Central Bank is in Milei’s sights in Argentina; understand possible consequences of closing

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Former directors of the Brazilian Central Bank assess what the consequences of not having a monetary authority in Argentina could be and how policies that are currently implemented by the institution would be carried out. Javier Milei, candidate for president of Argentina, holds up a dollar bill with his own face Natacha Pisarenko/AP The president-elect of Argentina, Javier Milei, has shown signs that he will fulfill his campaign commitment to end the country’s Central Bank and dollarize the economy. The measure is considered extreme by economists. “Closing the Central Bank is a moral obligation, and dollarizing (the economy) is a way to get rid of the Central Bank”, declared Milei, last Monday (20). The president-elect proposed, however, that the currency adopted by his government “be that chosen by individuals”. In his victory speech over the weekend, he did not mention these actions, but said that the crisis requires drastic measures, “without gradualism”. The closure of the Argentine Central Bank means that the country could no longer set its basic interest rate, a traditional instrument to try to contain the rise in prices in several nations, nor issue currency (amount of resources available in the economy). With the end of the BC, in theory, the government would also be giving up an institution that lent resources to banks at the end of the day to close their cash flow, and that regulated the financial system, avoiding irregular operations, losses to customers and possible financial crises. banking trust. On its website, the Brazilian BC says that its institutional mission is “to ensure the stability of the purchasing power of the currency [controle da inflação] and a solid and efficient financial system.” g1 got in touch with former directors of the Brazilian monetary authority. And asked what the consequences of not having a Central Bank could be, and how policies that will no longer be implemented by the Central Bank would be carried out. institution (see below in this report). After winning the election, Milei talks about privatizations and confirms his promise to close the Central Bank Economic scenario The new Argentine president takes over the government in the midst of an adverse scenario, with inflation around 120% — the highest in around 30 years. In total, approximately 11.8 million people are below the poverty line, which represents 40.1% of the country’s population. Furthermore, the neighboring nation has a billion-dollar foreign debt, a problem that is aggravated by the lack of international reserves. Since 2019, an exchange control system has been in force in Argentina, and several types of exchange rates operate in parallel to the official one. To attack these problems, Milei proposes, in addition to dollarization, reducing the size of the State with cutting public spending and selling state-owned companies — traditional liberal measures. “The assumption for other steps, towards dollarization, is that you have a fiscal surplus [nas contas públicas]. Because you will lose the ability to issue currency [sem o BC]. If it manages to control spending, it will reduce the inflationary momentum”, said Luiz Fernando Figueiredo, former director of Monetary Policy at the BC between 1999 and 2003. Argentina: Milei’s victory could affect vehicle trade with Brazil Dollarization of the economy If it is complete , the dollarization of the economy would represent the replacement of the Argentine peso by the dollar, but economists indicate that another alternative could be to index the peso to the North American currency. There are still no details on what will be done. With dollarization, the fear is that there will be shortage of currency for payments by ordinary citizens and companies. And this could also create export difficulties, depending on the exchange rate of the dollar and other currencies, such as the Real, in addition to the loss of attraction of the local tourist sector. Tony Volpon, former director of International Affairs at the BC in 2015 and 2016, explained that, before dollarizing the economy, Argentina would have to present a plan to “stock” dollars and make this possible. One path would be an additional devaluation of the peso, which would contribute to increasing exports. “The adjustment would undoubtedly be recessive. It contracts domestic demand to have a higher export balance. They would have to restructure their debt, partly Chinese and partly from the IMF, to have effective stockpiling. It is possible, but it is very difficult. Pass an economy that has already suffered so much due to yet another recessive process”, he added. Luiz Fernando Figueiredo said that many Argentines have savings in dollars, part of which is outside the country. “When you start to have everything in dollars, you start to count on part of the money that is abroad. Today’s situation is chaos. It is not possible to dollarize now, you have to create the conditions to dollarize. One of them is to have enough dollars”, he declared . For him, the issue has less to do with how gradual this dollarization can be and more with how to be able to do it right. “There’s probably no risk of running out of money for day-to-day payments. As much as it’s a very bold agenda, it’s with very good people [economistas]. It’s not a group of people just starting out”, he concluded. Alexandre Schwartsman, former director of International Affairs at the BC between 2003 and 2006, agreed that the dollarization of the economy could come up against the fact that there is currently no dollar available for all operations in the country. “If you’re talking about the dollar, there’s a problem. If it takes away liquidity from the economy, it runs the risk of recession”, he added. At the same time, the economist explained, the end of the BC would also subject the Argentine economy to “international fluctuations”, as occurred at the end of the 90s — when the Brazilian BC authorized a strong devaluation of the Real due to the lack of currency. As a result, Argentina saw its exports to Brazil fall, affecting the productive sector. “If it loses competitiveness, to recover it has to go through a process of deflation, typically associated with the loss of economic activity”, said