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May 14, 2018


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Hmmmm....well a possible reason for the persistence of the Blue Market was discussed before (http://noelmaurer.typepad.com/aab/2017/04/observatorio-argentino-34-what-is-the-opposite-of-blue.html) but I don't think it explains the deep dollarization of Argentina's financial system. Perhaps as a result of the crisis in 2001, financial institutions have preferred debt contracts written in dollars rather than pesos? Could it be that debts issued in dollars are more likely to be approved and/or come with more favourable terms?

Maybe Argentina should just dollarize fully now like Ecuador?

oh man systemic currency risk is a bitch.

as you know Bob my thinking on this issue was permanently warped by being in Indonesia in 1997. banks had borrowed heavily in foreign currencies because why not? the economy was growing, the rupiah was stable. until it wasn't -- 60% drop in two weeks. whoops.

dollarizing loans just pushes it downstream. the banks aren't on the hook directly but watch their NPL rate head for the moon because nobody can afford to repay their debts.

the IMF solution in Indonesia was, I shit you not, "austerity!" yeah guys great job converting what should have been a two year recession into a lost-decade depression. around 2010 they publicly admitted they'd screwed that one up. nobody ever suffered any consequences, of course, but hey the "my bad" was nice.

okay so Argentina. jacking up IRs to keep the currency afloat is a painful solution that at a minimum is growth-killing and at worst will shut down bank lending because why loan money when T-bills are paying 23% or whatever. it's also a bit late in the day given that the systemic exposure is large and the peso has already fallen far -- even if rate hikes stabilize it, borrowers are still going to feel pain. some of which will be transferred to the banks through NPLs. weaker banks may go to the wall. are there weak Argentine banks that are 'too big to fail'? whoops now you have the fun choice bailout / or don't.

there are some solutions floating around that AFAIK have never been tried. one that caught my eye was a mandatory cramdown: by law, all dollarized bank loans made before date X get fixed at a particular exchange rate. no idea if it would work but the current menu of policy options is not very heartening.

Doug M.

The mandatory cram-down as described sounds like the Argentine corralón. The corralón pesified all debts at an exchange rate of 1:1, while pesifying deposits at 1.4:1. So if you owed $1 and had $1 in deposits, you now owed one peso and enjoyed 1.4 pesos in deposits; this at a time when the market exchange rate had crashed from parity to about 3 pesos per dollar.

The corralón didn't work well, as you know, but the Argentine government waited until the alternative was to altogether abandon the credit economy before trying it.

Is the cram-down proposal significantly different?

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