Argentina’s top presidential contender, Javier Milei, known as an anarcho-capitalist, created turmoil in local financial markets and caused currency devaluation after his surprising victory in the Sunday primary.
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Adding to the astonishment, he declared his intention on Wednesday to shut down the country’s central bank. Despite this, he emphasized his commitment to preventing a default on the national debt if he becomes the winner in the October election.
Milei, a staunch libertarian, informed Bloomberg News that his audacious fiscal plan would improve Argentina’s reputation and credit standing, removing the need for a default.
His strategy involves reducing spending by a minimum of 13% of the GDP before mid-2025. This involves significant cutbacks in public projects, streamlining ministries, eliminating subsidies, and lifting currency restrictions for businesses to conduct transactions in US dollars. Additionally, he aims to close the central bank, which he views as unnecessary, and adopt the US dollar for the $640 billion economy.
“I will make every effort to avoid a default, obviously,” Milei said in a two-hour interview in Buenos Aires on Wednesday. “If you do the fiscal adjustment that’s needed, the financing will be there.”
Milei caused a market shock by unexpectedly leading the primary as a presidential candidate, a role he was not previously considered a serious contender for. The primary is seen as a gauge for the upcoming presidential elections in a country where polls are often unreliable. This drop in popularity led the government to devalue its tightly controlled official exchange rate by 18% as markets opened on Monday.
In his first interview with foreign media after this surprising victory, Milei spoke to Bloomberg. He outlined his strategy to replace the Argentine peso with the US dollar to tackle the soaring 113% inflation rate. He also intensified his criticism of the central bank, labeling it “the worst garbage that exists on this Earth”.
“Central banks are divided in four categories: the bad ones, like the Federal Reserve, the very bad ones, like the ones in Latin America, the horribly bad ones, and the Central Bank of Argentina,” he said.
Should Milei secure the presidency, he intends to entrust economist Emilio Ocampo with the responsibility of shutting down the central bank. Ocampo has informally advised Milei on the dollarization initiative.
Ocampo will also assist in negotiations with the International Monetary Fund (IMF), which has a $44 billion program with Argentina. The candidate has clarified that he has no intentions of seeking additional funds from the IMF.
“A fiscal deficit is immoral,” Milei said.
“If you live continually with a fiscal deficit, you’re going to be insolvent.”
But don’t mention that to the US, which has only seen four annual surpluses in the last 50 years.
Milei has already crafted a blueprint for dollarizing the economy, a step he promises to take early if he wins the October 22 election. Argentina would adopt a model similar to El Salvador’s, allowing people to choose between currencies voluntarily.
Once two-thirds of the monetary base undergoes conversion, the economy will complete its full dollarization, he explained.
“If nobody wants to have pesos in Argentina, the question is how much are pesos worth in real terms? Nobody wants them, we’re not talking about water in the middle of the desert. We’re talking about something nobody wants,” Milei said.
Manuel Garcia Gojon, writing for The Mises Institute, notes that Milei’s comprehensive plan, presented in some detail on August 2nd, is distinctly pragmatic from an anarchist standpoint:
The first measure consists of an organizational reform of the government, going from 18 to 8 ministries. The ministries to be included are interior, foreign relations, defense, economy, justice, security, infrastructure, and human capital. No career bureaucrats are to be fired initially, but they will be reassigned. The political appointees will not be renewed and will be kept to a minimum. All government employee privileges, such as bodyguards and drivers, will be eliminated, except in the cases in which they are absolutely necessary for security reasons. This measure also includes initiating the privatization or closure process of all state-owned companies.
The second measure consists of a significant reduction in public spending. For the first budget, they seek to eliminate expenditure items amounting to 15 percent of GDP, taking it from a deficit to a surplus. On the revenue side, they seek to eliminate 90 percent of taxes, which only raise an amount equal to 2 percent of GDP but have a distortive effect. There is also an intention of lowering the taxes that remain.
The third measure consists of a flexibilization of labor regulations. Firing an employee is currently very costly in Argentina between litigation and compensation. This measure is geared toward reducing those costs by making it easier for companies to fire new employees. The balancing side of this measure is the implementation of a private unemployment insurance scheme. With this measure they seek to take formal employment in the private sector from 6 million positions to 14 million positions.
The fourth measure consists of a liberalization of trade. The goal of this measure is unilateral free trade in the style of Chile. This includes the elimination of all import and export tariffs and the reduction of regulatory restrictions.
