The unforgettable image of a presidential candidate demolishing a replica of the central bank with a sledgehammer will forever be etched in the minds of Argentines. However, as President-elect Javier Milei prepares to assume office on December 10th, the question lingers: will he have the audacity to embark on a treacherous and unpredictable path?
Argentina, with its nine defaults, holds the prestigious title of being the world champion of defaulting on risk. As the largest creditor to the International Monetary Fund (IMF) and with a credit risk rating of CCC assigned by Fitch Ratings (which places it fourth from the bottom), Argentina urgently needs to overhaul its economy.
While I cannot predict the future, I can offer some insights into the process. Let’s begin by acknowledging that it is not impossible for a country to function without a central bank. Currently, out of the 198 countries in the world, 10% do not utilize their own currency, showcasing the viability of alternative systems.
Another crucial factor to consider is the IMF’s inclination towards central banks. Given that the IMF is Argentina’s primary creditor, its opinion will carry significant weight in any reforms undertaken by the country.
Additionally, Argentina’s monetary base is valued at $7.7 billion, according to the latest balance sheet. To put this into perspective, it is equivalent to 220,000 Bitcoins or just slightly higher than MicroStrategy’s market capitalization of $6.9 billion. In comparison, the monetary base of the United States exceeds $5 trillion.
This figure indicates that replacing the monetary base will pose a substantial challenge, but not an insurmountable one. The difficulty lies in acquiring physical cash for day-to-day transactions, but in the crypto world, we know that stablecoins and Bitcoin can play a significant role in this process.
It would make sense for Milei to follow the blueprint laid out by El Salvador. This entails firstly adopting the U.S. dollar as the official currency and subsequently embracing Bitcoin as a viable means of exchange.
A currency typically requires “legal tender” status, which mandates that all establishments within the country must accept it. Milei, if he truly adheres to the principles of liberalism, may opt for a major policy shift by allowing the free market to determine which currencies thrive.
It is well-known that Argentines hold vast amounts of savings in foreign currencies, particularly the U.S. dollar. While the exact figures are uncertain, estimates range from $100 billion to $300 billion. What is crucial, however, is that under the new government’s exchange-rate regulations, these funds may feel secure enough to return to the country.
Even during the Menem era in the 1990s, Argentina did not possess a fully convertible currency. Therefore, the first action the future government is likely to take is to unify all exchange rates and declare the currency freely convertible. Failure to do so would be cause for concern.
Lastly, it is important to distinguish between the central bank and the treasury, as they are separate entities. While a country can function without a central bank, it becomes more challenging to operate without a treasury that manages inflows (via taxes) and outflows (via public spending).
Treasury departments are also responsible for issuing government bonds. While a country can issue bonds denominated in foreign currencies, it relinquishes control over the currency printing press. This increases the risk of being unable to repay the bonds in the designated currency. Consequently, a country’s debt capacity diminishes, necessitating a lower level of leverage and a fiscal policy that aligns with this reality.
Notably, this forces a country to operate with utmost efficiency in its fiscal policies, which likely underpins Milei’s proposal.
In conclusion, the path ahead for Argentina remains uncertain as it grapples with economic challenges. However, the potential abolition of the central bank and the adoption of alternative currencies could pave the way for a new era. Only time will tell if President-elect Milei possesses the courage to navigate this uncharted territory successfully.
About the author:
Alexandre Vasarhelyi is the founding partner at BLP Crypto, overseeing cryptocurrency funds. He entered the world of digital assets in early 2017 after spending over 23 years in the traditional financial sector, working on proprietary trading desks at esteemed institutions such as Banco Indosuez, Credit Suisse, Deutsche Asset Management, ING Bank, and Banco Pine. His expertise spans fixed and variable income assets, currencies, options, and commodities in both local and international markets. Alexandre holds a degree in production engineering from the Escola Politécnica of the University of São Paulo, a postgraduate degree from Rio de Janeiro’s Fundação Getulio Vargas (FGV), and an MBA from the Brazilian Institute of Capital Markets.
Disclaimer: This article is intended for informational purposes only and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed in the article belong solely to the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.