The patacone plan - back to the future?

Economic crisis has led to acute social problems

By BBC World Business reporter, Mark Gregory

For months provincial governments in Argentina have paid many of their bills and their employees in bonds not cash.

These bonds can be exchanged for goods in shops and are to all intents and purposes a form of currency.

In effect what the federal government now proposes to do is extend the principle to the whole country.

It is estimated that provincial government bonds add up to about 5% of the cash now in circulation.

With the addition of national government bonds this figure could go up to 10% or even 15% of cash used for everyday transactions.

What is it?

A bond is essentially a piece of paper that commits the issuer to paying a designated sum of money to whoever owns it at particular date in the future.

Until that date, the bond can be bought or sold by anyone at whatever value the market determines.

The government of the Buenos Aires province, the country's most populous region, pioneered the idea of substituting bonds for cash.

Initially it printed $1bn worth of bonds called patacones, a name derived from a former Argentine national currency.

These were paid to employees in lieu of their normal salaries.

By issuing its own version of patacones, the federal government hopes to stave off a formal devaluation of the official currency the peso, which is fixed at a rate of one to one with the US dollar.

Future shock?

The bonds will help the government meet its expenses, and could also inject spending power into the recession plagued economy.

But there may be a high price to pay.

Existing provincial government bonds have typically lost one fifth or more of their nominal worth.

Federal bonds are also unlikely to change hands at face value for long.

By relying on them the government risks a collapse in confidence in the value of money and a return to the hyperinflation that prompted Argentina to link its currency to the dollar in the first place, 10 years ago.