Will the US dollar come to Argentina soon? New President Javier Miley’s plans under the microscope | 03/12/23

• Javier Miley wants to make the US dollar legal tender in Argentina
Dollarization can potentially tame high inflation, but it may not make sense for the economy
• Basic requirements for implementing plans may be missing

Argentina has elected a new president: Javier Miley, a self-proclaimed “anarcho-capitalist” from the La Libertad Avanza party – which translates as “Advancement of Freedom” – won a majority of votes in the November 19 election. “The reconstruction of Argentina begins today,” Miley said after his victory. “There is no room for partial steps, half-heartedness, or half-measures.” The future Argentine president continued: “If we do not make rapid progress on structural changes, we are heading directly towards the worst crisis in our history.”

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In fact, Argentina has had many problems for decades. According to Tagesschau, the inflation rate in the South American country reached nearly 143 percent in October, and in the past five years, the value of the Argentine peso against the US dollar has decreased by about 875 percent, according to CNN Business. . In addition, the country is heavily indebted, the economy has been suffering from a multi-year drought, low industrial productivity, a large shadow economy and a bloated state apparatus. According to the German news agency dpa-AFX, about 40 percent of Argentines live below the poverty line. Javier Miley now wants to address these issues. “We have huge problems in front of us: inflation, economic stagnation, lack of real jobs, insecurity, poverty and want,” he said, according to CNN. His solutions: privatize state-owned enterprises, abolish ministries, abolish social spending and introduce the US dollar as legal tender. In particular, Argentina’s dollarization, which was promised during the election campaign, is arousing a great deal of international interest.

This is behind the idea of ​​dollarization

As CNN Business explains, dollarization means Argentina will abandon the peso and use the US dollar as its currency instead. Argentina’s central bank, which often printed money in the past to prevent the country from defaulting, will no longer have any control over Argentina. Monetary policy. Instead, the country has to follow the decisions of the US Federal Reserve. But as The Guardian points out, Argentina and the United States are very different economies. Therefore, the correct monetary policy pursued by the United States may be wrong for Argentina.

Argentina had a rather bad experience in the past when it pegged its currency to the US dollar at a fixed exchange rate in 1991. After a deep recession and violent protests against restrictions on cash withdrawals, this peg had to be abandoned in 2002. However, Dollarizing the country represents a different approach – and not unprecedented in Central and South America. According to CNN Business, Panama and Ecuador have already implemented dollarization, but these countries are much smaller than Argentina, which is a member of the G20 and is considered one of the most important industrialized and emerging countries in the world.

Dollarization of Argentina is controversial among experts

According to Argentine President-elect Miley’s argument, dollarizing Argentina would, among other things, solve the problem of hyperinflation, according to CNN Business. Some experts also share this opinion, but others see completely different problems. For Steve Hanke and Matt Sekerke of Johns Hopkins University, “Dollarization in Argentina […] “It is not only feasible, but desirable,” they wrote in an article for the Journal of Central Banking. William admitted that while dollarization would be “a sure way to control inflation, it will not be a solution to the country’s financial problems.” “CNN Business” Jackson should be considered, as he works as chief economist for emerging markets at economic research firm Capital Economics, and according to “Reuters”, Elijah Oliveros Rosen, chief economist for emerging markets at “Standard & Poor’s Global Ratings,” Oliveros Rosen also submitted a report and said: “Dollarization will be the main problem in Argentina, and it cannot solve the really big budget problem.” Dollarization is not a magic solution; “It does not guarantee high economic growth or sound financial management,” warned Daniel Raisbeck, a policy analyst at the American libertarian think tank Cato Institute, according to Quartz. If this is not the case, dollarization may do more harm than good.

Portfolio manager Thierry Larousse of Vontobel Asset Management called Argentina’s dollarization plans a “terrible idea” that “will not happen in the short term,” according to CNN Business. In his opinion, the Argentine economy is too fragile to bear this step. If implemented anyway, the peso conversion rate would be highly inappropriate, which would increase the already high level of poverty in the country. However, the path towards dollarization could certainly benefit the Argentine economy. “To dollarize, you have to do it [die Wirtschaft] “Stabilization: stopping runaway inflation and rebuilding foreign exchange reserves,” the Vontobel expert said, according to CNN Business. “This requires budget consolidation and access to capital markets. However, the latter is largely deprived of Argentina, where the country is rated Currently, as Alejandro Werner, former director of the International Monetary Fund’s Western Hemisphere Department, told Americas Quarterly in September, dollarization “from an economic perspective” is “in partial default.” [auf die] The size, diversity and complexity of Argentina […] This is clearly not an “optimal exchange rate regime”.

Will a lack of foreign exchange reserves ruin Miley’s plans?

One point that, according to many experts, specifically stands in the way of Argentina’s dollarization plans, is the lack of foreign currency reserves. “If you want to dollarize at a conversion rate that makes sense from a social and economic perspective, you need a minimum level of international reserves,” said Thierry Larose, Vontobel portfolio manager, for example, according to CNN Business. But Argentina doesn’t have that. S&P Global’s Oliveros Rosen also made similar comments. “They don’t have enough dollars to transform the monetary base, so they will have to issue external debt to start dollarization,” he added.

Although experts largely agree that the Argentine Central Bank has almost no dollar reserves, there is a heated debate about whether these reserves are necessary for the dollarization process. Because unlike the government, Argentine citizens and businesses as a whole are likely to hold large sums of dollars. According to Reuters, Javier Miley had already recommended that citizens stay away from the peso during the election campaign, because it was not suitable even as a “poo.” According to consistent media reports, many Argentines have long been converting any surplus pesos into US dollars in order to protect themselves, at least to some extent, from extremely high inflation. According to what DW reported, citing the Argentine Statistical Office, Argentines had more than 246 billion US dollars in foreign accounts or in the form of dollar bills at the end of 2022. Capital also says that no other country in the world – except for the United States… United States of America – There are as many dollar bills as Argentina, and it is estimated that Argentines may have around US$200 billion in cash.

Argentines have long ago abandoned the peso, write Steve Hanke and Matt Sekerke of Johns Hopkins University in Central Banking. It should also be noted that money is primarily a unit of account and that most of the money supply is produced by the commercial banking system. Therefore, changing from peso to US dollar is a fairly easy change here. The two American experts said: “If one can avoid the fallacy of assuming that central bank obligations must be paid from foreign reserves, then dollarization becomes a much more logical proposition.” However, there are enough reserves available to buy back cash pesos and no more liquidity is needed to convert claims into government debt, according to the central bank’s Hanke and Szekerke.

Political support may not be sufficient

But even if dollarization is technically possible in Argentina, it may fail due to a lack of political support. According to the German News Agency, the winner of the elections, Miley and his party do not have a majority in the Argentine Parliament, and his camp does not have a single regional governor and lacks qualified personnel to fill important key positions. “We believe that some of his more extreme proposals — especially dollarization — may not be implemented given limited support in both Parliament and the public,” said William Jackson of Capital Economics, according to CNN Business. Miley may also be aware of this, because according to The Guardian, he neither mentioned the promised dollarization nor the abolition of Argentina’s central bank in his post-election victory speech.

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