Description
The PPT explaining about Dollarization taking the example of Argentina. It starts off with the different types of dollarization. It then describes the advantages and disadvantages of dollarization.
Dollarization is defined as when residents of a country extensively use foreign currency alongside or instead of the domestic currency
?
Unofficially
? When private agents prefer the foreign currency
over the domestic currency
?
Semiofficially
? Where foreign currency is legal tender, but plays a
secondary role to domestic currency
?
Officially
? When a country ceases to issue the domestic
currency and uses only foreign currency
• Compare Central Bank reserves with M0
? As of Dec 1999, Argentina held $19.0 billion in reserves, while the monetary base is $16.5 billion • Liquidate reserves to acquire dollars • Buy non interest bearing dollars with interest bearing reserves • All peso-denominated deposits, debts, securities, and contracts are relabeled and become dollardenominated
Monetary association with the U.S ? Instead of selling its reserves on the open market for dollar bills the Federal Reserve could print an equivalent M0($14 billion - Argentina) ? In exchange US receives seigniorage ? Considerations ? Guarantee that pesos are never introduced ? To ensure this, put the assets currently backing the monetary base in an ESCROW account ? As long as pesos are not introduced, Argentina would receive the interest income ? If pesos introduced, U.S would seize the assets ? Problems ? As output grows , demand for media of exchange grows ? Demand grows , but the supply remains the same ? Practical and Tactical difficulties in future
?
Reduced risk Protection against inflation and devaluation Positive investor sentiment ? Stable capital market, end of sudden capital outflows, and a balance of payments that is less prone to crises ? Boost to international trade ? Eliminates currency mismatch ? Income streams, financial assets and liabilities would be denominated in the same currency ? No exchange rate to attack, so no currency crisis ? Reduce borrowing costs
? ? ?
• Lack of monetary policy independence • Central bank loses it power to accumulate
“seigniorage” • Central bank also loses its role as “The lender of last resort” for its banking system • All its securities must be bought back in USD • Damage a nation's sense of pride
? ? ?
Low levels of capital investment Inflation peaked in 1989 reaching 20,000% Unsustainable growth of the money supply to finance the large fiscal deficits maintained by successive governments Fragility of domestic financial institutions Interest rate fluctuations ? 1980s – U.S imposed tight monetary discipline upon its own institutions ? Expensive to borrow money because banks were required to keep higher reserve requirements
? ?
A currency board generates profits (seigniorage) from the difference between the interest earned on its reserve assets and the expense of maintaining its liabilities--its notes and coins in circulation ? It remits to the government all profits beyond what it needs to cover its expenses and to maintain its reserves at the level set by law ? An orthodox currency board has no discretion in monetary policy; market forces alone determine the money supply
?
Dollarization • Greater credibility because it is harder (though not impossible) to reverse
Currency Boards • Retain seigniorage domestically
Year
Event
1980s
1989 1991
Economic Instability (Latin American debt crisis and hyperinflation)
Major structural adjustment program - tax reform, privatization, trade liberalization, deregulation and adoption of a currency board Argentina’s Congress enacts the Convertibility Law
1991-94
1995
Strong economic growth , Currency Board considered to be successful
Following Mexico’s December 1994 peso devaluation, capital flows out of emerging markets. Argentina’s GDP declines by 2.8%
1995-1999 The U.S. dollar experiences a prolonged period of real appreciation, resulting in appreciation of the Argentine peso 1996-1997 Renewed period of Argentine economic growth (5.5% in 1996, 8.1% in 1997), but current account deficit and debt measures worsen 1998 1999 Financial crisis moves to Russia and then Brazil Brazil, facing its own financial crisis, devalues its currency, hurting Argentine exports, 30% of which were traded with Brazil
Year
Event
March,2000
The IMF agrees to three-year $7.2 billion stand-by arrangement with Argentina conditioned on a strict fiscal adjustment and the assumption of 3.5% GDP growth in 2000 Argentina’s continued poor economic performance prompts the IMF to augment the March 10, 2000 agreement by $7.0 billion as part of a $40 billion assistance package Government announces a $29.5 billion voluntary debt restructuring in which short-term debt is exchanged for new debt with longer maturities and higher interest rates IMF augments its March 10, 2000 agreement for a second time, increasing lending commitment by another $7.2 billion.
