Argentina - Dollarization debate crashes the peso
Milei is burning down the economy and may benefit politically from it.
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Typical Argentina economic paradox: The economy is bad, so people expect the next government to come in and reform things, which somehow means the economy is now getting worse. In the past week, the peso has crashed further following Milei’s comments that “the peso is worth 💩.” The economic pain for locals is likely to worsen across the election and upcoming government transition, even as many foreign investors believe that reforms are necessary and the country has significant potential for growth in the future.
Can Javier Milei dollarize Argentina? That is one of the top questions I've gotten in recent months as the insurgent candidate has led the polls and promised a radical dollarization agenda. The answer I’ve built over time of how to do that is divided into at least five different parts (all of which could go into numerous sub-parts, but no need for that here):
1) Allowing dollar transactions between private parties to occur legally and without currency controls
2) Collecting government taxes and fees in dollars
3) Providing government payments in dollars
4) Making sure citizens trust that dollars can be used and will not be taken away
5) Actually having dollars
I discussed some of this in a recent World Politics Review column, and here is a breakdown of how I view the above five points:
1) With fairly simple and uncontroversial executive authority, a president can loosen the country's currency controls and allow for dollars (or any foreign currency - Euros, Reales, Yuan, Bitcoin!) transactions to take place throughout the country. If Milei or Bullrich wins, there is no reason that within 30 days of taking office, the president couldn't drop restrictions and allow restaurants or banks to accept dollar transactions if they wanted or pay their workers in dollars. That wouldn't mean a full conversion to dollars, but simply legalizing the use of foreign currencies for everyday transactions would be the obvious and easiest first step.
2+3) Collecting taxes and fees in dollars and government spending in dollars are much more difficult and legally complicated. This will require a substantial debate in the legislature. It very well would be blocked.
4) Trust is not easy. Just because dollars are allowed doesn't mean Argentines will magically start to use dollars everywhere. At first, there will likely be a divided system in which people gleefully use physical dollars in day-to-day transactions wherever they can but are much more cautious about electronic transactions and bank accounts given the history of the corralito.
5) As nearly every financial institution globally has stated, Argentina can't fully dollarize if it doesn't get its fiscal situation in better shape. They can't print dollars, so they can't spend more than they have. They already owe tens of billions of dollars in debt (denominated in dollars!) that various countries, banks, and multilateral financial institutions expect them to pay back. Even Milei says he'll need $40 billion in dollars to make the plan work.
Whatever the challenges, Milei has stuck to his dollarization policy and it has become quite relevant in the final month of the campaign. Argentina’s black market currency rate reached over 1,000 pesos to the dollar this week. If Argentina fully or partially dollarizes, then the peso will become increasingly useless. And if people believe the peso will be useless in 12 or 24 months, then they will try to dump their pesos as soon as possible. And that will cause even greater devaluation.
To be clear, Milei knows his comments are weakening the peso and he is enjoying it and encouraging the chaos. Crashing the economy before the election both helps his chances and makes it more likely (though far from certain!) that the worst economic damage and the blame for it occurs under the outgoing Peronist administration and not the new administration that will take office after the election.
Sergio Massa and the Peronists are far from innocent in all this. Price controls, additional subsidy payments, and printing lots of pesos in the run-up to the election have all contributed to the peso’s decline and the economic challenges that are ongoing. While Massa is a relative moderate among the Peronists, he’s still the architect of much of the current system of controls. It's easy and obvious to point fingers at the crazy politician who runs around with a literal chainsaw, but many Argentines understand that the current administration is mostly to blame.
Argentina's economic crisis will continue for the rest of this year. While it's not responsible to crash Argentina's peso and in spite of the challenges of dollarization, no candidate has outlined a serious plan that would save or revalue the peso. Milei will throw gasoline on the fire and delight when people accuse him of doing exactly that. He wants to make sure that burning the peso for heat is its most economical use.