Read more about the article The Dollar-Renminbi Tango: The Impacts of Argentina’s Potential Dollarization on its Relations with China

The Dollar-Renminbi Tango: The Impacts of Argentina’s Potential Dollarization on its Relations with China

The surprising victory of Javier Milei, the unconventional ‘anarcho-capitalist’ candidate, in the August primaries ahead of Argentina’s October 2023 general election, can be largely credited to his commitment to dollarize the Argentine economy, a move perceived as the ultimate solution to bring an end to the nation's economic turmoil. The potential shift from the local currency to the dollar has sparked concerns about Argentina's bilateral currency swap line with China. This swap line plays a crucial role in their bilateral relations and has also served as a means for Argentina to fulfill its debt obligations to the International Monetary Fund. The swap line is seen as a key element in preventing Argentina from defaulting on its IMF obligations, which is vital for both its economic and international financial stability. Given the significance of these developments, this article explores Argentina's potential shift towards dollarization and its implications for the country's relationship with China. It does so by assessing the critical role of the bilateral currency swap line between the Central Bank of Argentina (BCRA) and the People's Bank of China (PBOC) in backing Argentina's external payments. The analysis traces the history of the BCRA-PBOC swap line, highlighting how Argentina has relied increasingly on it during financial crises. It also examines the potential challenges and uncertainties that may arise if Argentina does indeed move towards dollarization, including the fate of the swap line and how it would be managed. Additionally, the article reflects on China's strategic approach to swap agreements with partner countries, emphasizing its flexibility in sustaining stable trade relations, even in the face of undesirable political shifts. Finally, it underscores the magnitude of China-Argentina trade relations, particularly in terms of Argentina's significance in helping China secure strategic resources, and how these relations impact Argentina's economic recovery. In conclusion, the fate of the BCRA-PBOC swap line is deeply intertwined with the broader economic and political dynamics between China and Argentina. Both nations are likely to seek pragmatic solutions to address the challenges posed by Argentina's potential shift towards dollarization, thereby ensuring the continuation of stable bilateral relations.

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Read more about the article The U.S. Dollar’s “Exorbitant Privilege” Remains

The U.S. Dollar’s “Exorbitant Privilege” Remains

• Notwithstanding the ongoing drive by countries for a higher plurality of main currencies, raising the use of the renminbi, “de-dollarization” looks bound to be partial and limited. • Higher speed and depth of such a transformation would require a metamorphosis of China’s regulatory and policy regime for which the country will not have the desire to implement. • While the euro has remained mostly a regional reserve currency, the U.S. may retain its “exorbitant privilege” through the provision of U.S. dollar safe assets for longer.

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Read more about the article Dollarization of Argentina: Revival of a Zombie Idea

Dollarization of Argentina: Revival of a Zombie Idea

Last March, a proposal of dollarizing Argentina’s economy arrived at its Congress. We summarize here the potential consequences of such a route in case the bill succeeds in getting approval. First, we point out the broad implications of dollarizing an economy. Then, we set out some cases of Latin American experiences with dollarization. Finally, we address the case of Argentina. The main potential benefit of dollarization would be elimination of domestic inflation, but at a very high cost. Argentina’s fiscal imbalances will not be eliminated by dollarization. Even though dollarization would prevent the printing of money, it imposes no constraints on government spending and borrowing. The only result is that monetary policy ceases to be available as an option, leaving almost no response capacity in case of external shocks. Moreover, dollarization creates the possibility of being exposed to pro-cyclical monetary policies unrelated to domestic necessities. It also eliminates seigniorage benefits. On top of more general features of dollarization and case studies, implementing dollarization now in Argentina would have to face hard-to-overcome challenges. Proposing dollarization under current conditions would require a selective default of domestic currency liabilities, a brutal devaluation, and/or a unilateral conversion of public deposits.

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