The Real Talk Is About The Latino Dollar

Eric Ellis, Brasilia

01/20/1999

IT'S an idea that's been aired recently in Hong Kong, in Brussels, and with the simultaneous advent of the euro in Europe and the ongoing economic turbulence in Brazil, it's an idea that's gaining, er, common currency in smart Latin American salons.

The topic on Latino lips is dollarisation, and after the punishing experience this past week by Brazil's barely five-year-old real, there may be something to be said for it.

Argentina's colourful President Carlos Menem, never one to shirk controversy, is the most prominent enthusiast for a Latino greenback. Having just (literally) tangoed in the White House while declaring his admiration for most things North American, Menem returned to Buenos Aires to instruct his Finance Ministry to examine the merits of a single currency, be it the $US, the merco, the moneda or whatever a home-grown super-currency might be called.

On the surface it would seem to make sense. Argentina and Brazil are the heart of an emerging free trade bloc, Mercosur, that aims to have the best of the two worlds its 200 million inhabitants admire - Europe's unified stability and the US economic boom. But Brazil and, by extension, Argentina are also the latest to be buffeted by the financial hurricane claiming casualties throughout the developing world.

Yesterday, Brazil succumbed by confirming as policy its snap decision last Friday to float the real, its central bank intervening only when turbulence demands. That decision prompted a mark-down from a rate of 1.43 to the $US to what many economists have long said is the "appropriate value" of around 1.60.

The real had been firmly maintained around 1.22 for much of the past five years. The $US is already the currency of Latino regional trade, more so than elsewhere in the world. It's the currency of choice from Havana - much to Fidel Castro's chagrin - to Patagonia and it's not just the cliched back-alley black marketeers and taxi drivers who have set the trend.

There is hardly a self-respecting Latino businessman, or housewife for that matter, without a $US account tucked away for a repeat of those days when Latino inflation was measured in the thousands, not the single digits now the norm of the '90s.

Travelling around Latin America, it's perfectly normal to solely use US dollars in bars, restaurants, shops and cabs. The Wall Street Journal claims that the average Buenos Aires shop will have at least 5 per cent of its float in greenbacks.

This dual but mutually inclusive market is evident when one makes an automatic teller withdrawal in Rio. Many machines offer a choice between dollars and reals.

It's claimed that around 54 per cent of Argentine bank deposits and 63 per cent of loans are in dollars. And the reason why Miami in Florida is a cosmopolitan Latin city is not just because the mayor speaks Spanish and Fidel emptied his gaols into the Caribbean back in the 1980s. Miami and its real estate blossomed as a safe haven for Latino-based $US earnings back in the hyper-inflated 1970s and '80s.

Latinos would also likely not suffer the phony nationalistic debate that dogged the introduction of the euro in Europe - that a population somehow has a patriotic bond with the sterling, marks or francs burning holes in their pockets.

Indeed, most post-war Latin American countries have experienced as many currencies as they have presidents. Brazil, for one, has had six in less than 20 years, the current real being the most stable, the dramas of past weeks notwithstanding.

Many are the bathrooms and bars in Rio and Sao Paulo wryly wall-papered with one-time life savings of cruzeiros and cruzados. The current Argentinian peso is just eight years old, about the same tenure as Menem, who replaced the defeated austral with it.

By contrast, Panama, by virtue of American control of its most valuable asset, the canal, escaped Latin America's hyper-inflation because it has the dollar (or balboa as it's known locally) as its currency.

With official US inflation at 1.5 per cent, its lowest since the waffles and white picket-fence era of Eisenhower, Latin America sought to import this low-inflation regime by linking currencies to the greenback through complex mechanisms such as Argentina's currency board.

At least two of the US Federal Reserve Board's last three interest rate cuts are read as being designed to placate Brazil, and keep the tumult away from the US. While it might be politically unpalatable out there on the pampas, being hostage to the vagaries of the Fed has paid off for Brazil, Mexico and Argentina, Latin America's giants.

After years of basket-casedom, they managed to stabilise, reform and sit back, and watch foreign investment swell their GDP as well as their national bank accounts.

Latinos felt good about their lot within two generations. Democracy flowered. But then the speculators descended, Mexico collapsed, then Asia, then Russia, and suddenly these seemingly rigid fiscal regimes crumbled - in Brazil's case, the central bank has lost more than half its $US75 billion in three crazy months in an ultimately pointless defence of the $US link.

Brazil's decision yesterday to stay with a floated real has come at the cost of a real suddenly 30 per cent cheaper than it was a week ago, and re-introduced the spectre of inflation, now forecast to rise to at least 6-8 per cent this year from about 2 per cent pre-crisis.

Interest rates were yesterday jacked up to 41 per cent in Brazil.

This new talk of dollarisation comes as the Americas seek ever closer economic union and a common market. The dream of many a Latino statesmen, and of a President Clinton, is that one day soon the Americas will be a free trade zone stretching from Alaska to Tierra del Fuego.

While Clinton is hobbled, probably permanently while he is President, by Republican and middle-American resistance to giving him fast-track regional trade liberalisation approval, Latinos themselves have taken up the cudgels with gusto.

Chile, South America's richest and most able economy, wants to join the North American Free Trade Agreement group of Mexico, US and Canada.

Chile is an associate of Mercosur, which groups Brazil, Argentina, Paraguay and Uruguay, and which in turn is talking to the Andean Community, which includes Ecuador, Venezuela and Peru. And they are all talking to each other and to the Central American nations, which see their destiny with NAFTA.

The successful introduction of the euro in Europe has set intellects alight, none less than Stanley Fischer, deputy managing director of an International Monetary Fund facing extreme criticism of its handling of the world financial crisis and none too keen to lose another $US42 billion to speculators with their eyes on Brazil.

"If European monetary union succeeds, there probably will be a shift towards more currency unions and fewer currencies," he said recently. Carlos Menem couldn't have said it any better.