| As Argentina Seeks Relief, Buenos Aires
Touts Bonds That Many Don't Want By MATT MOFFETT Staff Reporter of THE WALL STREET JOURNAL LA PLATA, Argentina -- In a daring, decadelong economic experiment, Argentina has held to a single, simple monetary rule: One peso equals one dollar. Carlos Ruckauf, governor of Buenos Aires province, with patacon in hand. But as Argentina endures a financial calamity that has jarred markets around the world, the country's vast Buenos Aires province is suddenly facing a more complicated financial calculation: What is one patacon worth? The patacon is a wallet-size negotiable bond that the cash-strapped provincial government wants to use to pay part of what it owes to public employees and suppliers. Complete with an engraving of Daro Rocha, the mustachioed founder of this provincial capital, the patacon looks like legal tender. And, if all goes as planned, the patacon will start being used as money Tuesday, in an area accounting for one-third of Argentina's population and economic output. 'An Act of Vandalism' But many workers and businesses are outraged about the plan. Mobs of unemployed protesters, known as piqueteros, have set up roadblocks that paralyzed major thoroughfares in the province, which encompasses suburban Buenos Aires and a Nevada-size area of the surrounding pampas. The teachers union has decried the patacon as "an act of vandalism against wages," and the rank and file walked out of classrooms. Dozens of merchants and state contractors have flat out refused to accept patacons at face value. U.S. Urges IMF to Seek Enduring Fix for Argentina's Economic Troubles The bonds pay annual interest of 7% to those who hold them to maturity next year, and the federal government has said it will accept them as payment on taxes, as well. But the country's long history of financial turbulence, resolved only by the dollar-backed peso, has made residents wary of anything that gives off a whiff of funny money. Many fear that patacons won't be widely accepted or will quickly lose their value. Yet the consequences of not having enough pesos circulating are also proving devastating. Lacking the means to pay suppliers, provincial hospitals have been forced to ration food and have deprived cancer patients of medicine. "The question is whether bad money is better than no money at all," says Vitali Carlos, a union leader. The Definition of Money Argentina's patacon predicament demonstrates how confusing -- and crucial -- the very definition of money has become in interlinked global markets. An intractable three-year recession, combined with a speculative wave from Wall Street, has strained the limits of Argentina's "currency board" system of pegging the peso firmly to the dollar. Under the rules of the currency board, the central bank can't print pesos unless it has dollars to back them. During the first half of the 1990s, Argentina's dollar-backed peso not only vanquished inflation that had reached 5,000% annually -- it also ignited an economic expansion exceeded only by China's during the period. But more recently, as several Asian and Latin American countries devalued their currencies, the peso made Argentina too pricey a place to buy goods from or invest in. Finally, this year the local and international lenders that had been keeping Argentina afloat cut it off. Now, Argentina is negotiating with the International Monetary Fund to obtain further aid to help keep the country going. With its travails, Argentina, for a while seen as a model of free-market reform in Latin America, has shaken emerging markets around the world and hamstrung stocks of U.S. companies that had bet on the peso policy. The crisis also has injected a note of desperation in the tone of Argentine authorities. "Perhaps I will pay for the crime of speaking the truth," Buenos Aires Gov. Carlos Ruckauf said. "It seems to me that the fact that Argentina went broke is being hidden from Argentines." Federal Wiggling Patacons are a stopgap measure in a country that can't print money, can't raise it through taxation during a recession and can't borrow it from financial markets. Provincial officials say one reason they have been forced to resort to the patacon is the federal government's own wiggling on the currency board. The province was set to raise some badly needed revenue with an international bond offering in June. But in mid-June, federal Economy Minister Domingo Cavallo, the original architect of the currency board, committed what is widely seen as a major policy stumble: He announced that Argentina was tinkering with the peso-dollar peg to grant exporters what was, in effect, a 7% currency devaluation, intending to make their goods more competitive abroad. International investors were so unnerved that Buenos Aires province had to cancel its bond issue, says the Buenos Aires economy chief, Jorge Sarghini. Without the fresh capital, the province hasn't been able to pay employees or contractors for weeks. In downtown La Plata, merchants and shoppers are divided over whether the patacon is merely monetary sleight of hand or their salvation. The commercial district, several blocks of sprawling mission-style buildings subdivided into dozens of shops, once thrived on the trade of civil servants and factory workers. With the recession, some stores have been boarded up and political graffiti have proliferated. A typical message: "Fuera Ruckauf." (Out with Ruckauf.) Some merchants are taking a proactive stance on the patacon. "Yes, we accept patacons," says the sign outside a Volkswagen dealership. Buenos Aires McDonald's restaurants are offering a meal they call the Patacombo. The notice outside the woman's clothing store Orix specifies that it will take the provincial paper at 100% of face value. "These days, if customers want to pay us in tomatoes, I'll consider making a deal," says Mariano de Seta, the local cellphone dealer for Telefonica of Spain. He says sales have fallen to about 40 phones a month from three times as many at the beginning of this year. Other businesses are more skeptical. The electric utility will take patacons, but only up to 60% of each bill. At a department store called Todo Vale $2 (translation: Everything Costs $2), management doesn't even want to look at the bonds. "My