Argentine peso will continue to fall due to dollarization probabilities

The closer we get to the Argentine elections in October and the more likely it seems that the libertarian candidate javier milei can win, the more the weight of the country will weaken. The government has already devalued the policy rate and the blue-chip swap rate depreciated 20% last week.

Milei wants to dollarize the Argentine economy. But how do you dollarize your economy when you don’t have enough dollars? That’s the question Argentine economists have been wrestling with since Milei’s success in this month’s primary elections.

Three economists from MIT, Tomas Caravello, Pedro Martinez-Bruera and Ivan Werning, wrote an article this month arguing that when dollarization is first announced, the currency should fall and prices should rise. But also that the peso would continue to weaken, and even faster than it would otherwise.

Dollarization is a short-term solution that may cause problems in the long term, but it would restore the credibility of the currency and prevent the country from printing pesos to finance expenses it cannot afford. miley plan”burn” the central bank (recently clarified that he did not mean it).

Argentina’s gross reserves of $24 billion (some analysts say net reserves are negative) are not enough to convert the country’s pesos to dollars at the current rate. Argentina it has US$100 billion of debt in local currency and those pesos would have to be converted to dollars. While many Argentines have dollars, many, mostly the poorest, do not.

The model they want miley and his economic adviser, emilio ocampowould imply the creation of a special fund to issue asset-backed commercial instruments, which would be used to pay off the debt of Argentine banks.

The fund’s assets would include government debt. But even if the Government of Argentina It puts up all the assets it can find, it’s not clear that it can raise enough to dollarize.

The supply of M2 monetary aggregates is around US$50 billion and that of M3 is US$100 billion. Those figures, at the official exchange rate, are already 21% lower than before the primaries. And the M3 money supply at the blue-chip swap rate is only about $46 billion. Still, only more severe devaluation can make this work. The more likely dollarization is, the less the peso will be worth.