Earlier this week, the United States signed an agreement with Argentina for a $20 billion swap line, to be augmented with an additional $20 billion provided by private sources. The objective is to prevent a collapse of the peso that would derail the country\u2019s disinflation program and trigger a defeat of President Javier Milei\u2019s party in upcoming congressional elections. This bailout is a terrible idea\u2014it hands over $40 billion in US public and private funds to Argentine speculators with only a meagre chance of repayment for, at best, a short-lived stabilization of Argentina\u2019s economy. But if the Trump Administration is hell-bent on handing over the cash to its political allies in Argentina, it should at least do it right\u2014by using the funds to finance full dollarization.<\/p>\n
In the leadup to his election in December 2023, Milei actually campaigned on the promise of dollarizing Argentina\u2019s economy. In the event, he didn\u2019t follow through, in part because the government was broke and lacked the dollars needed to do it. Since his election, Milei has instead implemented an orthodox disinflation program of dramatic cuts in government spending, later combined with interventions in the foreign exchange market to slow the depreciation of the peso. These policies have brought inflation (year\/year) down toward 30 percent, low by Argentine standards, but at the cost of an overvalued exchange rate and widespread economic distress. In consequence, as well as because of political scandal within his party, Milei\u2019s candidate lost the Buenos Aires provincial election in September and prospects are dicey for mid-term congressional elections next week.\u00a0<\/p>\n
Fortunately for Milei, he is pals\u2014in fact, the \u201cfavorite president\u201d\u2014of President Trump. Accordingly, the Administration has come to Milei\u2019s rescue with a $20 billion swap agreement.\u00a0\u00a0The dollars will be used by Argentina\u2019s central bank to buy pesos in the foreign exchange market and thus prop up their value. Moreover, the Administration has intervened directly itself on several occasions to buy pesos. Finally, the Administration is\u00a0\u00a0working on an additional $20 billion to be provided by private lenders,\u00a0who are now looking to ensure they don\u2019t lose money on the deal<\/a>.<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0So what\u2019s wrong with all this? Plenty:<\/p>\n So much for the art of the deal.\u00a0\u00a0Clearly, the best option for the United States is to keep the taxpayers\u2019 money safe and let Argentina float the peso.\u00a0<\/p>\n But if the Trump Administration insists on handing over the moola, it should at least do so as effectively as possible.\u00a0\u00a0And that means using the money to fully dollarize Argentina\u2019s economy: replacing the peso with the dollar for all transactions and assets. To be sure, Argentina would lose the ability to adjust its exchange rate, print money to finance budget deficits, and conduct its own monetary policy, but those losses are, as they say, features rather than bugs. As demonstrated by\u00a0Ecuador, El Salvador, and Panama<\/a>, inflation would fall roughly to US levels, a necessary\u2014but hardly sufficient\u2014condition for a stable and prosperous economy.<\/p>\n\n