White Paper

A Dollarization Blueprint for Argentina

In the months leading up to the Brazilian government’s decision to devalue and then float the real in January 1999, the Argentine peso also came under speculative attack, though much milder than the real experienced. After the real was devalued, there was increased speculation that Argentina would devalue the peso. In fact, despite the good record of Argentina’s currency board-like system since it was established in April 1991 (BCRA 1998 and Kiguel 1998), there has often been speculation that the currency would be devalued (Hanke 1999). Interest rates in pesos have accordingly been persistently higher than interest rates in US dollars within Argentina.

During the past year, the spread between interest rates on Argentine 30-day loans in pesos and dollars has varied between 50 and 440 basis points. And as of late January 1999, the average rate for overnight interbank loans was about 7.5% a year for pesos, compared with about 6.5% for dollars. For one-year interbank loans, the late-January 1999 interest rates were about 19.75% for pesos and 14.75% for dollars.

To reduce and ultimately eliminate speculation about devaluation, the Menem government, on January 21, 1999, announced that it intended to dollarize. The government is now considering the precise form of dollarization and the schedule for dollarizing.

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Steve H. Hanke is Professor of Applied Economics at the Johns Hopkins University and an Adjunct Scholar of the Cato Institute. Kurt Schuler is a monetary consultant based in Arlington, Virginia. This study first appeared in “Friedberg’s Commodity and Currency Comments Experts’ Report,” February 1, 1999.