E-Letter To The Washington Post And Anthony Faiola Re: Does The BCRA and The IMF Have An "Enron" Problem?

I am writing to you Mr. Faiola, because in my opinion, you have offered the best reporting regarding the economic troubles in Argentina. No one, in my estimation, in the mainstream media, has covered the financial, economic and geopolitical elements of the story any better than you.

Making that clear, I hope that your grasp and potential reporting on the subject that I am writing to you about allows you to go even further and higher in your coverage of one of the most important countries in the world.

It appears from all of the due diligence that we have performed at BlackElectorate.com that the numbers on the balance sheet of Banco Central de la Republica Argentina (BCRA) do not add up to the public position of the International Monetary Fund (IMF) regarding possible monetary policy options available to the country. Specifically speaking, the IMF is outright stating that it would be "technically unfeasible" for Argentina to dollarize its economy. We have looked at the balance sheet of the Central Bank and there is nothing there in the assets or liabilities that supports the assertion by representatives of the IMF. Quite the contrary, the country, the last time we checked, had more than sufficient foreign reserves and gold holdings with which to leave its current monetary arrangements in favor of dollarization.

To be clear, we are not necessarily advocating dollarization as the best route for the country. Anyone familiar with our editorials for the last two years should know that we view the gold standard and currency board monetary regimes as most optimal. In fact, Argentina is partly in the mess that it is in now because its previous monetary regime violated critical aspects of currency board orthodoxy.

Over the last 22 months we have consistently noticed and written about the manner in which the IMF has ruined countries around the world by the manner in which it obfuscates, obstructs and ignores the monetary policy desires and options of sovereign nations around the world. We most vividly remember the 1998 episode when economist and currency board guru, Dr. Steve Hanke, was advising the government of Indonesia in the establishment of currency board in Indonesia. In order to prevent that initiative from progressing, the IMF publicly cast doubt on the need for the currency board option (although many in the financial markets and among the Indonesian citizenry felt otherwise) and everyone from Walter Mondale and President Clinton personally warned then-Indonesian President Suharto against accepting Professor Hanke's advice. I am sure that you remember the coverage of that riveting drama, so thick that a diverse range of publications and opinion leaders from the Wall St. Journal to Nation Of Islam Leader Minister Louis Farrakhan commented on the controversy, and questioned the IMF's actions, with varying degrees of depth and interest.

Though not as deep, I am beginning to have a similar feeling, as I did in 1998, regarding the IMF's comments regarding the technical prospects of whether or not Argentina could dollarize successfully. We are picking up a hint in the IMF's public responses to dollarization-related inquiries that possibly, the Fund is exercising its unique and legendary powers of obfuscation, at least, and outright obstruction, at worst.

At the same time we do not desire to leave the BCRA exempt from scrutiny and in fact do wonder aloud if some items on the central bank's balance sheet are not properly valued and accounted for. It will take some digging and hard questioning of Bank officials and economists in order to determine the appropriateness, accuracy and veracity of the monetary authority's accounting practices and the application of such.

We have included a letter to the editor written to the Financial Times by Steve Hanke regarding the matter that sums up the problem and available evidence rather succinctly. As of this writing The Financial Times has not followed up in response to the questions raised by Mr. Hanke. Mr. Faiola, please do look into this matter and bring your considerable journalistic talents to bear, if you think appropriate. I am confident that there is a potentially explosive story underneath the surface of the BCRA's balance sheet and the IMF's comments regarding the issue.


Cedric Muhammad

LETTERS TO THE EDITOR: Questions the IMF is obliged to answer
Financial Times; Jan 17, 2002

From Prof Steve H. Hanke.

Sir, On January 10, the FT published two items in which the authors advocated dollarisation for Argentina: "Duhalde's wrong turn", by Jeffrey Sachs, and "Argentina could learn from the example of El Salvador" (Letters) by Manuel Hinds. These were followed by an editorial, "Argentina's bind" (January 14), which concluded: "Given Argentina's terrible record of monetary management, policy credibility may be easier to achieve through the (dollarisation) route."

When asked about dollarisation for Argentina during a press briefing on January 11, Anne Krueger, first deputy managing director of the International Monetary Fund, threw cold water on the idea, however. Indeed, Dr Krueger said: "Well, my understanding at the moment is that (dollarisation) is technically unfeasible. So I don't think the authorities are thinking about it; I don't think we are thinking about it."

Dr Krueger's statement implies that the Banco Central de la Republica Argentina (BCRA) does not have enough foreign reserves to liquidate its peso monetary liabilities and dollarise the economy. According to the BCRA's balance sheet of January 10, this was not the case, however. The BCRA's peso monetary liabilities were 17.92bn pesos and "pure" foreign reserves in US dollars were Dollars 14.75bn. In addition, the BCRA had 14.96bn pesos of domestic assets valued at market prices that could be sold to acquire US dollars. Consequently, at the time Dr Krueger made her statement, it would have been feasible for Argentina to dollarise at an exchange rate of 1 peso to 1 US dollar, the rate in force under the Convertibility Law.

This, of course, leads to a number of questions: Is Dr. Krueger misinformed? Or does the IMF know something that the rest of us don't know? In short, does the BCRA have an "Enron problem"?

In accord with the IMF's executive board decision to enhance transparency (January 4, 2001), the IMF has an obligation to answer these questions and explain why dollarisation is not feasible at a one-to-one peso-dollar rate. Furthermore, if the BCRA does have an "Enron problem", at what exchange rate would dollarisation be feasible? After all, dollarisation is always feasible at some rate.

Steve H. Hanke, Chairman, Friedberg Mercantile Group, New York, NY 10005

Cedric Muhammad

Thursday, January 31, 2002