There is more than 7 pesos issued per dolar in the Central Bank

The CEDIN is in operation. People have the option to take their undeclared dollars to any commercial bank and exchange them for these certificates. The CEDIN can be change into dollars only if the holder can demonstrate that he sold o developed a real estate project. The government thus hopes that the CEDIN will be an alternative currency to the dollar that will abate the natural tendency of people to use foreign currency instead of pesos.

The CEDIN will be accepted as long as there is confidence that its one-to-one convertibility with the dollar will be respected or as long as there is trust that the government will not fall into temptation to issue CEDIN without backing dollars. Thus it could be worth to analyze the past behavior of the Central Bank in relation to the money creation.

Official information published by the Central Bank to April of each year shows that:

–  In 2011 Central Bank reserves were U$S 52 billion while the total amount of pesos issued were $167 billion, then for each dollar in the reserves there was almost 3 pesos issued.

–  In 2012 the reserves were U$S 48 billion and the pesos issued rose to $ 223 billion, thus for each dollar in the reserves there were nearly 5 pesos issued

–  In 2013 the reserves fell again reaching U$S 38 billion while the pesos issued rose to $287 billion, meaning that for each dollar in the reserves there were 7 pesos issued.

These data reveal the tendency of the Central Bank to create domestic money beyond the availabiliy of foreign reserves. The process has been so intense that it explains the rise of the unofficial price of the dollar in the black market well above the price of the official dollar. The antecedent feeds some concerns among the population that the same behavior will occur with the CEDIN. It will stop being convertible into dollars because the Central Bank has issued them bereft of foreign currency support.

The central issue about the CEDIN is that the growing fiscal deficit requires an increasing money supply. As long as there is no plan to recompose the public finances, the Central Bank will continue to be pressured to issue unbaked money. The massive peso emission was the path undertaken to finance the deficit at the expense of feeding the inflationary process and impairing the domestic currency of its role as savings instrument and mean of trade. The possibility that the CEDIN will follow the same fate is real if the government does not take control in some way of the public spending, for intance reducing the burden of subsidies.

Distrust is also fed by the systematic violation of rules. Unprecedented events in the history of Argentina had occurred. Among the most relevant are the manipulation of INDEC statistics, the state appropriation of social security savings, the Central Bank reserves and nationalization private companies, the improper use of the state to execute open or covered threat operations, the interference to the judiciary system, the degradation of the public resource distribution system to local governments, and the masive and obscure distribution of subsidies to public and private companies.

The fact that the City of Buenos Aires, Córdoba and Santa Fe have decided not to recognize de CEDIN has very limited impact if any at all. The risk of failure of the CEDIN does not arise from this decision of the provincial governments but by the high and persistent fiscal deficit and the high rate of money creation. The success of the CEDIN  and the creation of conditions for sustained economic and social progress are determined by a deep and dramatic advance in the organization and management of the public sector.