Schwartsman. READ ALSO ‘If Lula comes, he will be welcome’, says Milei about the possible trip of the president of Brazil to his inauguration in Argentina Argentine stock market soars more than 20% at opening after election; blue dollar passes of the 1 thousand pesos Weapons, the age of criminal responsibility, extinction of the BC, dollarization: the obstacles for Milei to implement campaign promises Definition of the interest rate Without the Central Bank, Argentina would give up the traditional instrument (interest rate) used to control inflation in several countries, such as Brazil. Here, for example, the BC raises interest rates to contain rising prices — based on a target system. The rate in Argentina would be based on North American interest rates. At the beginning of this month, the Federal Reserve (the central bank of the United States) maintained interest rates in a range of 5.25% to 5.50% per year. This remains the highest level since 2001. On top of the US rate, however, Argentina will be charged an additional amount called “risk spread”, which will be linked to investors’ perception of the economy. The greater the assessment that the country will have difficulty honoring its commitments, the higher the interest charged will be. Country risk, an indicator that measures investor confidence in nations, totals around 4,177.5 points in Argentina. One basis point corresponds to 0.01 percentage point. This means that, in investors’ perception, Argentine interest rates would be around 41 points higher than American rates, that is, almost 50% per year. Economist Alexandre Schwartsman points out that Argentina has already gone through defaults on its debt and that, as a result, its credit history is bad. And he considered that it is necessary to adjust its accounts to gain the trust of investors and obtain resources to pay its debt. “Until the fiscal imbalance is corrected [das contas públicas] gigantic, anything else will have to be subordinated to it. Sooner or later this restriction will hit”, he added. Tony Volpon, in turn, noted that Milei’s elected government will need to reach an agreement with the National Congress and that it will also need the Judiciary for measures to adjust public accounts. “He wants to greatly reduce the size of the State, which would provide a more sustainable fiscal position. The State is very big”, he declared. Regulation of the financial system With the closure of the Argentine Central Bank, there would no longer be, in theory, an institution that would regulate the financial system, preventing fraud, protecting customers and, also, helping banks to closing the cash register at the end of the day (a routine operation, which is not necessarily linked to financial difficulties). It is not yet clear whether these duties will be passed on to other federal bodies. In Brazil, the BC also has the power to liquidate banks when there is “irretrievable insolvency” or when serious infractions are committed, for example. News or rumors of institutions in trouble can generate, for example, a run to the banks by the population in search of their resources. And if they are not contained, the difficulties can lead to an effect cascade throughout the financial system, affecting the entire economy. “This will continue. You can even call it an agency for monitoring and regulating the financial system. There’s no way to be without it. It’s easier to eliminate the part that was about monetary policy [definição dos juros para conter a inflação]. But you can’t be without [regulação do sistema financeiro]”, declared Luiz Fernando Figueiredo. Alexandre Schwartsman agrees. “It is necessary to regulate, supervise, and fundamentally, be a lender of last resort [pra fechar os caixa dos bancos]. I guarantee you it won’t be the FED [o BC norte-americano] to do this.” Tony Volpon has the same assessment. “This thing about ending the BC is a rhetorical figure. It will create other authorities, which may have other names to do the same thing. Small countries that have dollarized still have institutions that take care of the banking sector and money laundering issues. All these things will have to be done”, he stated. Can the plan work? Luiz Fernando Figueiredo assesses that Milei’s economic plan could work if he manages to reform the State, reducing its size and containing expenses. In his view, this could result in gains in credibility and confidence that stimulate investments and jobs. To move forward, however, the elected president will have to approve unpopular proposals in the Legislature. “It can always work. He’s with a team that seems to be very good, and he’s going to have to keep doing, doing, doing and things kind of depend on each other. What I think is central is state reform. This is the priority point, an assumption”, declared Luiz Fernando Figueiredo. Tony Volpon said he has no idea what could happen, and assessed that it is necessary to see who will be appointed to key positions in the economy. He made a comparison with Donald Trump, former president of the USA, who had a “radical rhetoric” but placed traditional names in these key positions. “If the Milei government starts with people from the [ex-presidente] Macri, you don’t want to do too much adventure. There will be tension between having a government with people who don’t want to radicalize and a president who wants to radicalize. Another parallel is Guedes with Bolsonaro. Guedes is not an adventurer. It has to be seen who will be appointed”, said Tony Volpon. Alexandre Schwartsman, in turn, is not optimistic about the economic plan. For him, Javier Milei will not reach the end of his term. With the dollarized economy, or fixed exchange rate, he argued that the past could repeat itself, with the economy entering a recession — which makes it difficult to adjust public accounts —, resulting in a blockage of resources in the banks (corralito). “There was no money to pay everyone, so the money stayed in the Bank. If you go this route, you run the risk of having a similar situation. When it goes to financial repression, the population doesn’t see the slightest humor. You wake up one day and you can’t take out the money you have in the bank. And then people take to the streets. And in Argentina, when they go out on the streets, things are not easy”, said Alexandre Schwarstman.

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