a thread in which ilx interprets economics and finance, sometimes linen by linen*, and disagrees a lot (probably)

I'm uncertain what to think about Argentina's plan to potentially dollarize the economy. I understand the rationale but not whether it would work or not, or why a currency peg would be a more manageable approach

Ecuador dollarized their economy, but would Greece or Italy be better comparisons? Argentina always seems confusing though, for a country with such high economic potential to be in this kind of position

I guess the problem with a currency peg is that no one would believe that Argentina would stick to it. Even Switzerland, a country with a much better track record for fiscal prudence, broke their peg to the euro when it became inconvenient. Not sure if dollarization would really work for a country of the size of Argentina. Seems logistically tricky.

i don’t think argentina will dollarize. to dollarize you need to back pesos with dollars and they don’t have dollars. so the only way they can do it is to sharply devalue the peso. but the only dollars argentina has are in deposits as bank reserve requirements which can’t be used for any other purpose. china has given them a “swap line” which lets them make payments in yuan but they could pull back on that at any moment. i think it’s more likely we see peso depreciation and some default but no dollarization. the extent of default precipitated by real dollarization would be extreme

I guess if Argentina did dollarize it would be similar to the scenario of countries joining the eurozone. This has happened a few times since the introduction of the euro, but all smaller economies: mostly the Baltics and small countries like Slovenia, Slovakia and Malta. Usually the conversion to the euro happened at a rate at which the converting currency had been pegged for some preliminary period.

Why similar to the countries you mention and not Italy or Greece? Italy's economy being bigger than Argentina's

I guess it is similar to that too. I was thinking of the difference between joining an existing currency and forming a new one. But I guess they are basically the same.