The fifth measure consists of a monetary reform. This measure includes allowing the use of any commodity or foreign currency as legal tender and the liquidation of the central bank, which would result in the elimination of the Argentine Peso. There are alternative plans for the implementation of this measure, but the leading one is the one developed by Emilio Ocampo and Nicolas Cachanosky. In terms of timing, it would take between nine and 24 months. The conversion would be made at the market exchange rate. Once two thirds of the monetary base has been converted, a countdown for the last date to convert would be triggered.
An additional challenge for this measure is that the central bank has remunerated liabilities three times the size of the monetary base. These are like the Federal Reserve’s program of paying interest on reserves in order to sterilize increases in the quantity of money. The central bank does have some commodities and foreign currencies in reserves but most of the assets consist of government bonds that currently trade at a third of their face value. To access the necessary liquidity to liquidate the central bank, the bonds would be transferred to a fund which would acquire the necessary line of credit using the bonds as collateral. The line of credit has already been confidentially agreed upon. The bonds are guaranteed to increase in price if the budget deficit is eliminated as specified in the second measure.
The sixth measure consists of an energy reform. This measure intends to eliminate all subsidies to energy providers through a recalibration of the financial equilibrium to lower costs to keep the companies profitable and minimize the impact on the cost to the consumers. This measure opens a door to subsidies on the demand side for vulnerable households. They also seek to improve the energy infrastructure through a scheme of public interest declarations for projects which would be financed and executed by the private sector, but for which the government might provide a minimum revenue guarantee.
The seventh measure consists of fostering investment. This will be done through a special legal arrangement for long term investment with a focus on mining, fossil fuels, renewable energy, forestry, and other sectors. In order to foster investment, they will also aim to eliminate foreign exchange restrictions and export fees.
The eighth measure consists of an agrarian reform. This includes the elimination of the foreign exchange spread between the official exchange rate and the market exchange rate through the liquidation of the central bank, the elimination of all export fees and retentions, the elimination of the gross revenue tax, the elimination of all restrictions to foreign trade including quotas and the need for authorization, the promulgation of a new seeds law, and the improvement to road infrastructure through private enterprise.
The ninth measure consists of a judicial reform. This measure includes the designation of a Minister of Justice with the consensus of the judicial branch, as well as the appointment of a Supreme Court Justice without political affiliations to fill the present vacancy, prohibiting members of the judicial branch from engaging in partisan politics, and promoting the budgetary independence of the judicial branch. Furthermore, they will seek to implement jury trials and oral proceedings throughout the country.
The tenth measure consists of a welfare reform. Current welfare benefits will be initially maintained. They aim to move in the long term towards a private system in which users pay for the health and education services they consume. In the short term they aim to provide income protection programs to mitigate extreme poverty, nutritional programs, parental educational programs about cognitive stimulation, greater coverage for preschool, incentives for graduation, programs for the integration of people with disabilities, the promotion of access to private credit, and the elimination of all middlemen in the provision of welfare.
The eleventh measure consists of an educational reform. They aim to move towards a greater degree of freedom to choose the curricula, methods, and educators. The measure also includes launching a school voucher pilot program. They will also establish an evaluation criterion for schools so that they may compete for incentives.
The twelfth measure consists of a health reform. They aim to transfer the subsidization of healthcare from supply to demand to allow for greater freedom of choice and competition. This measure includes providing the existing healthcare benefits as vouchers so that there is no restriction to a specific provider.
The thirteenth measure consists of a security reform. This measure includes reforms to the homeland security, national defense, and intelligence laws, as well as a reform to the penitentiary system to incorporate public private hybrids and intensifying the prosecution of drug trafficking.
The former congressman got more votes than Patricia Bullrich’s pro-business group and Economy Minister Sergio Massa’s ruling Peronist team, which was a surprise to experts who predicted he’d be third.
Investors are concerned that the country might be heading for its fourth debt crisis in 20 years.
A big worry for markets is whether Milei, who is new to politics, will get support for his plans.
At 52 years old, Milei doesn’t hold back in criticizing politicians he thinks have been taking from Argentines for many years. He said he’d use referendums if lawmakers didn’t agree on his ideas.
“If I lower the currency risk, and I lower the credit risk, that means country risk will plummet. It means that bonds are literally going to fly,” he said.
“The truth is its a pretty simple trade. Or, if you buy and hold, for example, returns in a year would be above 200%.”
In a detailed Bloomberg interview, Milei also criticized China and leftist leaders in Latin America, whom he sees as “socialists.” He wants to exit the Mercosur trade group and make commodity markets less regulated.
According to the Buenos Aires-based consulting firm 1816 Economia & Estrategia, Argentina is on the brink of financial collapse as it has depleted all of its liquid international reserves and has reportedly spent an additional estimated $1 billion.
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