Drowning in Debt: Argentina’s Economic Quandary

Anyone wanting to take a crash course in monetary matters could not do better than spending a few days in Argentina. 

It has the highest interest rates in the world (the central bank recently raised them to 133 percent) and, at the same time, given its inflation rate, the lowest real rates among the forty largest economies in the world (inflation is expected to reach 190 percent). The peso has lost more than seventy percent of its value in twelve months, and the country’s president has filed charges against the leading candidate for the presidency, Javier Milei, for saying that Argentines should not renew fixed-rate deposits in the local currency because it is “crap.” Since there are, in theory, strict capital controls and the only legal exchange rate is the official one, buying dollars outside of the government system is illegal. Still, everybody does it, making the market exchange rate a bit under three times the legal rate. 

Behind all of this is a colossal amount of fiscal spending and debt. The lack of access to foreign credit and the impossibility of raising taxes even more (corporate taxes already take up one hundred percent of businesses’ earnings plus a bite of their assets every year) mean that the only way to finance the government is to print money. The crazy volume of pesos printed to sustain a system based on patronage and corruption led the monetary authorities to issue short-term debt and offer it to commercial banks in order to mop up some of the pesos and prevent the economy from fueling inflation either through the purchase of goods or through the purchase of dollars. 

The debt is constantly rolled over, and the cycle is continually renewed. But wait, it gets even better: in order to make that paper minimally attractive, the central bank offers its creditors the highest nominal interest rates in the world. And how does it pay for the interest on that debt? By printing pesos, of course—thus defeating the purpose of issuing debt to “sterilize” the excess pesos.

Given the constantly changing monetary and foreign exchange reality, it is difficult to calculate the exact amount of debt owed by the central bank in US dollars. It is at least three times the monetary base, which credible estimates calculate to be the equivalent of about $10 billion.

All of this, and particularly Milei’s proposal to make the dollar his country’s legal tender and abolish the central bank, has triggered an important debate in Argentina. While some support dollarization, others prefer to allow the market to decide among competing currencies. Those who oppose dollarization but support some kind of monetary freedom argue that there are not enough dollars to exchange the 21 trillion pesos that the central bank owes the commercial banks and others. 

In contrast, those in favor argue that the whole process, as was the case in other countries that dollarized their economies officially, is gradual and based on credibility. The transition, they say, would not require the exchange of every peso overnight. Once people trust the government, billions of dollars held by Argentines outside of the system (the equivalent of about half the country’s gross domestic product) would come out of the shadows or return to Argentina. I sense that in either case, the government, already unable to pay back its foreign debt and with no access to further credit, will not be able to pay off all of its internal debt and will ultimately have to impose on its creditors a significant haircut. 

But my purpose here is not to engage in this debate. It is just to point out that the magnitude of the crisis is such that Argentina is finally debating what it should have been discussing a long time ago—how to take away from politicians the decision-making power over their money.