suppliers will laugh at me and then cut me off," says Rosana Gomez, an owner. In a telephone survey of 350 retailers, 40% said they would accept it; most of the rest weren't sure. Federal authorities have become concerned that several other tapped-out states might flood the market with scrip, further undermining the peso. So Mr. Cavallo said last week that the federal government would issue a single bond that will eventually take the place of the patacon and any other provincial bonds. Many industrialists cringe at the thought of the patacon, especially during a financial crisis. "This is not the time to be playing around with money -- or something that looks like money," says Francisco Gliemmo, president of a provincial industry group. Since March, when savers and investors were badly spooked by the country's prospects, Central Bank reserves have fallen $10 billion to about $17 billion. But Argentina still has sufficient resources to cover its monetary base; Argentina's currency-board law also permits, in a pinch, the use of government securities as backing for a portion of its money. The province says it will issue $90 million in patacons this week and as much as five times that amount by the end of the year. "Putting such a large number of patacons on the market can't help but have the psychological effect of devaluing the peso," says economist Jose Sbattella. The patacon also raises questions about Argentina's commitment to the steep budget cuts promised in its recently announced "zero deficit" plan. The austerity push is one of Argentina's justifications for seeking billions of dollars in additional assistance from the IMF. Along with introducing the provincial bond, Gov. Ruckauf announced spending reductions of $500 million, slashing everything from cellphone use to the paychecks of senior administrators. But for every patacon the province issues, that is one less peso saved from spending cuts, since patacons represent peso obligations that the government eventually must meet. Critics say Gov. Ruckauf hasn't gone far enough in rooting out waste and corruption. State Congressman Horacio Piemont uncovered one Buenos Aires Education Ministry official who is earning $2,000 a month while spending much of her time in another state campaigning for public office. Moreover, in Buenos Aires province, as in both federal and state bureaucracies throughout Argentina, government salaries have generally been higher than private-sector ones. Argentina's 23 provinces are a financial mess -- one state had to put its capitol building on the block, while another tried taxing wind as an economic resource. But Buenos Aires is the worst case. Gov. Ruckauf, who took office in 1999, says the problem was one he inherited. Argentina's peso, lashed to an ever stronger dollar, has become a hindrance to exporters. Also, Mr. Ruckauf's predecessor left him big deficits, which the province funded until recently by borrowing. Since the late 1990s, the total debt of the province has doubled to nearly $6 billion. The peso problem worsened this year -- especially after a tumultuous period in March when Argentina had three different economy ministers in three weeks. The province couldn't borrow. The equally strapped federal government delayed revenue transfers. Buenos Aires health clinics have been running short of rubber gloves and syringes lately. Some primary schools have had to stop offering the only hot meal many low-income students were receiving. Last month, Gov. Ruckauf had to admit the truth: "There isn't cash to pay salaries," he said. The province tried to put the best face on the patacon, even cranking up a promotional campaign. The slogan: "He who wants to, spends it. He who saves it, earns." Late last week, the government filled automatic tellers with patacons so that Buenos Aires employees could collect part of their salary in the bonds. But at the last minute, provincial judges barred the release of the bonds until Gov. Ruckauf assumed personal liability for any financial harm the patacons might cause. Mr. Ruckauf said he will go ahead with the patacon launch Tuesday anyway. Some Buenos Aires residents are receptive to the patacon, if only out of desperation. Almost everyone in the province seems to be in hock these days. The province owes $180 million to contractors. The state has its creditors, too. The print shop that did the patacon engravings took on the job to cover an $8 million bill for back taxes. The government said it would establish a hotline where consumers can denounce speculation by merchants who won't accept the patacon at 1-to-1 to the peso. But people such as teachers union leader Susana Luburu, one of 180,000 workers and retirees who will be paid partly in patacons and partly in pesos, frets that the paper won't hold its value. "One peso buys a cup of coffee or a newspaper," she says. "But what will you be able to buy with one patacon?" The situation is even more confusing for government contractors. The province wants to pay them in both patacons and yet another piece of paper -- three-year "debt consolidation" bonds that yield 12%. Daniel Amato, head of the contractors' federation, says he fears the value of the consolidation bonds will quickly collapse as their cash-starved bearers unload them. "Contractors don't need money in three years -- they need it this instant," says Mr. Amato. Other solutions are under discussion in Buenos Aires. One La Plata newspaper has been conducting an online survey on whether Argentina should extend its peso-dollar peg the next logical step: doing away with the peso and using the greenback for all transactions. The thinking is that dollarization would once and for all eliminate investor fears of an imminent devaluation, thus reducing capital flight and bringing down interest rates. Some provincial-rights diehards have floated an even more radical idea. Since the provincial bank, Banco de la Provincia de Buenos Aires, was chartered in 1822, before Argentina's Central Bank came into being, it might not be subordinate to the Argentine equivalent of the Fed, the theory goes. Thus the province might legally be able to print its own pesos. Copyright © 2001 Dow Jones & Company, Inc. All Rights Reserved. 8.21.01
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