Argentina weighs up the peso and the dollar

By Kevin Gray

BUENOS AIRES, Argentina (AP): Liliana Fabricante doesn't mind a few American influences, like fast-food chains or movies. But President Carlos Menem's recent suggestion of replacing Argentina's peso with the U.S. dollar is too much.

"I don't like it," the 31-year-old homemaker said. "I want money that's ours. Something that shows it's from Argentina, not something that makes us feel like we're another state."

A resurgence of economic turmoil in Latin America has prompted Menem to seek ways Argentina could scrap its multicolored peso bills for the more universally recognized American greenbacks.

Nothing that sinking currencies around the world have increased economic pressures at home, Menem hopes an economy operating exclusively in dollars could insulate Argentina from future global turmoil.

The proposal has gained momentum in recent weeks, particularly amid Brazil's struggle to bolster its sinking currency.

Pedro Pou, Argentina's Central Bank president, said last week that local officials were working with their U.S. counterparts to prepare working papers on the possibility.

However, officials from both countries concede any formal switch wouldn't happen anytime soon. A final decision to dump the peso for the dollar would require several years of planning, not to mention approval from Argentina's Congress, the U.S. Treasury and the Federal Reserve.

Still, Menem's proposal has sparked a debate over what Argentines are willing to sacrifice for economic security and just how much a shift to dollars would compromise national sovereignty and pride.

Disagreeing with critics who maintain Argentina would relinquish part of its nationhood, convenience store owner Julio Roussales said: "If that's what it takes to reduce interest rates, prevent our country from slipping into recessions, and curb our debt, then I'm for it."

Besides, Roussales noted, dollars already freely circulate in the Argentine economy, where the peso is pegged one-to-one with the dollar. Dollars have served as a parallel currency since 1991, when the peso replaced the country's former currency, the austral.

ATM machines ask customers whether they want pesos or dollars, bank accounts can be opened in either currency and most daily transactions can be handled using either bill. Many mortgages and long-term business projects are handled in dollars.

"People keep dollars at home or tucked away in their wallet," Roussales said. "We've changed currencies before and I don't have any love for the peso."

Analysts say the loss of its national currency is only one potential drawback should Argentina decide to join Panama as the second Latin American country with a dollar-based economy.

"If Argentina wants to dollarize its economy, it would have to surrender it's monetary sovereignty to the United States," said Arturo Valenzuela, director of Georgetown University's Center for Latin American Studies.

"They would have no flexibility because the Federal Reserve makes decisions thinking only of the United States," he said.

U.S. Deputy Treasury Secretary Lawrence Summers acknowledged as much Tuesday, saying in congressional testimony that countries are reluctant to adopt another nation's currency because they fear "loss of control over monetary policy," such as the ability to independently set interest rates or print money.

"That's obviously a choice for Argentina to pursue," Summers told the U.S. Senate Finance Committee. But "it may be a choice that can serve important functions in anchoring the (Argentine) economy."

Until now, Argentina, aided by its economic plan pegging the peso to the dollar, has weathered two recent financial crises in neighboring Brazil.

But Argentine officials say that has not completely allayed investor fears of a potential devaluation or default on foreign debt.

Those fears, Pou said, are reflected in the recent surge in Argentina's interest rates, now at 11 percent. Replacing the peso with the dollar would end those fears, he added.

The idea of dumping the peso isn't new. Argentina talked of switching to the dollar in 1995, when the region's economies contracted during the Mexican peso devaluation. Such talk helped Argentina ward off more severe consequences from that crisis.

Menem says the debate over switching to the dollar could be a step toward considering a regional dollar-based common currency, along the lines of the euro, launched by 11 of the 15 European Union nations on Jan. 1.

That, says Fabricante, would be easier to swallow than the faces of American presidents on Argentina's currency.