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American Diplomacy
Commentary and Analysis

March 2002

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At the request of American Diplomacy, the author of the following analysis, a distinguished economist, has commented on what his native Argentina might do to contain or reverse its ongoing financial crisis. —Ed.

Argentina is now without savings. Without savings, there will be no credit for investments in agriculture, livestock, industry or services. Such a situation will condemn the country to persistent recession, unemployment and poverty. This gives us good reason to look for escape hatches to limit the consequences of this problem.

The flight of Argentine savings abroad is not a new phenomenon. Since the middle of the 1940's, a time when there began an inflationary process that lasted almost half a century, Argentines sought refuge by keeping dollars under their mattresses or opening accounts in foreign banks. Those who invested in dwellings to rent stopped doing so as the result of a "temporary" suspension of evictions put into effect as a decree/law promulgated by the military government that ruled from 1943 on, and which persisted for decades.

Owing to the stability of prices achieved in the decade of the 1990's, some savings began to be deposited in local banks, both in pesos and in dollars. There were two main reasons why not all funds followed this route: first, the fear that the authorities would restrict their availabilityas happened in 1989 and now once again; and second, the fact that those who had evaded taxes could not account for the origin of their holdings.

The solution to these problems would be for the savers to regain confidence in the country, which is not likely to happen for many years, perhaps decades. If we want to restart the economy, it will be necessary to find ways to change this situation. This will not be achieved by laws assuring depositors that the government will not touch their assets, nor by laws affirming the "autonomy" of the Central Bank, because nobody believes in such promises.

One means of reducing the magnitude of these problems might be found in delegating the administration of some aspects of our finances, for a specified time, to a foreign central bank which would inspire confidence in the depositors. There are several possible alternatives: the U. S. Federal Reserve, the European Central Bank, or the central banks of Chile or Uruguay. Of the four, the latter seems best because Montevideo is close to Buenos Aires, and the Uruguayan authorities have shown themselves to be capable and responsible in managing the economy.

To bring about this collaboration, the Argentine government should negotiate with Uruguay an agreement establishing a commitment. This could be for a limited timesay, five yearsand it would allow the Central Bank of Uruguay to collect a commission for its services.

This agreement would authorize local banks to receive in Montevideo deposits from Argentina and from abroad, to add to the money available for loans in Argentina. The Uruguayan Bank would commit itself not to reveal the identities of the holders of these accounts, nor to confiscate the funds, nor replace them with bonds, nor limit their free availability. The advantage of signing such an agreement between the two governments is that the constitution of Argentina places international agreements above laws, so that the Argentine executive power could not change the terms by a "decree of urgency and necessity," nor could Congress do so by passing a law. With this additional guarantee, we could expect greater confidence on the part of foreign and Argentine depositors.

Because it would be unfair for those who have kept their funds abroad to get the same interest rate as those who have kept their money in the country, a tax of, say, one percent or two percent could be applied to the former. Before the expiration of the agreement, the local banks would return the funds to their origin in Montevideo. In this way, there would be no "whitewashing."

Of course, many people, for different reasons, will prefer to keep their savings abroad and not risk them at home, even with these guarantees. But it is possible that others would take advantage of a higher rate of interest. Since the total amount of Argentines' savings abroad runs into tens of millions of dollars, if even a percentage of that amount were to be returned, it would hasten the recovery of the Argentine economy.


Translated from the Spanish by J. Edgar Williams.

March 2002


The author is a former secretary of Foreign Commerce and vice president of the Central Bank of Argentina. He has published articles previously in this journal. [click here]

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