With Argentina looking seriously at dollarizing its economy, other Latin American countries have rejected the idea - senior figures in Brazil, Mexico and Colombia say it's unsuitable for their countries and some analysts agree with them. One adds that even to dollarize Argentina is a project that would take years rather than months to implement.
Colombia's finance minister, Juan Camilo Restrepo, said in London in January: "We will not see any dollarization of the Colombian economy. We have an exchange rate policy which is clear and working properly. We have an independent central bank dealing with monetary policy. In Colombia we don't foresee changing to a currency board [the system Argentina has now whereby every peso in circulation is backed by dollar reserves] although we recognize that the Argentine authorities have been doing a good job. But it's not a scheme to be imitated by everyone."
Colombian government executives point out that the country has not suffered the hyperinflations that drove Argentina to adopt its currency board and that it is fiscal and monetary regimes that really determine whether any currency system holds up. Since coming to office six months ago the government of Andres Pastrana has moved swiftly to reduce the fiscal deficit to a target of 2% of GDP. But a recent Santander Investment report is sceptical. "We forecast a modest deficit reduction from 4.8% to 3.9% of GDP," it says.
Brazil's new central bank governor, Francisco Lopes, whose task is to restore faith in the real after last month's collapse of the crawling peg, has also ruled out the dollar option. "Argentina would become a type of Panama [Panama is dollarized]. The currency is one of the bases of any society."
But national pride isn't the only obstacle to adopting the dollar. With dollarization, the national central bank has no capacity to act as lender of last resort to the banking system and there is no way to smooth macroeconomic adjustments through monetary or fiscal means - they are swift and brutal causing rises in unemployment and bankruptcies. This troubles some analysts although many believe these difficulties could be overcome in the longer term.
Fernando Losada, a vice-president and senior economist with ING Barings, says: "A fixed exchange rate [or dollarization] is not a magic panacea for all the problems. Many Latin countries have weak banking systems and the banks need the support of the central banks. But under fixed exchange rates [currency boards or fully dollarized] the powers of the central bank are limited. If you get into trouble you could produce a run on the domestic banking system. It's not advisable for everyone." Mexico is one country where the banking system is not considered robust enough to withstand the pressures of dollarization.
Another factor is trade. Dollarizing makes most sense in economies where a large proportion of the trade is with the US. Apart from Mexico and Venezuela most countries do not have the US as their number-one trading relationship any longer. In many cases exports to the US account for around 15% to 20% of the total which is substantial but not overwhelming.
Even in Argentina's case dollarization is unlikely to happen quickly unless in response to a crisis. "It will not happen overnight, or in weeks or months," says Losada. "Even if they announce tomorrow that they are going ahead it will take years to redenominate all the contracts and bond issues." Brian Caplen