Cavallo says rupiah debate is damaging<\/p>\n
BUENOS AIRES (Reuters): The public disagreement over
\nIndonesia's plans to set up a currency board is doing little to
\nstabilize the rupiah currency, the architect of Argentina's
\ncurrency peg, Domingo Cavallo, said Monday.<\/p>\n
\"It seems to me extremely dangerous to have a public debate in
\nthe media over the introduction of a currency board as a possible
\nsolution to stabilize the rupiah and return stability to
\nIndonesia's economy,\" the former economy minister told Reuters in
\nan interview.<\/p>\n
Cavallo, who masterminded the successful introduction of such
\na system in Argentina in 1991, said the debate between
\nIndonesia's authorities on the one hand, and the International
\nMonetary Fund on the other, \"far from contributing to stabilizing
\nthe rupiah, could accentuate its volatility.\"<\/p>\n
Indonesia's government looked set Monday to press ahead with a
\nproposal for a fixed exchange system despite the IMF's tough
\nstance against the plans.<\/p>\n
The IMF warned Monday that Indonesia's plan could risk its
\nUS$43 billion rescue package to the country and the European
\nUnion threw its weight behind the IMF's stance.<\/p>\n
\"In my opinion, to avoid chaotic hyperinflation in Indonesia
\nthey have to find an effective form of stabilizing the rupiah at
\na reasonable level,\" he said.<\/p>\n
Cavallo said the economic debate surrounding a currency board
\nin Indonesia is founded on the wrong basis. The discussion about
\n\"whether currency boards reduce currency and economic volatility
\nor not, is wrong, because they are talking about currency boards
\nwithout admitting the complete logic of those systems,\" he said.<\/p>\n
The key to the smooth functioning of a currency board,
\nwherever it may be, is about the monetary authorities'
\nwillingness to adopt the \"anchor\" currency as the main store of
\nvalue if need be, said Cavallo. Argentina's peso is pegged to the
\ndollar at one-to-one.<\/p>\n
\"You have to think of it (a currency board) more in terms of a
\ndollarization of Indonesia's economy than the application of a
\nfixed exchange rate for Indonesia's currency,\" he said.<\/p>\n
\"Real convertibility is not being discussed, which for its
\nexistence must be accompanied by the political acceptance of the
\nidea that in the last instance, a complete dollarization of the
\neconomy could take place,\" he said.<\/p>\n
In currency board systems, the amount of domestic currency in
\ncirculation usually has to be backed up by an equal amount of
\nforeign currency reserves.<\/p>\n
But if reserves are being depleted and monetary authorities
\nshow the willingness to switch to the anchor currency as the main
\nstore of value in the economy, local currency interest rates will
\nultimately fall and confidence will return.<\/p>\n
Some economists criticize a currency board because it leads to
\na loss of monetary policy to change interest rates to smooth the
\neconomic cycle. But Cavallo said this was no loss.<\/p>\n
\"I suspect that for emerging economies, the instrument of
\nmonetary policy is an extremely dangerous instrument,\" he said.<\/p>\n
Cavallo said Argentina's decision to adopt a currency board
\ninvolved no fully fledged debate with multilateral lending
\norganizations.<\/p>\n
He sent the legislation to Congress in 1991 and within two
\nweeks it was approved by lawmakers. \"It was an internal political
\ndiscussion. The IMF gave its support after three months, it did
\nnot support it initially but neither did it publicly go out and
\ncriticize it,\" he said.<\/p>",
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