Dollarize or Die.(Argentina's economy)(Brief Article)(Statistical Data Included)

Without a dramatic rescue, Argentina is almost certain to begin defaulting on its $132 billion debt. The peso, pegged one-to-one with the U.S. dollar since 1991, might survive default, but that is unlikely. It could become a floating currency--in principle, good economics. The question is whether Argentina's central bank is disciplined enough to resist further debasing the peso by printing new money to pay the country's debts. I think not.

The only viable alternative is to dollarize. Dollarization means that the dollar would become the sole legal tender of the realm. Panama, Ecuador and El Salvador are already dollarized. Every Argentine peso would be converted to dollars, perhaps at the current one-to-one rate. Then again, Economy Minister Domingo Cavallo might use the opportunity to engineer a quickie devaluation, setting the conversion rate at 1.25 (or higher).

Critics of dollarization maintain that Argentina's existing fast tie to the strong dollar decked the economy. The dollar began gaining strength against Europe and Asia in April 1995, rising about 40 percent against Europe and 30 percent against the yen. In 1998 neighboring Brazil floated its currency, the real, which has since been cut in half against the dollar, dealing a further blow to Argentina's competitive standing as an exporter. But Argentina's Achilles' heel was not a strong peso. It was government spending greatly outpacing revenue collection, creating the need for chronic new borrowing.

Meanwhile, the International Monetary Fund played the role of an enabler by treating periodic cash-flow droughts with billions of dollars in rescue packages. Argentina ...