Adolfo Diz - Tenure at The Central Bank

Tenure At The Central Bank

The advent of the National Reorganization Process, the last Argentine dictatorship, on March 24, 1976, led to Diz's appointment as President of the Central Bank of Argentina on April 2. Central Bank Presidents in Argentina are largely subordinate as policy makers to the Economy Minister, and as were many of his predecessors, Diz was recommended to the post by the new Economy Minister (José Alfredo Martínez de Hoz).

The central banker signed a number of significant policy changes during his tenure.

Diz simplified the myriad exchange rates issued following the Rodrigazo crisis of 1975, and business sentiment recovered amid higher exports, lower inflation, and a stabilized peso. He then began a series of measures deregulating finance. The first, the Financial Entities Law, was enacted by the Central Bank on June 1, 1977, and introduced a sweeping deregulation of the nation's financial sector, including commercial banks, while prohibiting non-profit banking and imposing minimum capital requirements of US$10 million. New regulations shuttered numerous Argentine credit unions and community banks, which in a bid to survive, were granted a charter by Diz to form Credico-op Bank in 1979. Domestic credit was also stymied by the new policies, particularly the Monetary Regulation Account Law of 1977, which raised reserve requirements to 45% of deposits, thereby doubling borrowers' interest rates while eliminating yields on demand deposits; GDP, which had grown by 5% amid the improved business sentiment, fell by over 3% in the year after these policy changes as fixed investment plummeted.

Investment banking, in turn, flourished under the Central Bank's laissez-faire approach towards them, as well as by its extansion of deposit insurance on high yield accounts. A a variety of exotic investment vehicles became available in Argentina around 1979, while private, financial sector foreign debt ballooned to over US$30 billion (a third of GDP). Part of an anti-inflation package unveiled in late 1978 (prices had risen 175% annually for two years), Diz implemented Martínez de Hoz's Exchange Timetable (the Tablita). The pre-announced, progressively smaller devaluations of the peso encouraged the financial sector, and the economy benefited from both a recovering credit market, as well as from lower inflation (which slowed to half the 1978 rate). The disproportionately slow crawling peg approach helped make the peso one of the world's most overvalued currencies by 1980, however, and the collapse of the BIR, a heavily leveraged newer bank, on March 28, touched off a wave of capital flight as fears of an imminent crisis mounted.

Diz responded on April 1 by implementing Central Bank Circular 1050, a measure designed at the Economy Ministry. The policy tied monthly loan interest payments (almost all lending in Argentina is on an adjustable basis) to the local value of the US dollar. The timetable, made unsustainable by the balance of payments crisis, was abandoned in February 1981, however, and both the Economy Minister and his protégé, Adolfo Diz, stepped down at the end of March; as those privy to inside information from the Central Bank profited with the collapse of the peso, a large number of homeowners and other borrowers were bankrupted by the sharply higher monthly payments imposed by Circular 1050.