Thursday, November 10, 2011

Lira Lessons from Argentina

. Thursday, November 10, 2011

The Economist's 'J.O.' on what it would mean to leave the euro:

Creating a new currency is not that difficult. A determined country could simply pass a law saying that all financial dealings should henceforth be conducted in the new lira (or drachma, or escudo, or whatever). Colleagues who have covered Argentina tell of how, in August 2001, the province of Buenos Aires issued $90m of IOUs to employees as part of their pay packets. These bills, known as patacones, were soon widely accepted in exchange for goods and services. McDonalds even offered a special “Patacombo” menu in exchange for a $5 denomination IOU. Argentina broke its "irrevocable" currency peg to the US dollar a few months later.
That's not how I read the history. How I read the history is that McDonalds was one of the only companies that would take patacones, and even then only if you had exact change. Other companies hoarded pesos (or USD) and moved them out of the country if they were able. Withdrawals of pesos from banks was strictly limited under corralito so patacones had some use, but there was a general shortage of goods and services in the economy so no currencies (besides the USD) could truly be said to be "widely accepted". As I read the history, the workers who suddenly found themselves paid in patacones surrounded government buildings in Buenos Aires in protest and demanded they be paid in pesos. The use of patacones, while perhaps the only option for a provincial government that couldn't pay its debts any other way, was a disaster and the currency was only in substantial use for a short time.

It's possible I've got my history wrong, and J.O. certainly is not arguing that issuing a new currency is painless. But I don't think it's quite as simple as (s)he says.


Lira Lessons from Argentina
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