Start the Chainsaw: Argentina’s Radical New President
By Christian Kassis & Sara Ristic
Argentina, one of Latin America’s largest and most influential nations, has recently headed to the polls in a general election that is seen as a broader referendum on the economic system which has prevailed in the nation for nearly a century. The election is generationally significant in Argentina and carries the potential to make waves regionally throughout Latin America. There are many systemic practices under question, including the economic orthodoxy of the Argentine establishment, which is operating under the hard-to-define ideology known as Peronism. This order is being challenged by a radically anti-establishment and pro-market outsider named Javier Millei. This piece will provide you with a background on the presidential candidates, Argentine political history leading up to the present, the economic crisis Argentina faces, an exploration into Javier Millei’s eye-catching campaign and proposals such as his infamous ‘dollarization’ plan, and the official election results that were recently announced on November 19th.
Two major candidates stepped up to run for Argentina’s presidency, both aiming to drive the country to regain itself economically. The two candidates were Sergio Massa, who has been representing Argentina’s establishment and is the current Minister of the Economy, and Javier Milei, an outsider and economic libertarian who is known for his books on economics and politics. Milei’s most notorious proposal, known as dollarization, has been grabbing global headlines which represent a hard reaction of the Argentinian people against the continued mismanagement of the country’s currency and finances. On the path to election, he expressed his plans to rid the country of their central bank and present currency, the Argentine Peso, and use the U.S. Dollar as its national currency instead.
It is best to begin with a brief introduction into Argentine politics to understand the foundations on which this presidential race is occurring. Argentina is a presidential republic similar to the US, however Argentina’s political system invests significantly more power into a strong executive branch, with the president having broad and sweeping powers much like those found in Turkey or Russia. This political structure paired with a long tradition of populist authoritarians beginning with the three-term president Juan Peron and his wife Evita, an enigmatic couple who captivated the nation and synthesized nationalism, populism and the labor movement into a cohesive ideology known as Peronism. Starting in the 1970s, the Peronists have overseen the failed war with Britain over the Falkland islands, Argentina’s estrangement from the western political bloc, along with continued declines in income and the standard of living leading to a series of deep recessions which have subsequently created further economic woes. In pursuit of economic growth, the Peronists ran massive deficits that were financed with foreign capital and in a practice which would become globally infamous, followed by a policy of mass currency expansion to further shore up foreign capital.
The state of Argentina’s economy has only continued downhill since, with a highly devalued currency that tops an annual inflation of 124% and a prolonged recession, all contributing to a cost of living crisis which has seen the poverty rate reach a whopping 40%. This current crisis is just the latest in a series of events that has trapped Argentina in a continuous cycle of defaults on their foreign debt and the denigration of their credit rating, leading to a further difficulty in sourcing deeply needed capital. Much of this is the result of Argentina’s policy of currency expansion, which has allowed the government to continuously generate funds to finance domestic debt and spending. However, Argentina continues to collapse further into economic despair. The issue here primarily lies with currency, for as much as Argentina can manipulate their Argentine Peso, any currency expansion would decrease the exchange rates and thus increase Argentina’s foreign debt, all of which is held in U.S. Dollars.
Argentina, by all metrics, has the tools to be one of the most prosperous countries in the world, with excellent land for agriculture, some of the world’s largest lithium reserves, and a strong and healthy demography to provide the workforce needed for an economic boom. Argentina was one of the wealthiest countries in the world only a century ago. However, government policy has consistently been the leading cause of economic stagnation, recession, and inflation which have wasted Argentina's economic potential. The destruction continuously caused by Peronist governments’ rampant debt spending and currency expansion forms the hard logic for Javier Millei’s flagship policy of dollarization, by removing the ability for the government to print and spend with its own currency. In a global market where commodities are nearly exclusively traded in U.S. Dollars, it is the most viable and reliable option for countries opting to transition away from their own domestic currencies.
How does this stabilize an economy that is defaulting on its foreign debt almost every decade? The idea behind dollarization is reserved to those whose national currency has lost value due to hyperinflation and instability, which Argentina checks the box for. The credibility and strength of the U.S. Dollar is sufficient to help stabilize an economy, allowing for an easier integration into foreign markets, while also attracting foreign investors at the same time. The main value of full dollarization from Argentina’s point of view is the “elimination of the risk of a sudden, sharp devaluation of the country's exchange rate”. Despite the shiny slogan for solving all of Argentina’s immediate problems, dollarization is not a solution. The Washington Post puts it best: “dollarization does not, by itself, impose fiscal discipline on government leaders; it merely eliminates the ability to avoid default by printing money.”
Dollarization is a financial challenge that requires significant capital to back it up. The central bank would require enough dollar reserves to purchase all currency in circulation and to provide a cushion to banks to handle a potential surge in withdrawals, and local analysts currently estimate net foreign reserves at negative $6.5 billion to negative $10 billion (about $50 billion short of what might be necessary to consider dollarization). Argentina could try to fill the reserve gap by raising money on the bond market from foreign investors, but this is likely to weaken the official exchange rate. Even if this were to all work out, it could all easily go wrong for Argentina. The switchover to dollars could be undone by a widespread bank run, putting the country closer to hyperinflation. It could also be argued that well thought out economic policies could prevent this, but the additional problem with dollarization is that you lose an independent monetary system. Argentina cannot adjust the interest rates to regulate the supply of money, as that is now in the power of the US Federal Reserve, which sets rates according to the needs of the US economy. The dollarization plan behind Milei’s platform is of both high-risk and high-reward, which could either magnify inflation or halt it completely.
The financial markets are having real-time reactions to the results of the candidates' polls even before the election date. On Monday, November 6, it was reported that the country's dollar notes were the worst performers in emerging markets, with bonds due in 2030 dropping more than 3 cents, the most since July 2020. Initial polling indicated Massa to be ahead, which provided some stability to markets. Upon Milei’s election, the Argentine stock market was up 20% at open on Tuesday, November 22, followed by a 34% rise in the shares of YPF, which is Argentina’s largest oil entity. This is a direct result of Milei’s promise to reform the state by making major cuts to government spending and emphasizing privatization, having stated that “everything that can be in the hands of the private sector will be in the hands of the private sector.”
The Argentine election represents a potential paradigm shift in the broader economic sphere across Latin America and beyond. Many countries will likely have to weigh the proposition of a stable currency in exchange for giving up the ability to independently manage their currency. However this is far from unprecedented, and the examples of nations in Europe adopting the Euro provide the best example for how a country like Argentina can proceed and prosper without the burden of fiscal irresponsibility. Ultimately, this election was a referendum on the confidence of Argentina’s people, not just in Sergio Massa or the establishment, but on the confidence of future leaders to responsibly manage the currency and spending. On November 19th, the people decided that this power is too great in the hands of one person, and that they should instead lock those responsibilities away and toss the key, no matter the cost. Milei defeated Massa during the run-off election, as declared when Massa conceded, therefore allowing Milei to take office as President on December 10th.
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