Argentina to adopt the dollar? Not likely

The greenback's popularity abroad is a bonanza for Uncle Sam.

It will become even more lucrative if Argentina actually implements its talk late last month of "dollarizing" its economy.

At present, there's roughly $320 billion of $100 and smaller bills circulating around the world. That's about two-thirds of total US currency.

Perhaps $30 billion are stowed away in Russia. Many Russians are scared to hold their rapidly inflating ruble. Possibly $5 billion are used in Argentina along with the peso; more in Latin America as a whole. The dollar is already legal tender in Panama and Liberia.

When Uncle Sam first issues his currency, the federal government can pay its bills with them at no cost - other than relatively minor printing costs. This profit is called seigniorage.

Not only that: Uncle Sam doesn't pay any interest on that cash.

So American taxpayers save at least $18 billion a year in interest. Greenbacks stowed in cookie jars help indirectly finance Washington's huge national debt.

After Brazil devalued its currency, the real, against the dollar last month, Argentina's peso came under pressure on the foreign exchange markets. The real had lost one-third of its value by last week. Speculators and the fearful sold pesos, suspecting they too might fall.

That's when Pedro Pou, president of the Central Bank of Argentina, told the press his nation is studying several options to eliminate or reduce the use of its own currency, and use dollars instead.

The US and Argentina are now preparing working papers on the topic and will convene in the next few weeks to discuss their conclusions, he indicated.

Don't hold your breath.

"The proposal mainly was meant to send a strong signal to markets that before Argentina would devalue the peso, it would move more completely toward the dollar," says William Cline, an economist at the Institute of International Finance in Washington. The institute does research for the world's large private financial institutions.

It was a warning shot to speculators. Some experts say Argentina's Congress wouldn't approve such a loss of monetary sovereignty. Former president Raul Alfonsin held dollarization would make Argentina "an appendage" of the US, like Puerto Rico. The issue is big in Argentine politics. In any case, dollarization is unlikely to happen soon.

Nor does Washington seem to take the idea too seriously.

A Treasury spokeswoman said Jan. 21, "There is no formal working group or treaty process under way."

At present, Argentina has a "currency board" that ties the peso firmly to the US dollar, one peso per dollar. This was adapted in 1991 after a period of hyperinflation. Under this board, Argentina holds a dollar in its reserves for every peso it issues.

This change did the anti-inflation trick. The value of the peso stabilized with that of the dollar.

The system gives Argentina some monetary control of the economy. It can expand the nation's supply of pesos. It then acquires a matching number of dollars. That's no problem if it has a trade surplus. Otherwise, it must borrow dollars.

These dollar reserves are invested in US Treasury securities. There they earn less interest than Argentina must pay on its borrowings. That gap annoys Mr. Pou. It indicates a lingering suspicion that Argentina might drop the currency board and devalue.

Since Brazil is a major trading partner of Argentina, there has been increased fear that Argentina will devalue to remain competitive. Talk of dollarization aims at dispelling that concern.

"If you don't have a currency of your own, you can't be subject to a speculative attack," notes Peter Kenen, an economist at Princeton University in New Jersey.

Dollarization would be "a boon" to the US, notes Wayne Ayers, chief economist at BankBoston, a bank with a $8.1-billion subsidiary in Argentina. It would mean more seigniorage and bigger interest-free financing.

But Argentina would lose seigniorage.

That is not insubstantial. For developing countries, it can be 5 to 10 percent of total government revenues, notes Harvard University economist Richard Cooper.

Dollarization also may be considered a blow to national pride.

Argentina's monetary policy would move, in effect, to the Federal Reserve in Washington.

At a Senate Finance Committee hearing last Tuesday, Deputy Treasury Secretary Lawrence Summers spoke of "the loss of flexibility" to Argentina from "not being able to adjust monetary policy to domestic conditions."

Argentina could also lose its "lender of last resort" - the ability of a central bank to come to the rescue of troubled banks with quick injections of cash. But with a treaty, the US Fed could take over that role. A treaty could take two or three years to work out, Pou says.

Nonetheless, the adoption of a common currency, the euro, by 11 European nations this year has stirred up some chit-chat of a "dollar zone" in the Americas.

"It may be that more countries will move in that direction in the future," Mr. Summers said.