Narayan AmmachchiJP Morgan predicted a bleak outcome for Argentine President Javier Milei’s ambitious plan to dollarize the economy, arguing that the country’s fragile economic situation is unsuitable for such a risky venture.
The investment bank emphasized that dollarization is typically successful only in countries with robust economic growth and ample foreign currency reserves. Even if Argentina could secure the necessary volume of dollars, JP Morgan warned that the strategy is inherently flawed and bound to fail.
A similar experiment in Ecuador led to money laundering, strengthening the hands of criminal gangs.
Additionally, “white knight” lenders like the ECB and the European Commission often provide crucial support, while hefty commodity-linked reserves help defend the currency peg. Unfortunately, Argentina lacks all of these crucial factors, making dollarization a risky proposition, according to the bank’s analysis.
A dollarization plan would be a complex and potentially risky endeavor. The process would require Argentina’s central bank to exchange commercial banks’ pesos for a specific amount of dollars. This essentially converts existing peso deposits into dollar accounts for individual clients. Imagine a bank informing its customers that their 1,000 Argentine pesos are now worth just US$1.
This conversion wouldn’t be a simple swap. All outstanding loans currently denominated in pesos would need to be renegotiated with new interest rates tied to the dollar. This would likely involve setting a conversion rate between peso and dollar interest rates, further complicating the transition.
Beyond the technical hurdles, political roadblocks also stand in the way. President Milei would require a supermajority in Congress (a two-thirds vote) to pass the necessary constitutional reforms enabling dollarization. Considering the current political landscape in Argentina, that’s quite a challenge.
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