Javier Milei wants Argentina to swap the peso for the US dollar. Here’s what that would mean

London
CNN
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Chainsaw-wielding self-styled “anarcho-capitalists” are now one step closer to rebuilding Argentina’s struggling economy by abolishing the peso and adopting the U.S. dollar as legal tender.

Javier Millay, far-right liberal presidential candidatemade Argentina’s “dollarization” a centerpiece proposal of his campaign, hailing it as the cure for Argentina’s ills. hyperinflation problem. This is a step that other countries have taken, but none on the scale of Argentina.

Millay, a former financial analyst, came second In the first round of elections on Sunday, he came in second to Argentina’s incumbent left-wing economy minister, Sergio Massa. Both candidates are scheduled to face a runoff next month.

He may now try to gain support from centrists by taking a more moderate stance on the economy. JPMorgan analysts noted that he did not use the word “dollarization” during his speech on Sunday. However, markets will likely be nervous about the prospect of a close race.

For years, Argentines have preferred to pay for many goods and services in dollars as part of their unofficial “currency” rather than their collapsing national currency.blue dollar” Currency Market.

The value of the peso has plummeted 858% against the U.S. dollar over the past five years as the central bank prints more money to keep the spendthrift government from defaulting on its debts. This in turn spurred a rise in prices.

annual inflation Exceeded 138% According to data from the National Institute of Statistics and Census, September’s statistics were the highest in 32 years.

But full and formal dollarization would push the economy into entirely new territory. Analysts say it will be a huge undertaking.

Dollarizing Argentina’s economy would require converting all pesos held by citizens and businesses into US dollars and assigning dollar values ​​to all assets and contracts.

Such a move would effectively dissolve Argentina’s central bank and hand over the reins of monetary policy, the power to set interest rates and print more money, to the U.S. Federal Reserve. The Fed will continue to set borrowing costs based on the needs of the U.S. economy, not Argentina’s.

Milley argued that surrendering autonomy to Washington was a necessary step to instill discipline among Argentina’s policymakers. That means Argentina will no longer be able to print money.

Christopher Sabatini, senior fellow for Latin America at Chatham House, told CNN: “The problem for Argentina is to make up for the fiscal deficit.The copiers will start working at the central bank and the money will be printed.” Dollarization “will be mandatory,” he added. “Fiscal discipline” has contributed to controlling inflation.

Economists at Capital Economics said in an August note that the dollarized countries of El Salvador, Panama and Ecuador “have significantly lower inflation rates than the rest of the region.”

Kimberly Sperfechter, an emerging markets economist at Capital Economics, believes dollarization of Argentina would have little impact on the United States because Argentina is a “relatively minor player” in global trade. ing.

“(Argentina) is a relatively closed economy,” she told CNN. “It’s difficult to take money out (of the country) because there are capital controls.”

But dollarization is not a panacea for Argentina. faced with a crisis Analysts say the economy will worsen.

“(The policy) is seen as a silver bullet that will solve all of Argentina’s problems, but I don’t think that’s correct,” Superfechter said. “Fiscal policy will still be subject to the whims of politicians,” he added.

Capital Economics said dollarized economies would likely be protected from spikes in inflation and sharp currency depreciations, but would be more vulnerable to a process known as “internal currency devaluation.” .

Argentina will no longer be able to control its exchange rate and therefore be unable to absorb shocks to its economy by devaluing its currency. Rather, domestic wages and prices need to be lowered to stabilize the economy and remain competitive in export markets.

Even if it keeps inflation under control, dollarization does not guarantee default.Ecuador — that is One-fifth size of argentina $622 billion Economy — Since introducing the dollar in 2000, we have defaulted twice.

There is another major obstacle to Millay’s plan. Argentina doesn’t have enough dollars to dump its pesos.

According to Capital Economics, Argentina has a $7.5 billion hole in its foreign exchange reserves, meaning it has fewer dollars than it owes to foreign creditors.

“The central bank doesn’t have enough dollars. It’s just not there. We still owe $44 billion to the (International Monetary Fund) and we don’t have enough hard currency to pay it back.” said Sabatini.

It will likely be difficult for the government to raise dollars through other means.

The IMF has effectively barred Argentina from accessing international markets while it repays its debts, Sabatini explained. He also said the government needs to persuade people at home and abroad to return their pesos en masse, but must act calmly to avoid a “wave of speculation” that further devastates the value of the national currency. He said that there is.

“People will have to carry cash into wheelbarrows to exchange it into dollars,” Sabatini said. “The sheer complexity of what[Millais]is considering as an idea…is difficult to think about on a practical level.”