Argentina announces it can no longer guarantee payment on foreign debt.
Jan, 2001
June 16-17, 2001
September, 2001
December 7, 2001
Year December 14 , 2001
Event Supermarket looting begins (Unemployment Rate -18%)
December 26 , 2001
The liquidity standards for banks are relaxed. New economic plan announced based on: 1) Suspension of payments on public debt 2) New jobs creation program 3) Creation of new currency (the Argentino) to begin circulating in January 2002 and not to be convertible to the U.S. dollar
January 6, 2002 January 17, 2002
End of the currency board and a plans to devalue the peso by 29%
The government announces that dollar denominated loans exceeding $100,000 will be converted to pesos at 1.4 for fixed rate, deepening the balance sheet mismatch of banks
Brazilian Real devaluation No maintenance of the peg Failed the requirements of an orthodox currency board at one time or another ? Allowed to hold up to one-third of its dollardenominated reserves in the form of bonds issued by the government of Argentina ? Acted as lender of last resort
? ? ?
? Regulated reserve requirements for commercial banks
?
Engaged in monetary policy activities
?
Argentina defaulted on a large part of its foreign debt in early 2002 ? With some 93 billion dollars Argentina renegotiated the bulk of its commitments with most of its private creditors Sale to Venezuela of over 1 billion dollars in Argentine bonds at interest rates close to 15 per cent caused alarm in Argentine financial circles The Central Bank's foreign exchange reserves currently amount to 47.1 billion dollars, which are set to go down to just over 41 billion dollars after paying off the debt of Paris Club Six countries - Germany, Japan, the Netherlands, Italy, Spain and the United States - hold 87 per cent of the debt that Argentina is now set to pay off
?
?
?
?
?
Currency board did not give 100% credibility to the international investor confidence Some economists feel that Argentina is not part of an “optimum currency area” with the U.S as the economic forces affecting the two areas are very different
?
Thank You
doc_472696189.ppt
The PPT explaining about Dollarization taking the example of Argentina. It starts off with the different types of dollarization. It then describes the advantages and disadvantages of dollarization.
Dollarization is defined as when residents of a country extensively use foreign currency alongside or instead of the domestic currency
?
Unofficially
? When private agents prefer the foreign currency
over the domestic currency
?
Semiofficially
? Where foreign currency is legal tender, but plays a
secondary role to domestic currency
?
Officially
? When a country ceases to issue the domestic
currency and uses only foreign currency
• Compare Central Bank reserves with M0
? As of Dec 1999, Argentina held $19.0 billion in reserves, while the monetary base is $16.5 billion • Liquidate reserves to acquire dollars • Buy non interest bearing dollars with interest bearing reserves • All peso-denominated deposits, debts, securities, and contracts are relabeled and become dollardenominated
Monetary association with the U.S ? Instead of selling its reserves on the open market for dollar bills the Federal Reserve could print an equivalent M0($14 billion - Argentina) ? In exchange US receives seigniorage ? Considerations ? Guarantee that pesos are never introduced ? To ensure this, put the assets currently backing the monetary base in an ESCROW account ? As long as pesos are not introduced, Argentina would receive the interest income ? If pesos introduced, U.S would seize the assets ? Problems ? As output grows , demand for media of exchange grows ? Demand grows , but the supply remains the same ? Practical and Tactical difficulties in future
?
Reduced risk Protection against inflation and devaluation Positive investor sentiment ? Stable capital market, end of sudden capital outflows, and a balance of payments that is less prone to crises ? Boost to international trade ? Eliminates currency mismatch ? Income streams, financial assets and liabilities would be denominated in the same currency ? No exchange rate to attack, so no currency crisis ? Reduce borrowing costs
? ? ?
• Lack of monetary policy independence • Central bank loses it power to accumulate
“seigniorage” • Central bank also loses its role as “The lender of last resort” for its banking system • All its securities must be bought back in USD • Damage a nation's sense of pride
? ? ?
