Could Argentina Be the Next Latin American Country to Dollarise Its Economy?

As Argentina grapples with an unpayable debt load, triple-digit inflation, severe drought and rising economic hardship, the idea of abolishing the crumbling peso and adopting the US dollar gains ground.

There is a great deal riding on Argentina’s national elections in October. The reverberations will probably be felt across Latin America as the competition for strategic influence in the region as well as access to its coveted resources intensifies. China long displaced the US as Argentina’s largest trading partner, but the US is doing everything it can to regain lost ground, including, as we reported in January, rejigging the Monroe Doctrine, a 200-year old US foreign policy position that opposed European colonialism on the American continent:

It held that any intervention in the political affairs of the Americas by foreign powers was a potentially hostile act against the United States. Now, it is applying that doctrine to China and Russia.

Gen Richardson detailed how Washington, together with US Southern Command, is actively negotiating the sale of lithium in the lithium triangle to US companies through its web of embassies, with the goal of “box[ing] out” US adversaries.

The country where the US appears to be enjoying most success in this endeavour is Argentina, whose government even recently participated in the US-created Mineral Security Partnership, which Reuters dubbed a “metallic NATO”. But as the country grapples with unpayable debt, triple-digit inflation, severe drought and rising economic hardship, “Argentines are looking for a radical shift,” according to The Economist. The outcome of the upcoming election could even define the future of Argentina’s currency regime for years, if not decades, to come.

Dollarisation vs Dedollarisation

Much of the talk in recent months has been about dedollarising Argentina’s trade with China and Brazil, its two largest trading partners. In late April, the government announced it will start paying for Chinese imports in yuan rather than dollars. It activated the $18.5 billion million swap arrangement that same month, paying around $1 billion of its Chinese imports in yuan instead of dollars. As Reuters reported, the measure is intended to ease the country’s dwindling dollar reserves.

Argentina has been struggling with dollars for years, but this year its foreign currency reserves hit a critical low after a historic drought caused total agricultural losses of around €17.6 billion, or 3% of Argentine GDP. Dollar shortages are becoming an increasingly common problem among emerging market economies as central banks burn through their currency reserves in a desperate bid to stem the depreciation of their currencies.

Like 18 other emerging markets, Argentina has applied to join the BRICS-plus grouping, for which it can count on the full support of BRICS member Brazil. In fact, Brazil’s President Luiz Inácio Lula da Silva recently said he was conducting talks with fellow BRICS members Russia, China, India and South Africa about fining ways of helping Argentina’s economy. At the same time, Brazil and Argentina and discussing ways of reducing the influence of the US dollar in their bilateral trade. From Buenos Aires Herald:

Da Silva is attempting to persuade other BRICS leaders to have their economy ministers change an article in the group’s rules that would allow it to financially support non-BRICS countries such as Argentina through the New Development Bank, which is currently headed by his political ally and former Brazil president Dilma Rousseff.

On May 29, Da Silva will take part in a BRICS meeting where he expects to discuss the change. He said during the conference that he has spoken to Rousseff and also China’s President Xi Jing Ping about it.

Da Silva also vowed to continue working with Brazil’s Congress and exporters to Argentina to promote bilateral trade. This is likely to come in the form of credit for these companies to keep selling to Argentina and the development of mechanisms to trade in pesos and reais, skirting the U.S. dollar. Economy Ministers Sergio Massa and Fernando Haddad are expected to follow up on the work next week.

If the candidate chosen for the coalition of Peronist parties Frente de Todos — Alberto Fernández will not be running for a second term and two-time President Cristina Kirchner de Fernandez has also withdrawn from the race — emerges triumphant in November, it is safe to assume that the resulting government will continue to pursue BRICS membership, dedollarisation and the expansion of bilateral trade with both China and Brazil, its two largest trading partners. As the Argentinean broadcaster TN recently reported, China’s consolidation as Argentina’s number-one trading partner is a growing source of consternation for both the US and Europe:

The US and EU’s greatest fear is not only that China becomes the main trading partner but that, with that status, it will be able to influence bids and gain control of strategic sectors in Argentina such as telecommunications, ports, routes, military inputs and energy.

The two other main challengers in October’s election are Together for Change, a pro-US liberal-conservative bloc that helped propel Mauricio Macri to the presidency in 2015 but which is yet to choose a candidate; and Freedom Advances, a grouping run by the libertarian economist and congressman Javier “the Wig” Milei that paints itself as fiercely anti-communist and the last bastion of economic freedom in Argentina, and is currently leading in the (notoriously unreliable) polls. Given the prevailing economic uncertainty and despair in the country, with inflation surging to a record 109% year-over year in April, Milei has found fertile ground for his eclectic mix of right wing demagoguery and hair-brained economic policy proposals.

Those proposals range from classic neoliberal fare (charging poor people for public healthcare, cutting retirements and pensions, removing currency controls and “taking a chainsaw to public spending”) to more extreme measures that one Argentinean economist described as “proposed by fanatics that think it’s best to blow everything up”. They include shutting down Argentina’s central bank, abolishing the Argentine peso and adopting the US dollar as the official currency).

“If you want to end the scam of monetary emission to cover for the treasury and end inflation, given that Argentine politicians are thieves, the only way is to close down the Central Bank and, at the beginning [of my government], dollarize [the economy],” Milei tweeted last month.

A Popular Idea Among Some

The idea enjoys strong support among certain US economists. They include Johns Hopkins Prof Steve Hanke, who once served as adviser to the government of President Carlos Menem whose decision in the early ’90s to fix the Argentine peso at a wholly artificial and unsustainable value of one U.S. dollar paved the way to the financial crisis and currency devaluation of 2001, from which Argentina’s economy has never been able to properly recover…

Read the full article on Naked Capitalism

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