Argentina Needs the Dollar

ARTÍCULO RELACIONADO

FMI se reunirá con Gobierno y asesores económicos de candidatos en Argentina

The Argentine peso gained ground late last week after a three-day rout that followed President Mauricio Macri ’s crushing defeat in the Aug. 11 primary for a second term. But there’s no sugarcoating reality: The Argentine hunger for dollars has shot up alongside the risk of holding peso assets.

At least part of the small recovery may have come about because on Thursday the central bank put a limit on the amount of dollars commercial banks can hold. Swooning trust in the national currency, anemic growth and an unsustainable debt burden foreshadow another rough ride in 2020 for Argentines-no matter who wins the presidential election set for Oct. 27.

Stabilizing prices is job one, and the best way to do that would be to dollarize officially. The dollar wouldn’t solve all the country’s problems, but eliminating the peso, scourge of the Argentine people for decades, would go a long way to restoring confidence.

As with most problems in Argentina, however, the barriers to dollarization are political, not economic.

Political parties had already chosen their candidates when Argentines went to the polls last week. So the “primaries,” in which voting was compulsory, acted like a test run of the election. Left-wing Peronist candidate Alberto Fernández and his running mate, former President Cristina Kirchner, stunned the nation by winning 48% of the vote. The center-right Mr. Macri trailed with 32%.

The specter of a Peronist return to power sparked a stampede out of the peso. The Argentine stock market fell 37%.

At first glimpse it’s hard to understand the vote. Mrs. Kirchner drove the economy into a ditch during her eight years in power. She unleashed judicial warfare against her adversaries, went after the press, and allegedly engaged in obscene levels of corruption. Mr. Fernández has promised more populism and more power for the unions if he’s elected. Argentines appear to be handing Peronism the rope with which it will hang them.

Yet voters seem to want to punish Mr. Macri, who hasn’t delivered on promises to make them better off. Granted, he inherited a mess from Mrs. Kirchner and a costly drought hammered farmers in the 2017-18 growing season. But the government has piled on debt to finance deficits. Commercial borrowing rates are around 70% and the economy contracted 5.8% in the first quarter. Inflation in July, while trending down, was still above 54% at an annual rate. This isn’t a good record to run on.

Mr. Macri also brought the International Monetary Fund back to Argentina in May 2018. Its Argentine loan program now stands at $56 billion, the largest in the fund’s history. But far from “rescuing” the country from another financial and monetary crisis, IMF intervention has generated more fear and uncertainty because the nation associates it with financial collapses followed by extreme hardship.

Argentina needs the confidence shock that dollarization would bring to both foreign investors and locals. As Johns Hopkins economist Steve H. Hanke has long argued, and did again Aug. 12 in Forbes, “Argentina’s government should do officially what all Argentines do in times of trouble: dollarize.”

Argentina’s political class resists the idea, arguing that the country ought not lose its “monetary independence.” Which is to say that populism is best financed by the inflation tax, and for that a country needs central-bank printing presses.

All the talk of a national currency as part of national identity is also bunk. As monetary economist William Luther told me last week, Argentines don’t seem to want to hold pesos if they don’t have to. “In June 2019, the total amount of peso-denominated deposit-account balances and currency in circulation-which economists call the M1 money supply-was worth just $31.1 billion,” Mr. Luther said. In Chile, where per capita gross domestic product is similar to that of Argentina, M1 stood at $53.1 billion.

Given that there are more than twice as many people in Argentina as in Chile, the low level of Argentine holdings of local currency is even more dramatic. Since they “must hold some money to make day-to-day transactions,” Mr. Luther said, and “they are not holding very many pesos, we can be reasonably confident that they are holding quite a few dollars.” Since Mr. Macri’s primary defeat the number of dollars held by Argentines is logically even higher.

Argentines are far too familiar with the high cost of low central-bank credibility, and it may not be possible to salvage the monetary authority’s reputation in their eyes. In a February 2019 essay for the American Institute for Economic Research, Mr. Luther and Argentine economist Nicolás Cachanosky wrote: “Half measures, like adopting a fixed exchange rate or establishing an orthodox currency board, might work elsewhere. But Argentina has in the past broken the promises implicit in those reforms. In order for its commitment to be credible now it must go all the way” to dollarization.