President-elect Milei's Potential Fiscal Revolution: Argentina's Path from Default to Bitcoin Adoption
Summary:
This article discusses the future fiscal approach of Argentina's President-elect Javier Milei, known for his symbolically attacking a model of the central bank. Milei may tackle Argentina's economic issues, as the country is currently the International Monetary Fund's largest debtor with a high default risk. It suggests that adopting a strategy similar to El Salvador's—starting with the U.S. dollar before accepting Bitcoin—could be a possible solution. The article also notes the importance of efficient fiscal policies to manage the country's debt and monetary base.
The symbolic destruction of a central bank model by a presidential candidate is an image that Argentinians won't soon forget. But the question remains: Will President-elect Javier Milei maintain his audacious stance once he takes his position on Dec. 10? With its record of nine defaults, Argentina carries the gloomy title of being the global leader in default risk. As the biggest debtor to the International Monetary Fund (IMF) and a CCC credit risk as per Fitch Ratings—only four steps up from the lowest rating—it's clear that profound economic change is necessary.
Here's a glimpse into potential developments: it's important to acknowledge that the absence of a central bank is not entirely unthinkable. Currently, of the 198 existing countries and 180 separate currencies, 10% are not using their own money. It's also key to note that the IMF, Argentina's leading creditor, is a staunch advocate for central banks, making its view crucial in the ongoing process.
A snapshot to Argentina's monetary situation reveals a monetary base of $7.7 billion, a figure that outlines the difficulty of monetary base replacement. However, it is not an insurmountable task. Converting physical cash for daily transactions can be challenging, but the crypto realm has answers in the form of stablecoins and Bitcoin.
Milei could potentially adopt a strategy similar to El Salvador's—starting with the U.S. dollar before moving on to Bitcoin. Furthermore, in a major departure from conventional policy, if Milei sticks to his liberal principles, he might allow market forces to determine the currency's success.
Argentinians are known for storing significant portions of their fortunes in offshore U.S. dollars. The exact amount remains uncertain, with estimates ranging from $100 billion to $300 billion. But the essential point here is that lenient exchange regulations by the new government could potentially coax these funds back home.
Throughout the Menem era in the 1990s, Argentina didn't have a fully convertible currency. Therefore, it's likely that the upcoming government would take steps to unify all exchange rates and declare free currency convertibility as one of its first moves. If such a step is not taken, that should signal cause for concern.
It's crucial to understand that the central bank and the treasury are distinct entities. While a country might be able to function without a central bank, operating without a treasury that manages inflows and outflows becomes exceedingly complex. Given that the treasury is also responsible for issuing government bonds, a country can't control the money printer when releasing bonds in foreign currencies. This raises the risk of defaulting on debts, forcing the nation to reduce its debt capacity and to work within a lower leverage limit along with a spending and revenue strategy that aligns with this reality.
The stringent requirement of efficiency in fiscal policies might be the very reason for Milei's proposal. Alexandre Vasarhelyi, a partner at BLP Gestora and a cryptocurrency fund manager with over 23 years of experience in traditional finance, has been exploring digital assets since the start of 2017. He's held roles at Banco Indosuez, Credit Suisse, Deustche Asset Management, ING Bank, and Banco Pine, and has operated with numerous assets, currencies, options, and commodities in various local and international markets.
Published At
11/23/2023 1:50:40 PM
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