Javier Milei wants to turn Argentina into the world’s biggest dollarisation experiment.
A political outsider who swept Sunday’s primary vote and is now seen as the favourite to win October presidential elections, Milei has pitched the idea of ditching the battered peso to crush inflation that’s running at 113 percent and stifling the US$600-billion economy.
The bold plan fits with Milei's persona — a drain-the-swamp, chainsaw-yielding rock star who voters seem to like mostly because he’s not from the establishment. As Argentines cope with the triple-digit inflation, they’ve also seen the value of their currency plummet as the Central Bank burns through reserves trying to prevent an even worse decline.
But the architect behind the dollarisation idea cuts a far different figure: Emilio Ocampo, who worked in Wall Street for more than 20 years before moving to rural Argentina in 2005. Ocampo, who worked as an investment banker at Salomon Brothers, penned a book on dollarisation that sold out in Buenos Aires bookstores last year, and has since become an adviser to Milei on the topic.
While turning to the dollar is an extreme solution, Argentina is an extreme case, Ocampo argues.
It’s true that by dollarising, Milei’s own administration would lose a good chunk of its ability to determine terms of trade and dictate monetary policy — not to mention the fact it comes at a time many other countries are trying to become less dependent on the United States. But investors, Ocampo says, no longer believe in the local currency and local prices are so distorted that it’s impossible for the economy to function.
Runaway inflation prevents the country from doing any structural reforms, and dollarisation would be “a means to achieve economic and political objectives,” he said in an interview this week, after Milei’s strong showing on Sunday roiled markets.
Replacing pesos with dollars should be done in the first year of the administration and would “completely collapse inflation” in a little over a year, he said.
While Milei himself hasn’t said much about dollarisation, it’s a key part of his proposals for the South American nation, which is headed for its sixth recession in 10 years. Smaller economies like Ecuador have had some relative success in switching to greenbacks, but its a complex process.
Here are the main outlines of Ocampo’s plan:
Voluntary or mandatory?
Argentina would replicate the model used by President Nayib Bukele in El Salvador, which was “voluntary” — people will be able to use both currencies, with “absolute freedom” to move capital.
What’s the FX rate?
The monetary base — 6.4 trillion pesos, according to the Central Bank — would be fixed at an “equilibrium exchange rate” close to where the peso is trading on unofficial, parallel markets that Argentines use to skirt controls. It would then be frozen there, with the Central Bank barred from printing money and the financial system holdings dollarised.
A dollar currently buys about 780 pesos on that market, and the total monetary base at that level would be about US$9.3 billion.
What will happen with the FX restrictions?
The dollarisation can only be implemented in an economy without exchange restrictions — which would mean eliminating the foreign exchange barrier.
Any stabilisation plan will imply devaluation and adjustment of utility prices that are kept artificially lower by the government, and this has costs given the extremely complicated social situation in Argentina, Ocampo says. Around 40 percent of Argentines live below the poverty line, according to government data.
What happens to the Central Bank?
Under Ocampo’s plan, the Central Bank would no longer be the custodian of reserves. A special purpose vehicle called Monetary Stabilisation Fund would be created abroad — based in a foreign jurisdiction such as Switzerland, Ireland or Luxembourg and will have a statutory mandate, Ocampo said.
That fund would issue asset-backed commercial paper to pay down the US$26 billion in debt instruments held by commercial banks. Its main assets would be the debt currently owed by the government to the Central Bank and pension funds from ANSES.
“Treasury bonds held by the Central Bank have a very low value, it is true. But at least they have a market value,” Ocampo says. While non-transferable treasury notes or “transitory advances” do not have a market value, they represent a “cash flow” of funds for the Central Bank because the Treasury has to make payments on these notes, which means they can also be valued, he said.
- National Treasury local law bonds currently held by the Central Bank and ANSES as assets would be exchanged for Treasury bonds under New York law
- Fund would be over-collateralised, with a ratio of US$4 assets per each US$1 of liabilities
- Any incoming cash flows would automatically be used to pay down its debt
- The government would contribute with other assets
- Fund would issue its debt through a group of dealers, which would include the largest financial institutions involved in underwriting and trading emerging-market debt
- A term sheet has been drafted with the help of US law firm DLA Piper
- Ocampo expects that MSF’s debt would be paid off within four to five years, opening the door to the largest cancellation of Argentine debt in history without a default
by Ignacio Olivera Doll, Bloomberg