The controversial initiative javier milei to dollarize the economy continues to generate noise among specialists. This weekend, the Center for Political Economy of Argentina (CEPA) presented a new report titled “The dollarization of the economy: a wage liquefaction shock.”
In the study, CEPA explains that “dollarization implies replacing the existing pesos with dollars. That is, that no more pesos circulate” and that “dollarization would imply a mega devaluation to replace the existing pesos with the dollars that the BCRA has in net form.”
In this regard, the study maintains that “at a minimum it would be necessary to replace the monetary base, which is $5.15 trillion, with the net reserves that the BCRA has, which are around USD 1,800 million. From there arises an exchange rate in around $2,860 per dollar”.
Consequences
In reference to the leliq, the passive repos and other titles in pesos of the BCRA, the report comments: “Not replacing them and only making the currency exchange in the accounting records of the banks could lead to the fact that when a depositor intends to withdraw his deposit, Now converted to dollars, those dollars are gone.
“That would generate a banking crisis in which the BCRA cannot act as a lender of last resort since it would not have dollars to do so. The LELIQ, NOTALIQ and passive repos add up to $12.64 trillion. Adding these other pesos, the exchange rate conversion rate would be around $9,880”, he adds.
Regarding other BCRA assets, CEPA reports that “its maturity is between 2024 and 2032, totaling USD 61,707 million of nominal value. It is clear that the Treasury does not have that money, so to cancel them it would need a law of Congress -if it is with a discount-, or have access for that figure to the voluntary credit markets in foreign currency, which is not seen as feasible in the short term, and for which it would also need authorization from Congress”.
“Assuming that the BCRA intends to sell to the private sector all the listed securities that it has and there is demand from the private sector to buy them, for foreign currency bonds it would obtain around USD 3.5 billion at the current prices of those bonds and for bonds in local currency around USD 2,000 million”, Explain.
Lastly, he says: “With these estimates, net reserves of some USD 5.5 billion could be added. These are the assets that could replace all of the BCRA’s liabilities in pesos. Let’s remember, that whenever there is demand from the private sector to buy that important amount of bonds without the price being affected”.
wage liquefaction
Regarding salaries, the report warns that the conversion of pesos for dollars supposes a great adjustment in the value of the exchange rate. A large devaluation with an impact on wages and income of the population.
On this point, CEPA highlights that, in the scenario with less dollar support, the loss of purchasing power in dollars would be between 68% and 98%, . The perspective is one of smooth salary liquefaction
Source: Ambito
