Thu, Dec 27, 2001 page19

• Argentina's new president using the same old tricks

  The country's interim leader brings with him a new round of fiscal and financial chicanery that easily bests the slight of hand policies that brought the nation to its knees

  • By David Derosa / BLOOMBERG
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  No sooner had Argentina's interim president Adolfo Rodriguez Saa taken power on Sunday than he hit on a way to have his cake and eat it too -- or so he must have thought.

  Rodriguez Saa says he wants to keep the peso pegged to the dollar under the currency board but at the same time create a new currency, the argentino, presumably to circulate in parallel to the peso.

  

  Argentine interim President Adolfo Rodriguez Saa, right, consults with Buenos Aires Provincial Governor Carlos Ruckauf at the Casa Rosada government house in Buenos Aires, yesterday. Rodriguez Saa announced earlier that the country would stop repayment of its massive US$132 billion debt and provide thousands of jobs to the country's growing corps of unemployed people.

  PHOTO: REUTERS

  These monetary antics are classics destined for the history books. Rodriguez Saa, who made the announcement in his inaugural speech, has two months as president before presidential elections in March. Speaking before the nation's Congress he promised to fight for "justice and social equality."

  Hearty approval

  When he announced in the same speech he was suspending debt payments, lawmakers erupted in approval, chanting ``Argentina!, Argentina!'' Congress was rubbing default right into the faces of its foreign bondholders.

  Argentina's first default pre-dates Rodriguez Saa. On Dec. 19 the country failed to meet a deadline to pay US$215 million on the country's benchmark Global 2003 bond, at least according to Ramon Puerta, who was caretaker president before Rodriguez Saa took over.

  In his inaugural speech Rodriguez Saa said he would announce next week his plans for the argentino, which he referred to as the country's ``third currency'' in addition to the peso and the dollar.

  In reality there are many more currencies, or pseudo-currencies circulating in Argentina.

  Argentina's provinces already printed about US$2 billion of their own paper money earlier this year to meet their debts.

  Rodriguez Saa has told two Argentine newspapers, Pagina 12 and Clarin, that he wants to issue US$10 billion worth of argentinos. The country has about US$11 billion of pesos in circulation.

  The argentino will have no economic backing whatsoever, as far as can be ascertained at present.

  This is straight out of the Cuthbert Twillie school of public finance. Twillie, W.C. Fields's likable con-artist in the film classic My Little Chicadee, horns his way into a card game by telling the other gamblers: "I will give you my personal I.O.U." Come to think of it, I would take Twillie's paper over Rodriguez Saa's.

  The argentino will be used to pay state workers. Want to bet that, if nobody makes a big stink, Congress and other assorted high officials will continue themselves to get paid in pesos?

  One hoped that Argentina had seen the last of monetary shenanigans with the departure of former President Fernando de la Rua and his wily economy minister Domingo Cavallo.

  But Rodriguez Saa's race to issue yet another currency tells otherwise. There are implications for Argentina's ultimate choice of a currency and currency regime.

  In the final analysis, the choice of a foreign exchange regime depends on the character of the people in charge of the central bank.

  The power to abuse

  Central banks are uniquely endowed with the power to create money. It is an enormous responsibility and, at the same time, an enormous temptation.

  When a central bank goes bad it allows politicians to loot the country by spending newly printed money.

  The country then gets hyperinflation.

  In the case of Argentina, floating the peso will mean acquiescing to a massive depreciation in the value of the currency and the myriad problems such a move would bring.

  No way is one peso worth one dollar. Who is going to want to buy pesos when the government has declared itself in default on its debt?

  Moreover, the central bank, once freed from the duty of pegging the peso to the dollar, is likely to validate the depreciation in the peso with monetary policies that will lead to lead the nation into a period of hyperinflation.

  I have steadfastly advocated freely floating exchange rates for countries large and small.

  Still for Argentina, especially without any material change in the quality of financial and economic leadership, dollarization is the best choice, at least for now.

  David DeRosa, president of DeRosa Research & Trading, is also an adjunct finance professor at Yale School of Management and the author of In Defense of Free Capital Markets. The opinions expressed are his own.
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