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 Journal columnist 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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Air Next: How A Crypto Scam Collapsed On A Single Spelling Mistake

It is today a proven fraud, nailed by the French stock market watchdog: Air Next resorted to a full range of dubious practices to raise money for a blockchain-powered e-commerce app. But the simplest of errors exposed the scam and limited the damage to investors. A cautionary tale for the crypto economy.

Sky is the crypto limit

Laurence Boisseau

PARIS — Air Next promised to use blockchain technology to revolutionize passenger transport. Should we have read something into its name? In fact, the company was talking a lot of hot air from the start. Air Next turned out to be a scam, with a fake website, false identities, fake criminal records, counterfeited bank certificates, aggressive marketing … real crooks. Thirty-five employees recruited over the summer ranked among its victims, not to mention the few investors who put money in the business.

Maud (not her real name) had always dreamed of working in a start-up. In July, she spotted an ad on Linkedin and was interviewed by videoconference — hardly unusual in the era of COVID and teleworking. She was hired very quickly and signed a permanent work contract. She resigned from her old job, happy to get started on a new adventure.

Others like Maud fell for the bait. At least ten senior managers, coming from major airlines, airports, large French and American corporations, a former police officer … all firmly believed in this project. Some quit their jobs to join; some French expats even made their way back to France.

Share capital of one billion 

The story began last February, when Air Next registered with the Paris Commercial Court. The new company stated it was developing an application that would allow the purchase of airline tickets by using cryptocurrency, at unbeatable prices and with an automatic guarantee in case of cancellation or delay, via a "smart contract" system (a computer protocol that facilitates, verifies and oversees the handling of a contract).

The firm declared a share capital of one billion euros, with offices under construction at 50, Avenue des Champs Elysées, and a president, Philippe Vincent ... which was probably a usurped identity.

Last summer, Air Next started recruiting. The company also wanted to raise money to have the assets on hand to allow passenger compensation. It organized a fundraiser using an ICO, or "Initial Coin Offering", via the issuance of digital tokens, transacted in cryptocurrencies through the blockchain.

While nothing obliged him to do so, the company owner went as far as setting up a file with the AMF, France's stock market regulator which oversees this type of transaction. Seeking the market regulator stamp is optional, but when issued, it gives guarantees to those buying tokens.

screenshot of the typo that revealed the Air Next scam

The infamous typo that brought the Air Next scam down

compta online

Raising Initial Coin Offering 

Then, on Sept. 30, the AMF issued an alert, by way of a press release, on the risks of fraud associated with the ICO, as it suspected some documents to be forgeries. A few hours before that, Air Next had just brought forward by several days the date of its tokens pre-sale.

For employees of the new company, it was a brutal wake-up call. They quickly understood that they had been duped, that they'd bet on the proverbial house of cards. On the investor side, the CEO didn't get beyond an initial fundraising of 150,000 euros. He was hoping to raise millions, but despite his failure, he didn't lose confidence. Challenged by one of his employees on Telegram, he admitted that "many documents provided were false", that "an error cost the life of this project."

What was the "error" he was referring to? A typo in the name of the would-be bank backing the startup. A very small one, at the bottom of the page of the false bank certificate, where the name "Edmond de Rothschild" is misspelled "Edemond".

Finding culprits 

Before the AMF's public alert, websites specializing in crypto-assets had already noted certain inconsistencies. The company had declared a share capital of 1 billion euros, which is an enormous amount. Air Next's CEO also boasted about having discovered bitcoin at a time when only a few geeks knew about cryptocurrency.

Employees and investors filed a complaint. Failing to find the general manager, Julien Leclerc — which might also be a fake name — they started looking for other culprits. They believe that if the Paris Commercial Court hadn't registered the company, no one would have been defrauded.

Beyond the handful of victims, this case is a plea for the implementation of more secure procedures, in an increasingly digital world, particularly following the pandemic. The much touted ICO market is itself a victim, and may find it hard to recover.

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