Despite loving the dollar, Argentina is tormented by divorcing the peso

María Barro, a 65-year-old domestic worker in Buenos Airesbuys a few dollars each month with his salary in pesos to protect himself from Argentina’s persistent inflation, which exceeds 100% per year, and the constant devaluation of the local currency.

The peso is now in the crosshairs of the polling-favorite presidential candidate, libertarian Javier Milei, who has vowed to eliminate the central bank and dollarize the economy, the third-largest in Latin America.

Facing a close and uncertain battle with two more traditional center-right and center-left political candidates in the Oct. 22 vote, Milei points to savers like Barro who, when they can, hoard dollars despite strict capital controls.

“I try to buy dollars, even if they are less”, said Barro, who began buying dollars in parallel markets in 2022, when with 2,000 pesos he obtained about US$10. Now they are enough for US$2.70. “The pesos go like water and each time they reach for less ”.

Barro supports the idea of ​​a dollarized economy in theory, although she is still unconvinced to vote for Milei because she says she does not like her aggressive style, which involves insults against her rivals and even the Pope. She is still undecided about her vote.

Opinion has been sharply divided by Milei’s dollarization plan: her supporters argue that it is the solution to inflation approaching 115%, while her detractors say it is an impractical idea that would sacrifice the country’s ability to set interest rates, control money in circulation and be a lender of last resort.

“The reason for dollarization is that there is no price stability and the independence of the central bank is a chimera”said Juan Napoli, a candidate for senatorial for Milei’s La Libertad Avanza party.

Napoli, as others close to Milei have acknowledged, admitted that Argentina was not yet ready for full dollarization. Milei and his advisors have talked about a period of nine months to two years.

“It requires a great political agreement between us and also having sufficient reserves,” Naples said. The central bank’s current net foreign exchange reserves are in negative territory. “It’s going to take a while, it’s not going to be right away.”

“Last resource”

Dollarization has been attempted elsewhere, usually by replacing the local currency with dollars at a fixed exchange rate or by intervening in markets to “link” the local currency to the dollar.

The central bank thus loses its role of setting monetary policy, but is often retained to handle technical and administrative tasks such as reserve management and payment systems.

Argentina pegged its peso to the dollar in 1991, though it was forced to abandon that program a decade later amid a crisis.

Bolivia has a peg to the dollar and Venezuela an economy driven almost by the dollar, while Ecuador, El Salvador and Panama officially use the dollar. Zimbabwe dollarized and then abandoned that system, although economists estimate that 80% of its local economy is still in dollars.

However, Argentina’s $650 billion economy would be the largest global experiment in dollarization.

Many Argentines reject the idea, although some polls suggest support is rising as inflation peaks.

According to an end-of-August survey by the consulting firm D’Alessio IROL published on Monday, 50% of Argentines oppose dollarization, while only 25% consider it desirable and possible.

Martina Rivero, a 25-year-old employee at a store that sells baby clothes in the trendy Palermo district of Buenos Aires, said the country needed a solution to inflation, but eliminating the peso was not the answer. “I don’t know what the solution is, but I don’t agree with dollarization”said.

Argentina attracts dollars as a major exporter of soybeans, corn and beef. It has huge lithium reserves for electric batteries and one of the world’s most important shale oil and gas formations at Vaca Muerta.

On the other hand, the Government maintains a credit program for US$ 44,000 million with the International Monetary Fund (IMF), which means that the formulation of economic policies often comes with conditions. Milei spoke to the IMF in August and dollarization was part of the discussion.

Although the IMF has not commented on the plan, many experts see it as a drastic measure.

“For me, it’s absolutely a last resort,” said Olivier Blanchard, an academic and former chief economist at the IMF. “It is very expensive to give up exchange rate flexibility.”

dollars under the mattress

Mark Sobel, a veteran US Treasury official who now works at the policy think tank OMFIF, said that dollarization meant that authorities would lose the ability to issue money to finance the government, which “It would increase the vulnerability of the financial system.”

Instead, he said the central bank needed to stop printing money to fund the Treasury and reduce its fiscal deficit.

For many, the problem is that the love of Argentine savers for the dollar is almost impossible to undo due to the repeated crises that the country suffered and the forced conversion of dollar deposits to pesos 20 years ago. Now many choose to hide their foreign currency savings abroad or under the mattress.

A widely cited figure based on official government data suggests that Argentines have about $371 billion in dollar assets, much of it outside the formal financial system.

“The savings go to the mattress or, at most, the investment in another country goes, if those funds go abroad. So that link between savings and investment in the Argentina”said Facundo Martínez Maino, an economist who worked on the economic plan of the presidential candidate and former security minister, Patricia Bullrich.

This plan supports the formalization of a system “bi-currency” that, in fact, the country already has informally, and attract the funds that remain undeclared to the formal system.

“Dollarization is a huge fantasy and it is a big campaign lie”, Martinez Maino explained. “Not even the most fanatic (…) of dollarization can take the debate in Argentina today seriously. For a simple reason: Argentina has no reserves”.

Recently, Milei said that Bullrich’s plan for a bi-currency system is “coward” and maintained that it would end in a “hyperinflation and a bloody dollarization”.

Argentina’s cash in circulation and deposits translate to about $17.5 billion at the official exchange rate, or $8.4 billion at the street rate.

For holders of Argentine dollar bonds, an expected fall in the risk premium would likely translate into paper gains beyond current yields of more than 21%.

‘Lack of confidence in weight’

In the financial and tourist center of Buenos Aires, there are signs with prices in dollars alongside prices in pesos, often at the informal rate, which have flourished during years of strict capital controls that restrict normal access to the foreign exchange market.

Prices are often hard to follow. Some things are already tightly tied to the dollar and expensive, like property and cars, while other prices have remained unusually low, including utilities, fuel prices at gas stations, and public transportation.

Claudio Loser, former director of the IMF for the Western Hemisphere, said that dollarizing internally overnight would be a “terrible shock” for the economy, since holders of pesos would exchange them at a very high exchange rate, drastically diluting their savings.

Back on the streets of Buenos Aires, 18-year-old student Nicolás Ventrice came out in favor of dollarization and Milei, though he admitted not really understanding what it entailed.

“What motivates young people the most is the dollarization of the country”he claimed. “Although he (Milei) explains more or less, I never quite understand how he is going to do.”

Source: Reuters