By Marc Jones, Eliana Raszewski and Rodrigo Campos
LONDON/BUENOS AIRES/NEW YORK (Reuters) – María Barro, a 65-year-old housekeeper in Buenos Aires, buys a few dollars every month with her peso salary, a hedge against ongoing inflation in Argentina that is now over 100% and a steady devaluation of the little-loved local peso.
The peso currency is now in the crosshairs of the country’s presidential frontrunner, libertarian radical Javier Milei, who has vowed to eventually scrap the central bank and dollarize the economy, Latin America’s third largest.
Milei — facing a fierce three-way battle with traditional political candidates on the right and left ahead of the Oct. 22 vote — says savers like Barro are underlining why Argentina should do away with the peso.
“I try to buy dollars, however little,” said Barro, who began buying dollars in parallel markets in 2022 when 2,000 pesos earned her $10. Now it would make her $2.70. “Pesos are going like water and they are worth less every day.”
Barro theoretically supports the idea of a dollarized economy, but says she doesn’t like Milei’s aggressive style, which includes frequent expletive rants against rivals and even the pope. She is still unsure about her voice.
Milei’s dollarization plan is sharply divided: his supporters claim it is the solution to inflation near 115%, while opponents say it is an impractical idea that would sacrifice the country’s ability to set interest rates, check how much money is in circulation and act as a lender. of last resort.
“The argument for dollarization is that there is no price stability and that central bank independence is illusory,” said Juan Napoli, Senate candidate for Milei’s Liberty Advances party.
Napoli admitted that Argentina was not yet ready for full dollarization. Milei and advisers have discussed a time frame of nine months to two years.
“It requires a great political agreement between us and having sufficient reserves,” said Napoli. The central bank’s current net foreign exchange reserves are deep in negative territory. “It will take a while, it won’t happen right away.”
‘absolute last resort’
Elsewhere, dollarisation has already been attempted, usually replacing the local currency with dollars at a fixed exchange rate, or intervention in the markets to ‘link’ the local currency to the dollar. The central bank is losing its role as a determinant of monetary policy, but is often assigned to perform technical and administrative tasks such as reserve management and payment systems.
Argentina pegged its peso to the dollar in 1991 under President Carlos Menem’s neoliberal economic policies and even debated full dollarization. Ten years later, however, the country was forced to undo the peg, as a major economic crisis and a run on the peso led to riots and the collapse of the currency board.
Bolivia has a dollar peg, Venezuela has a quasi-dollar driven economy, while Ecuador, El Salvador and Panama all officially use the dollar. Zimbabwe dollarized and then left the country, although economists estimate that 80% of the local economy is still dollar-based.
However, Argentina’s $650 billion economy would be by far the largest dollarization experiment if it happened. The country is a major global exporter of soybeans, corn and beef, has one of the world’s largest reserves of lithium metal from electric batteries and huge shale gas and oil reserves in Vaca Muerta.
Many Argentines themselves are not convinced, because they are afraid of losing economic independence and becoming too dependent on the United States. Polls in recent months show more people oppose the idea, though some new research suggests support is rising as inflation spikes.
“I don’t know what the solution is, but I don’t agree with the dollarization,” says Martina Rivero, 25, who works in a baby clothes store in the trendy Palermo neighborhood of Buenos Aires.
Milei’s presidential rivals, Economy Secretary Sergio Massa and conservative ex-Security Secretary Patricia Bullrich, have both dismissed the idea of dollarization as impractical.
The government also has a $44 billion loan program with the International Monetary Fund (IMF), which means that making economic policy often comes with obligations. Milei spoke to the IMF in August, where dollarization was part of the discussion.
While the IMF has not commented on the plan, many experts see it as a drastic move.
“For me, it’s an absolute last resort,” says Olivier Blanchard, former IMF chief economist and now an academic. “It is very costly to give up exchange rate flexibility.”
DOLLARS UNDER THE MATTRESS
Mark Sobel, a veteran US Treasury official who now works at the United States OMFIF policy think tank, said the dollarization meant that authorities would lose the ability to act as a lender of last resort, which would make “the vulnerability of the financial system.
Instead, he said the central bank should stop printing money to fund the Treasury and reduce the budget deficit.
For many, the problem is that Argentine savers’ love for the dollar is virtually impossible to undo. Many were burned as the government confiscated, froze or forcibly converted deposits into what are known locally as the “corralitos” in 1989 and 2002. Since then it has been difficult to regain trust.
Widely cited official data shows that Argentines have a whopping $371 billion in dollar assets, much of it outside the local financial system.
“The savings are now put in the mattress or, at best, invested in another country. So the link between saving and investing in Argentina is broken,” said Facundo Martinez Maino, an economist who worked on Bullrich’s economic plan.
That plan supports formalizing a “bi-monetary” system the country already informally has in place to bring those funneled dollars back into the formal financial system.
“Dollarization is a huge fantasy and a big campaign lie,” said Martinez Maino. “Even the most fanatical, staunch supporter of dollarization in Argentina can make a serious case for it at this point. For a simple reason: Argentina has no reserves.”
In a recent public war of words, Milei said Bullrich’s plans were “cowardly and lukewarm and would end in hyperinflation and bloody dollarization.”
Proponents of the dollarization say it would raise the country’s risk premium – good news for long-suffering investors – and should be achievable by converting only physical money first.
Argentina’s monetary base of cash in circulation and deposits stands at 6.15 trillion pesos, about $17.5 billion according to the official stock market, central bank data shows. However, at commonly used parallel exchange rates, that is only $8.4 billion.
“It is already a principle that Argentines put into practice every day. They hold large amounts of dollars,” said Riccardo Grassi of Mangart Advisors, a Swiss-based hedge fund involved in Argentina’s massive 2020 debt restructuring.
“Dollarization is a rational idea,” Grassi said.
‘LACK OF TRUST IN THE PESO’
On the streets of downtown Buenos Aires, there are signs with dollar prices next to those in pesos. Some things – houses or cars – are already tied to the dollar and expensive, while other prices are kept artificially low by subsidies, including utilities, fuel pump prices and public transportation.
Some local companies are already choosing to pay salaries, at least in part, in dollars. About 20% of deposits in local banks are in dollar form, although that does not include dollars stashed outside the banking system.
However, Claudio Loser, former IMF director for the Western Hemisphere, said full dollarization would be a “terrible shock” to the economy, as holders of pesos would exchange them at a very high rate, diluting savings. Wealthier people with dollars on file would have more protection.
Back on the streets of Buenos Aires, 18-year-old student Nicolas Ventrice championed dollarization and Milei, though he admitted he didn’t really understand what it entailed.
“What motivates young people the most is the dollarization of the country,” he said. “(Milei) sort of explains it, although I never quite understand how he’s going to do it… all those things are a bit confusing.”
(Reporting by Marc Jones, Eliana Raszewski, and Rodrigo Campos; additional reporting by Anna-Catherine Brigida and Horacio Soria; editing by Adam Jourdan and Claudia Parsons)