To emerge from financial collapse, Argentina should dollarize its economy and abandon the peso to help restore confidence, economists in the US said Sunday amid a shift in leadership in Buenos Aires.
Steve Hanke, a Johns Hopkins University economist who advised former Argentine president Carlos Menem and other governments, said he sees little hope for maintaining parallel currencies in Argentina following its default.
"The people of Argentina don't trust the politicians, and that's why I'm proposing we get rid of the Argentine money and use the US dollar," Hanke said.
Hanke, who said he is advising Menem and other Peronist "modernizers" in Argentina who may be part of a future government, said he believed Argentina could emerge from its crisis in the same manner as Ecuador, which eliminated its currency, the sucre, after its debt default in 1999.
In Ecuador, Hanke said, "interest rates have gone way down" and that "it'll be the fastest growing economy in all of Latin America."
David DeRosa, a former hedge-fund trader who now teaches at the Yale School of Management, agreed that dollarization is the only way to help end the financial mess and avoid a return to hyperinflation.
"They are not in a position to have their own currency anymore," DeRosa said.
"There is no financial law and order ... if the peso were floating it would drop precipitously."
DeRosa warned that any attempt to introduce a new parallel currency -- as new President Adolfo Rodriguez Saa indicated in his initial statement Sunday -- could lead to further woes for Argentina.
"This is the same hat trick that the province of Buenos Aires did," DeRosa said, referring to provincial bank notes being circulated by the province.
"One of the most basic principles is that you have one currency ... Who's going to lend them money unless they can prove some kind of fiscal solvency? If they put out new funny money, [lenders] are not going to like that at all."
Some New York bond-rating agencies have suggested that investors may have to write off 50 percent of the value of Argentine bonds as a result of the default.
But according to DeRosa, bond traders are fearing much worse -- Argentine bonds as of Friday were trading at 28 percent of face value.
The economists said that Argentina has no choice but to satisfy the International Monetary Fund because it can no longer raise money in the private capital markets.
Hanke said the IMF provided "wrong-footed" advice to the government of Fernando de la Rua, but that the Argentines accepted this and established their own program of tax hikes and austerity measures that lead to the unrest that eventually led to the collapse of the economy and the government.
"It was bad advice form the IMF, but the Argentines accepted it, they advertised it as theirs," Hanke said. "They wanted to reduce interest rates and get the economy going ... but they killed the economy."
In a report released Friday by the Washington-based Cato Institute, Hanke and economist Kurt Schuler of Joint Economic Committee of Congress said the peso has become the biggest obstacle to renewed growth and "has no prospect of becoming credible in the near or medium term."
"Encouraging growth requires `quarantining' the government's financial problems, that is, stopping them from spreading to the rest of the economy," the report said.
"In the sphere of currency, quarantining the government's financial problems requires officially dollarizing, to end fears that the government will devalue the peso as a way of transferring resources from the public to itself."
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