Devaluation with contract redenomination in Argentina

Annals of Finance

Volumn 3, Issue 1, 2007, Pages 155-192

  Calomiris, Charles W ^a  

^a The Sanford C Bernstein Co Center for Leadership and Ethics   (United States)

Author keywords

Argentina; Devaluation; Pesification; Redenomination

Indexed keywords

EID: 33846818902     PISSN: 16142446     EISSN: 16142454     Source Type: Journal    
DOI: 10.1007/s10436-006-0064-9     Document Type: Article

References (25)

1. This study considers only the effects of redenomination policy on utility and debt contracts because one cannot identify other differences across firms related to redenomination policy (e.g., different firms' propensities to use toll roads, whose tariffs were also affected by redenomination policy).
2. For a review of the evolving drama from the perspective of markets and policy makers, see Paul Blustein, And the Money Kept Rolling In (and Out): Wall Street, the IMF, and the Bankrupting of Argentina Public Affairs, 2005. See also Pedro Pou, What Lessons Can Be Learned from Recent Financial Crisis? The Argentine Experience, available at http://www.kc.frb.org/Publicat/sympos/1997/pdf/s97pou.pdf.
3. For a discussion of covered interest parity, see David O. Beim and Charles W. Calomiris, Emerging Financial Markets Irwin-McGraw Hill, 2000, pp. 248-50.
4. In this discussion, I abstract from the fact that the 30-day deposit interest rate differential understates the extent of devaluation expectations, since the possibility of a redenomination of dollar debts was taken into account by the market. The perceived possibility of debt redenomination acts to reduce the observed interest rate differential for any given probability of devaluation.
5. Decree 214/2002 can be found within the website of the Ministry of Economy and Production: http://www.mecon.gov.ar. More specifically, Decree 214/2002 can be found at http://infoleg.mecon.gov.ar/txtnorma/ 72017.htm.
6. See also Michael Bordo andRoberto Chang, "Throw Away the Dollar Peg," Financial Times June 7, 2001. For a review of the issues involved in this discussion
7. see Luis Felipe Cespedes, Roberto Chang, and Andres Velasco, "Balance Sheets and Exchange Rate Policy", National Bureau of Economic ResearchWorking Paper No. 7840, 2000, and
8. "IS-LM-BP in the Pampas," IMF Staff Papers, vol. 50, Special Issue, 2003, pp. 143-56;
9. Charles W. Calomiris, Daniela Klingebiel, and Luc Laeven, "Financial Crisis Policies and Resolution Mechanisms: A Taxonomy from Cross-Country Experience,", in Systemic Financial Distress: Containment and Resolution edited by Patrick Honohan and Luc Laeven, Cambridge University Press, 2005, pp. 25-75;
10. RicardoHausmann and Andres Velasco, "Hard Money's Soft Underbelly: Understanding the Argentine Crisis," in Brookings Trade Forum: 2002 edited by Susan M. Collins and Dani Rodrik;
11. Aaron Tornell, "Policy in an Economy with Balance Sheet Effects," in Preventing Currency Crises in Emerging Markets edited by Sebastian Edwards and Jeffrey A. Frankel, University of Chicago Press, 2002, pp. 705-40;
12. Sebastian Edwards, Real Exchange Rates, Devaluation, and Adjustment MIT Press, 1989; and
13. Paul Krugman and Lance Taylor, "Contractionary Effects of Devaluation," Journal of International Economics 8, 1978, pp. 445-56.
14. Decree 410/2002 can be found within the website of the Ministry of Economy and Production: http://www.mecon.gov.ar. More specifically, Decree 410/2002 can be found at http://infoleg.mecon.gov.ar/txtnorma/ 72761.htm. It is important to note that, while foreign trade finance, and foreign debts enforced outside Argentina, were not pesified, pesification still had substantial benefits for exporters to the extent that they had borrowed domestically in dollars for purposes other than trade finance.
15. See Randall Kroszner, "Is It Better to Forgive than to Receive? Repudiation of the Gold Indexation Clause in Long-Term Debt During the Great Depression," University of Chicago, Working Paper, November 1999.
16. Liliana Rojas-Suarez and Steven R. Weisbrod, Financial Fragilities in Latin America: The 1980s and 1990s IMF Occasional Paper 132, Washington, DC: International Monetary Fund, October 1995, pp. 17-18. This article describes how partial redenomination of bank loans and deposits in Mexico was used to shift some of the burden for the bailout of bank borrowers (via loan redenomination) onto bank depositors (via deposit redenomination): "... the government engaged in a policy of reducing the real burden of borrower debt and forcing depositors to absorb some of these losses through a reduction in the real value of deposits. The latter action was achieved through a combination of policies: Forced conversion of foreign currency-denominated deposits at unfavorable exchange rates and negative real interest rates on peso-denominated deposits. The real value of loans was reduced through the conversion of foreign currency loans to pesos at an exchange rate that overstated the value of the peso relative to the dollar."
17. See Ben Bernanke and Mark Gertler, "Financial Fragility and Economic Performance," Quarterly Journal of Economics 104, 1989, pp. 878-104;
18. Steve Fazzari, R. Glenn Hubbard, and Bruce Petersen, "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity: 1, 1988, pp.141-95; and
19. Charles W. Calomiris and R. Glenn Hubbard, "Internal Finance and Investment: Evidence from the Undistributed Profits Tax of 1936-37," Journal of Business, 68, 1995, pp. 443-82.
20. See Sanket Mohapatra, "Exchange Rate Regimes and Corporate Borrowing from International Capital Markets," Working Paper, Columbia University, February 2004.
21. The Argentine economy continued to contract in 2000 and 2001. During 2000, real GDP growth was -0.8%. During 2001, growth in the first two quarters of the year (relative to the same quarters of the previous year) was -2.0% and -0.2%, respectively. In the third and fourth quarters, the decline in GDP accelerated, and the growth in real GDP for the 2001 year as a whole was -0.4%.
22. "Economy - Argentina: On the Mend, Albeit Slowly, Say Officials," Inter Press Service April 6, 2000.
23. "Another President Caught in Argentina's Economic Trap," The Economist October 7, 2000.
24. I say "may have suffered" because it is conceivable that utility companies did not suffer, on net, from redenomination policy, since tariff redenomination increased quantities demanded (by lowering prices) and also increased the likelihood of the payment of utility bills that otherwise may not have been paid at all as the result of their high cost (especially in the volatile political environment of Argentina in 2002).
25. Charles W. Calomiris, Daniela Klingebiel, and Luc Laeven, "Financial Crisis Policies and Resolution Mechanisms: A Taxonomy from Cross-Country Experience,", in Systemic Financial Distress: Containment and Resolution edited by Patrick Honohan and Luc Laeven, Cambridge University Press, 2005, pp. 25-75.