Mon, Jul 30, 2001 page21

• Buenos Aires invents its own currency to pay bills

  MONETARY POLICY US$500 million in new notes, called the `patacon,' are being printed by the province in an effort by the government to pay its own workers

  • BLOOMBERG
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  Buenos Aires, Argentina's most populated province, has resorted to printing its own currency to settle its bills.

  Governor Carlos Ruckauf has ordered the provincial mint to print a new bill to pay part of his workers' paychecks. The US$500 million of new notes will also pay interest of 7 percent when the government redeems them in a year's time.

  For those who want to spend them "they'll be accepted just like pesos," he said.

  Not everyone shares Ruckauf's optimism. Grocery stores such as Coto Cicsa, Argentina's No. 3 supermarket chain, and electric utility Edenor SA said they wouldn't yet accept the patacon, as the new currency is called.

  "We'd like to think we'll be able to spend these," said Juan Cosino, a worker at the Buenos Aires legislature who next month will receive US$500 of his US$1,400 monthly wage in patacones. "Nobody knows exactly what they'll be good for."

  Paying its workers with patacones helps Buenos Aires comply with a central government demand for provinces to reduce spending, while avoiding the political cost of wage cuts. Argentina needs to slash public spending to avoid defaulting on US$153 billion in debt that national and regional governments owe. The plan may also erode trust in the Argentine peso, whose one-to-one peg to the dollar has helped maintain confidence among international and local investors in the country for the past decade, said economists.

  "There are uncomfortable implications to having a new stock of quasi-money," said Ernest "Chip" Brown, chief Latin America economist for Banco Santander Central Hispano SA in New York. "It's deficit spending."

  Buenos Aires opted to print money as its coffers were hit by the same realities that have squeezed the central government: a budget deficit and a limited ability to raise new funds. The province is projected to run a US$1 billion deficit in the second half of the year. With its bonds yielding 37 percent, few investors are willing to lend the province fresh cash.

  "I wish we didn't have to pay our workers this way," Anibal Fernandez, Buenos Aires Labor Minister, said in an interview. "Frankly, we didn't have a choice."

  In creating the patacon, Buenos Aires is doing something the Federal government cannot: Argentina's currency regime forbids the central bank from printing pesos unless the increase in money supply is matched by a rise in foreign currency reserves.

  Buenos Aires, home to 40 percent of Argentina's 37 million population, isn't the first Argentine province to create its own currency. Local bonds can be used to pay at restaurants and supermarkets in some less populated provinces, particularly in the poverty-stricken north.

  Nor are local currencies unique to Argentina. Ithaca, New York, issued the "Hour" in 1991 to help the town get through a recession. During the Great Depression in the 1930's, hundreds of such currencies were created in the US.

  Patacones are named after the desolate Patagonia region of southern Argentina. Samples of the new bills look like pesos and come in denominations of as little as US$5.

  Ruckauf said patacones will be paid to the 30 percent of provincial workers who earn more than 740 pesos (US$740) a month.

  They will receive as much as 600 pesos worth of the new bills for part of their salary that exceeds 740 pesos.

  The government has limited success in persuading companies to accept as legal tender notes that Alberto Bernal, Latin American economist at IDEAglobal dubbed "funny money." Water utilities such as Azurix SA and Aguas Argentinas SA, and phone companies Telefonica SA and Telecom Argentina Stet- France Telecom SA have said they'll accept Patacones as partial payment, though some were less than enthusiastic about the change.

  "We'll take only as many patacones as we need to pay our obligations to the provincial government," said Azurix spokesman Gustavo Pedace.

  Carlos Serrano, a spokesman for the utility Edenor, said his company wasn't convinced.

  "The governor talked about the grave situation in the province and said the only way to avoid ceasing payments was with this patacon bond," said Serrano. "We didn't sign on. We want to help but we need more information."

  Since it's unclear whether the bills will be widely accepted, analysts said some workers may sell them at a discount for pesos or dollars.

  "If it's hard to spend this money people will create a black market if history is any guide," said Dustin Reid, a currency strategist at UBS Warburg Llc in Stamford, Connecticut. "They will still want dollars under their mattresses."
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