What To Do If I Have A Permanent Kinked Neck

The "Fund Bicentennial "does not jeopardize the Currency. The fiscal deficit itself.

By Ramiro Castiñeira

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Only a handful of countries have achieved currency without backing of foreign assets. Extreme example of this is U.S. with a currency backed solely by their own government debt. For other countries, mainly for emerging, so that society can gain confidence in its currency, the Central Bank needs to show not only that has a floor of foreign assets to support it, but it will not finance the commitment to free government.

There is no "rule" to know which is the optimal level of foreign assets to generate confidence in the currency. While the rule of "free reserves" or convertibility own time, are examples of trying to establish that floor, history shows that this does not guarantee the value of the currency. It may support the monetary base, something radically different to support the currency, or the broader monetary aggregates.

This reflects that the deterioration or strength of a currency does not come from the stocks that support, but by flows of the economy.

For example, economic science is evidence that a persistent surplus in the current account of balance of payments (flows) to build pressure for currency appreciation, regardless of the stock of reserves available to the Central Bank. Conversely, the deficit will act to push for a depreciation of the currency.

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Similarly, monetizing it is known that chronic fiscal deficit, ie red issued to finance the Treasury (flow), to build pressure for a devaluation of local currency, with the most money in circulation and the same generation value.

Warned of this, money is not put at risk by the creation of the Bicentennial Fund, but for the loss of government's fiscal surplus in a context where no access to credit in sufficient quantity and price to be independent of BCRA.

Pay the maturity of public debt with reserves virtually unaccountable interest before maturity to refinance an interest rate above 10% per year, not a bad decision financially if seeks to leverage the international situation of zero interest rates. The National State as a whole will save u $ s650 million annually in interest on a net basis (= 6500 * 0.10), without changing his assets (liabilities canceled Debt-to-asset-stocks-).

Now it is a fact that the Government and no income to cover their operating expenses, which has financed using Central Bank reserves, not only to pay down debt, but also to finance current operations. That's where the risks lie ahead.

with stock finance current expenditure (whether qualified as now, or selling as the Convertibility YPF) are short-term solutions that do not address the underlying problem is in deficit, the true source of impairment value of the currency.