal to make an orderly exit from the
> convertibility scheme, is to "pesificar" (i.e. peso-ify, de-dollarize) the
> economy. According to this proposal, all current dollar liabilities would
> be converted to peso liabilities by decree. The big loosers with such a
> scheme would be the banks, however, nobody (including many economists and
> serious analysts) other than the banks are worried about this since the
> banking sector has had extraordinary profits the last ten years.

It is not as easy as it sounds.  Argentina is, believe it or not, a
procedural democracy, and pesification (or devaluation) would require
a law (by Congress) to take place, and acceptance of the consequences of
that law on part of the courts.  Quite a difficult task, let me assure
you.

In the best scenario, I think  pesification could only be carried out if a
bond is given to those losing from that scheme (both banks AND
depositors). But that would increase the  size of sovereign debt
significantly, and increase the structural weakness of the
Argentine state, especially so since that bond (to be worth and therefore
accepted) should be either dollar-denominated, or else, indexated to
dollar.

> c) It was refreshing to hear an Argentine president (even if a transitory
> one!) talk about unemployment benefit and a "salario minimo, vital, y
> movil" (minimum wage). It had been literally decades since we had heard
> such words spoken from those in power.

Actually, that or similar language was used by the previous De la Rua
administration during the electoral campaign of 1999, and by Menem, in
1989 (the so-called 'salariazo').  I hope (and actually think that) this
time it is more than words.

Diego