martin redrado : presentation of the 2009 monetary program speech by mr martin redrado, president of the central bank of argentina, before the committee on treasury and budget of the national senate, buenos aires, 30 december 2008. * 1. * * introduction one year ago, when i last addressed the honorable national senate to present the 2008 monetary program, i already emphasized with concern the hostile international financial scenario we had to face. on that occasion, i highlighted the uncertainty imposed by this scenario on monetary policy. in particular, i underlined the advantages of our risk management approach based on three pillars : the money market equilibrium, a managed float, and countercyclical policies that includes a proper regulation and financial surveillance. i also mentioned that, from the central bank, we successfully weathered the first turmoil since the end of the 2001 crisis. twelve months later, we have lived through three complex situations, which proves us right in the actions we have taken. the first one was the beginning of the sub - prime mortgage crisis in the united states ( july - october 2007 ). the second episode was the abrupt imbalance in the demand for money after the rural sector conflict ( april - june 2008 ) ; and the third relates to the worsening international crisis ( midseptember 2008 onwards ). the performance of monetary - financial variables and the limited impact of these episodes on the real economy prove the soundness of our policies. throughout recent years we have patiently and persistently built the right instruments to mitigate various shocks. under a risk management approach where a central scenario is defined for the main variables, our strategy furnishes us with the right tools to face any deviation. we have mechanisms in place to provide or absorb funds as needed while preserving money market equilibrium. we have a sound, well - regulated financial system that is in a position to “ cushion ” any turmoil. all of this in a framework of abundant liquidity in foreign currency and a managed float with mildly fluctuating financial variables to reflect the natural convergence between the yields of argentine peso - and us dollar - denominated instruments. this regime – which provides predictability and flexibility at the same time – is undoubtedly the best suited for the current economic stage. moreover, this regime takes into account both our long history of macroeconomic volatility ( and de facto dollarization of the peoples financial behavior ) and consistency with the macroeconomic program as a whole. in this presentation, i will firstly highlight central bank actions to manage

rate, although this may prove unsustainable over time. we can therefore state that we have an interest rate increase scenario. the federal reserve has already raised the short - term rate, the federal funds rate, and we can see that the gap between the short and long - term rates has been reduced. today the world is witnessing an increase in interest rates, which so far has been very gradual. i would like to touch especially on some issues that were discussed in washington last weekend. the federal reserve has made a special point of it and dr. greenspan has asked the monetary authorities worldwide for flexibility, so that they may be in a position to absorb any shocks arising in the international markets. the main request by the us today is that china should loosen the exchange rate peg to the dollar. china has maintained a pegged rate regime. its central bank has the largest reserves in the world, with us $ 450 billion, and if the chinese administration floated the renminbi, their currency would be revalued. what would a revaluation bring about? it would make chinese goods more expensive and it would hamper china ’ s massive exports, especially to the us. just to give you an idea, the us have a trade deficit on the order of us $ 110 billion with china, and are therefore requesting a flexible exchange rate. let me tell you that on friday i had lunch with the governor of the central bank of china. we discussed the new state policy pursued by our president aiming at a rapprochement with the pacific asia region, in particular with china, as our countries undoubtedly complement each other in many ways. the governor then said that ‘ we will not float our currency. the us can rest assured that we will continue to buy us treasury bonds, so that there is nothing to be concerned about. ’ summing up, as far as the central banks go, no changes are expected in their current asset composition, given that many of these banks in southeast asia hold a large number of us treasury bonds. however, in this scenario the private sector might claim that it has reached a cap with regard to us asset holdings, so that a higher increase in interest rates could follow. last time an increase in interest rates took place world wide, during 93 - 95, we suffered the tequila effect. but then latin america ’ s economic policy as a whole was totally different from today ’ s. basically, most economies had a fixed exchange rate, with growing indebted