Low levels of capital investment Inflation peaked in 1989 reaching 20,000% Unsustainable growth of the money supply to finance the large fiscal deficits maintained by successive governments Fragility of domestic financial institutions Interest rate fluctuations ? 1980s – U.S imposed tight monetary discipline upon its own institutions ? Expensive to borrow money because banks were required to keep higher reserve requirements
? ?
A currency board generates profits (seigniorage) from the difference between the interest earned on its reserve assets and the expense of maintaining its liabilities--its notes and coins in circulation ? It remits to the government all profits beyond what it needs to cover its expenses and to maintain its reserves at the level set by law ? An orthodox currency board has no discretion in monetary policy; market forces alone determine the money supply
?
Dollarization • Greater credibility because it is harder (though not impossible) to reverse
Currency Boards • Retain seigniorage domestically
Year
Event
1980s
1989 1991
Economic Instability (Latin American debt crisis and hyperinflation)
Major structural adjustment program - tax reform, privatization, trade liberalization, deregulation and adoption of a currency board Argentina’s Congress enacts the Convertibility Law
1991-94
1995
Strong economic growth , Currency Board considered to be successful
Following Mexico’s December 1994 peso devaluation, capital flows out of emerging markets. Argentina’s GDP declines by 2.8%
1995-1999 The U.S. dollar experiences a prolonged period of real appreciation, resulting in appreciation of the Argentine peso 1996-1997 Renewed period of Argentine economic growth (5.5% in 1996, 8.1% in 1997), but current account deficit and debt measures worsen 1998 1999 Financial crisis moves to Russia and then Brazil Brazil, facing its own financial crisis, devalues its currency, hurting Argentine exports, 30% of which were traded with Brazil
Year
Event
March,2000
The IMF agrees to three-year $7.2 billion stand-by arrangement with Argentina conditioned on a strict fiscal adjustment and the assumption of 3.5% GDP growth in 2000 Argentina’s continued poor economic performance prompts the IMF to augment the March 10, 2000 agreement by $7.0 billion as part of a $40 billion assistance package Government announces a $29.5 billion voluntary debt restructuring in which short-term debt is exchanged for new debt with longer maturities and higher interest rates IMF augments its March 10, 2000 agreement for a second time, increasing lending commitment by another $7.2 billion.
Argentina announces it can no longer guarantee payment on foreign debt.
Jan, 2001
June 16-17, 2001
September, 2001
December 7, 2001
Year December 14 , 2001
Event Supermarket looting begins (Unemployment Rate -18%)
December 26 , 2001
The liquidity standards for banks are relaxed. New economic plan announced based on: 1) Suspension of payments on public debt 2) New jobs creation program 3) Creation of new currency (the Argentino) to begin circulating in January 2002 and not to be convertible to the U.S. dollar
January 6, 2002 January 17, 2002
End of the currency board and a plans to devalue the peso by 29%
The government announces that dollar denominated loans exceeding $100,000 will be converted to pesos at 1.4 for fixed rate, deepening the balance sheet mismatch of banks
Brazilian Real devaluation No maintenance of the peg Failed the requirements of an orthodox currency board at one time or another ? Allowed to hold up to one-third of its dollardenominated reserves in the form of bonds issued by the government of Argentina ? Acted as lender of last resort
? ? ?
? Regulated reserve requirements for commercial banks
?
Engaged in monetary policy activities
?
Argentina defaulted on a large part of its foreign debt in early 2002 ? With some 93 billion dollars Argentina renegotiated the bulk of its commitments with most of its private creditors Sale to Venezuela of over 1 billion dollars in Argentine bonds at interest rates close to 15 per cent caused alarm in Argentine financial circles The Central Bank's foreign exchange reserves currently amount to 47.1 billion dollars, which are set to go down to just over 41 billion dollars after paying off the debt of Paris Club Six countries - Germany, Japan, the Netherlands, Italy, Spain and the United States - hold 87 per cent of the debt that Argentina is now set to pay off
?
?
?
?
?
Currency board did not give 100% credibility to the international investor confidence Some economists feel that Argentina is not part of an “optimum currency area” with the U.S as the economic forces affecting the two areas are very different
?
Thank You
doc_472696189.ppt