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| Caribbean-Latin America |
| Latin Governments Try to Unseat the Dollar |
| 2005-05-14 |
| There is a connection between these moves and the cuddle-up with the Arabs. The problem for us is the Dems trying to kill CAFTA which would give these countries a solid tie to our economy. Once considered the bedrock of monetary stability, the U.S. dollar is losing fans among Latin American officials eager to promote their own domestic currencies. Yet recent government attempts to limit the role of the dollar contrast with the behavior of consumers who remain partial to the dollar as a dependable medium of exchange and store of value. Before governments can expect consumers to voluntarily switch allegiances, they will have to build credibility in their own currencies. It wasn't long ago that governments saw the U.S. Federal Reserve as a legitimate and effective substitute for homegrown monetary institutions. Beginning in the late 1980s and well into the 1990s several countries set the value of their currencies at a fixed rate against the dollar. The plan helped bring inflation under control, but a lack of accompanying structural economic policy adjustments consistent with stable money brought about the collapse of most fixed exchange rate regimes. Those countries that adopted the dollar as legal tender -- Ecuador, El Salvador and Panama -- have so far avoided devastating monetary crises. Argentina abandoned its currency peg known as "convertibility" in 2002, a painful episode that marked the end of the latest chapter in fixed exchange schemes. By then, several other countries had already adopted explicit inflation targeting as an alternative way to try to keep prices in check. Now that nine nations in the region rely on inflation targeting and the value of most currencies fluctuates in the foreign exchange market, these governments are becoming more wary of the dollar, particularly dollar borrowing on bank balance sheets. For consumers and companies however, the dollar remains popular. Because of the trust it inspires among both borrowers and lenders, rates for commercial loans in dollars where they are available are more attractive than those on local currency lending. The continued reliance on dollar borrowing worries officials who fret about the danger of instability if local currencies were to suddenly lose value versus the dollar. In Peru, where the dollar is widely circulated in parallel to the Peruvian sol, the government has engaged in a vocal campaign to reduce the amount of dollars in circulation. The results have been mildly effective: During the first quarter of this year, Peru's central bank reported the amount of dollars in the banking system had dropped to 54% in 2004 from as high as 70% in 2000. The transition in the credit sector has been slower, where according to the central bank almost three quarters of all loans issued in 2004 were denominated in dollars. In a recent release titled "The Importance Of The De-dollarization of the Banking Credit Sector," Peru's central bank states that having 74% of all bank loans denominated in dollars creates a potential currency imbalance for consumers as well as companies, since most receive income denominated in soles rather than in dollars. "The mismatch implies a currency exchange risk: if the exchange rate weakens, foreign currency liabilities rise while income doesn't. In this manner, the dollarization of the bank credit sector makes the economy vulnerable," argues the central bank. For anyone following the painful and ongoing debt cleanup of billions of dollars borrowed by Argentina's consumers and companies when the local currency was valued at parity with the dollar, the warning seems merited. Besides Peru, other Latin American countries have conducted campaigns over the years to reduce the dollar dependency of its citizens and raise the profile of local currencies. Mexico developed a futures market in pesos following its devaluation and financial crisis in the mid 1990s. Chile avoided the dollarization of its financial sector with the introduction of local currency deposits indexed to inflation, a measure that failed in other countries. Colombia and Uruguay have successfully issued international bonds denominated in domestic currencies. The development of new financial instruments and markets has had an impact in some sectors, as the figures from Peru suggest. Changing the ingrained habits of individual consumers and local companies that are still partial to the U.S. currency will be a slow process. The use of the dollar isn't limited to consumer and business loans. Newspapers in several Latin American countries run classified advertisements where prices for big ticket items, from houses to cars, are still quoted in dollars. Short of forcing individuals to convert their holdings into local currencies, a policy that failed in the 1980s, governments will have to convince citizens that local currencies can be trusted. Julio De Brun, who served as Uruguay's central bank president until April, says that more than the dollarization of a country's credit sector or its public debt, the original sin in this case lies in the erratic behavior of policymakers in the past. "Dollarization was first a response by economic agents to the lack of confidence in government policies and later a monetary option in countries that were already heavily dollarized and where the dollar had substituted for local currencies as a unit of value," Mr. De Brun said. Regardless of changes in monetary policy fashions, officials can't ignore the fact that adoption of strong ties to the dollar in the mid-to-late 1990s was the only credible option, he said. In Mr. De Brun's view, at the root of the wish to hold dollars lies a spontaneous desire among citizens to protect their wealth from the sometimes deceitful behavior of governments. For that reason, he feels it will take consistent efforts to improve credibility before officials begin to notice significant changes in the composition of currency holdings of their citizens, Mr. De Brun thinks that domestic businesses and consumers in economies where the dollar is still dominant will probably maintain current habits until local currency capital markets offer competitive options to the dollar. |
| Posted by:too true |
| #5 It also goes the other way. IIRC Ecuador switched to using the US Dollar as its currency to end the cycle of government inflation and devalutation that undermined their economy. |
| Posted by: Elmilet Thavirong9735 2005-05-14 12:59 |
| #4 Apparently, they've never heard of the "Iron Rule of Currency", that "Bad Money Pushes Out Good". In this case, their worthless currencies will become what everybody wants to spend, while dollars remain what everybody wants to *save*. This means their currency will inflate and inflate, compared to the dollar, and the only way to buy anything of great value will be with dollars. |
| Posted by: Anonymoose 2005-05-14 11:24 |
| #3 trailing wife, The equation: prosperity = reduced birth rates seems to have a few exceptions. |
| Posted by: gromgoru 2005-05-14 10:35 |
| #2 Lack of trust of the political system translates to a lack of trust in the local currency. Fix the former and you will fix the latter. |
| Posted by: Sock Puppet 0’ Doom 2005-05-14 08:15 |
| #1 Regardless of the philosophical basis for de-dollarization campaigns (what a bastardization of a word that is!), anything the L.A. countries do to stabilize their own currencies benefits us all. To be pedantic (not you, Captain P.), measures taken to stabilize currencies also benefit economies; and more stable economies south of our border hopefully will mean fewer economic migrants (also known as illegal aliens) heading north in search of a way to feed their hungry children |
| Posted by: trailing wife 2005-05-14 08:00 |