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CLARIN

Currency Crisis: Should Argentina Ditch The Peso And Adopt The Dollar?

With inflation on the rise, some pundits say the South American country should say adios to its faltering peso.

An exchange office in Buenos Aires
An exchange office in Buenos Aires
Annabella Quiroga

BUENOS AIRES — It's a classic response in Argentina. Every time the economy gets into trouble, people start proposing magic solutions.

This time, with a 100% devaluation of the peso so far this year and annual inflation heading above 40%, we're again hearing calls for dollarization. In other words, we ought to ditch the peso for the powerful U.S. currency, argue people such as Wall Street Journalcolumnist Mary Anastacia O'Grady.

"The fastest way to restore confidence would be to put an end to the misery caused by the peso and to adopt the dollar," she wrote. "Argentines could then get on with the business of saving and investing in their beautiful country."

But economists say it's not that simple. Clarín spoke with a number of analysts who insist that dollarization, instead of solving Argentina's current economic problems, would leave the country with even fewer economic tools to extricate itself from the current crisis.

"I've said it time and again: You can't dollarize when you have no dollars, and we don't have enough dollars," says Carlos Rodríguez, a lecturer at the Buenos Aires UCEMA university, who earlier served as deputy-economy minister under President Carlos Menem (1989-1999), when Convertibility (meaning the dollar was artificially pegged to the peso) was in force.

Ecuador adopted dollarization 18 years ago and stuck with it. — Photo: selbstfotografiert

"It doesn't resolve structural problems by itself," the economist adds. "Dollarization is a B alternative when faced with a collapsing peso. That is not happening for now and there are no dollars. It would require enormous financial restructuration of peso-denominated assets."

Ecuador adopted dollarization 18 years ago and stuck with it, even during the decade-long presidency of Rafael Correa (2007-2017), a leftist. Between 2006 and 2014, the Andean state grew on average 4.3% a year, thanks to high oil prices and important inflows of foreign monies. The economy's expansion and social spending allowed it to reduce poverty from 37.6% to 22.5%.

But in recent years, the economy has deteriorated with falling oil prices and a dearth of new investments. Today, Ecuador has no inflation, but its risk premium is above Argentina's: 757 basic points compared to 745.

Dollarizing the economy is like confining an alcoholic in a cell.

Eduardo Blasco, of the consulting firm Maxinver, was one of several Argentine analysts Ecuador's then president, Abdalá Bucaram (1996-1997), spoke with in the months preceding dollarization. Bucaram wanted to know specifically how Argentina's experiment with Convertibility was working out.

Blasco says dollarizing the economy is like confining an alcoholic in a cell. "Adopting this kind of option is extremely debatable as it ties your hands when making economic policies," he argues. "It is a simplistic and extreme measure that resolves nothing."

In the case of Ecuador, dollarization worked initially, the Maxinver analyst explains, "But it still has fiscal and economic problems and a high country risk," he says. "Ecuador is still a country highly dependent on oil and other primary products. It has very low industrialization rate."

Blasco compares Ecuador's trajectory to that of Peru, which kept its currency. "They just took things seriously," he says.

Federico Furiase of EcoGo, another consultancy firm, agrees. "Without discipline, and with low reserve levels, a lack of competitiveness and inflationary inertia, dollarization is just sweeping problems under the rug," he says.

"The only way to keep a competitive and real exchange rate for our exports without a deterioration of the purchasing power of wages is to gradually lower inflation, and the precondition for that is to reduce the fiscal deficit," Furiase adds.

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FOCUS: Russia-Ukraine War

What's Driving Chechen Fighters To The Frontlines Of Ukraine

Thousands of foreign soldiers are fighting alongside Ukraine. German daily Die Welt met a Chechen battalion to find out why they are fighting.

Photo of the Chechen Dzhokhar Dudayev Battalion in Ukraine

Chechen Dzhokhar Dudayev Battalion in Ukraine.

Alfred Hackensberger

KRAMATORSK — The house is full of soldiers. On the floor, there are wooden boxes filled with mountains of cartridges and ammunition belts for heavy machine guns. Dozens of hand grenades are lying around. Hanging on the wall are two anti-tank weapons.

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"These are from Spain," says the commanding officer, introducing himself as Maga. "Short for Make America Great Again," he adds with a laugh.

Only 29 years old, Maga is in charge of the Dudayev Chechen battalion, which has taken up quarters somewhere on the outskirts of the city of Kramatorsk in eastern Ukraine.

The commander appears calm and confident in the midst of the hustle and bustle of final preparations for the new mission in Bakhmut, only about 30 kilometers away. The Ukrainian army command has ordered the Chechen special forces unit to reinforce the town in the Donbas, which has been embattled for months.

Bakhmut, which used to have 70,000 inhabitants, is to be kept at all costs. It is already surrounded on three sides by Russian troops and can only be reached via a paved road and several tracks through the terrain. Day after day, artillery shells rain down on Ukrainian positions and the Russian infantry keeps launching new attacks.

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