Politics Javier Milei and Argentina’s Reform Trial (Opinion) - Wall Street Journal

[sergio]

Great article in the Wall Street Journal.

Opinion | Javier Milei and Argentina’s Reform Trial

New President Javier Milei’s free-market ideas will fail without a stable currency.

www.wsj.com

 

[StatusNomadicus]

surprisingly written without much bias and pretty good analysis, from WSJ. full text here for those who can't click:
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OPINION

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Javier Milei and Argentina’s Reform Trial​

New President Javier Milei’s free-market ideas will fail without a stable currency.​

---

By
The Editorial Board
Jan. 3, 2024 6:32 pm ET

Can a basket-case economy escape from a 25-year socialist decline? That’s the drama now unfolding in Argentina, where new President Javier Milei is pushing a big-bang economic reform to make the once-rich nation prosperous again. The political question is whether his reforms can take hold before the public loses confidence in his efforts.
Mr. Milei won a mandate for his agenda with 56% of the vote in November, but his reward is to inherit a bankrupt country. The economy is in recession and more than 40% of Argentines live below the poverty line. Government debt is 85% of GDP and the country owes the International Monetary Fund some $46 billion, making it the fund’s largest debtor.
Borrowing in the capital markets is prohibitively expensive. The value of the peso has collapsed because the central bank has spent years printing money to pay government bills. Inflation is in the neighborhood of 200% and may go higher. Such are the fruits of left-wing populist governments in the Peron tradition.
Mr. Milei’s response is to go for major reform fast, even at the risk of some economic pain. “I have to tell you again: There is no money,” Mr. Milei said in his Dec. 10 inaugural address. There is “no alternative to shock.”
Two days later his minister of the economy, Luis Caputo, modified government electricity and transportation subsidies, suspended government advertising budgets and killed pending public construction projects. He cut the number of federal ministries in half and announced that contracts in foreign currencies will now be enforced. The exchange-rate remains pegged but Mr. Caputo announced a devaluation of 54% to 800-to-the-dollar from 350 and a crawling peg of 2% monthly.

Last week Mr. Milei issued an emergency decree with a goal of eliminating 5,000 civil-service jobs. The decree also repeals dozens of laws that micromanage the economy. It ends rent control and other landlord regulations. It lifts price controls and deregulates everything from tourism and supermarket shelves to sugar production and football clubs.

It reduces labor regulations. It lifts import quotas and eliminates import prohibitions. Export quotas are also gone, freeing ranchers and farmers to sell their meat and milk around the globe. A day later the President sent Congress a bundle of other reforms. His Law of Bases and Starting Points for the Freedom of Argentines proposes to sell some 40 state-owned companies, enact political, judicial, education and tax reforms and allow private investment in public infrastructure.
All of these reforms point in the right direction to attract capital and restore incentives to work. But in the short term they also involve some pain, and they challenge the interest groups that benefit from the status quo, especially labor unions.

Last week the country’s largest labor federation joined demonstrations in Buenos Aires to protest the executive order. And on Wednesday the nation’s appeals court suspended the labor reforms included in the emergency decree. The government said it will appeal, but this won't be the last time Mr. Milei runs into resistance.

***​

The biggest economic risk is the overhang from the former government’s abuse of the central bank, which piled short-term debt on its balance sheet. The Milei administration has promised to move that debt to the treasury where it belongs. But that won’t stop the looming threat of hyperinflation.
Last week a central bank bond auction to raise the estimated $30 billion it owes to importers took in a mere $68 million. The bank blamed the lack of interest on unfamiliarity with the process, but monetary uncertainty is also at play.
Shortly after his victory, Mr. Milei said his campaign promise to close the central bank is “non negotiable.” Yet so far his reform agenda doesn’t include a path to putting the peso out of its misery. It doesn’t even make the U.S. dollar legal tender.
As long as the peso hangs around, the temptation will remain for this government or the next to abuse it. Argentines know this better than anyone. This explains why some $256 billion is outside the domestic financial system, according to the latest government data. And why so many transactions—from real estate to surgery in private clinics—are done in dollars. Undeclared dollar bills held by Argentines are estimated to be worth at least $50 billion.
There’s no shortage of dollars in Argentine hands. What’s scarce is confidence in the country as a destination for capital. A stable currency that people trust is essential for the economic recovery Mr. Milei wants, and his reforms will fail without it.
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[Avocado]

surprisingly written without much bias and pretty good analysis, from WSJ. full text here for those who can't click:
---------------
OPINION

---

Javier Milei and Argentina’s Reform Trial​

New President Javier Milei’s free-market ideas will fail without a stable currency.​

---

By
The Editorial Board
Jan. 3, 2024 6:32 pm ET

Can a basket-case economy escape from a 25-year socialist decline? That’s the drama now unfolding in Argentina, where new President Javier Milei is pushing a big-bang economic reform to make the once-rich nation prosperous again. The political question is whether his reforms can take hold before the public loses confidence in his efforts.
Mr. Milei won a mandate for his agenda with 56% of the vote in November, but his reward is to inherit a bankrupt country. The economy is in recession and more than 40% of Argentines live below the poverty line. Government debt is 85% of GDP and the country owes the International Monetary Fund some $46 billion, making it the fund’s largest debtor.
Borrowing in the capital markets is prohibitively expensive. The value of the peso has collapsed because the central bank has spent years printing money to pay government bills. Inflation is in the neighborhood of 200% and may go higher. Such are the fruits of left-wing populist governments in the Peron tradition.
Mr. Milei’s response is to go for major reform fast, even at the risk of some economic pain. “I have to tell you again: There is no money,” Mr. Milei said in his Dec. 10 inaugural address. There is “no alternative to shock.”
Two days later his minister of the economy, Luis Caputo, modified government electricity and transportation subsidies, suspended government advertising budgets and killed pending public construction projects. He cut the number of federal ministries in half and announced that contracts in foreign currencies will now be enforced. The exchange-rate remains pegged but Mr. Caputo announced a devaluation of 54% to 800-to-the-dollar from 350 and a crawling peg of 2% monthly.

Last week Mr. Milei issued an emergency decree with a goal of eliminating 5,000 civil-service jobs. The decree also repeals dozens of laws that micromanage the economy. It ends rent control and other landlord regulations. It lifts price controls and deregulates everything from tourism and supermarket shelves to sugar production and football clubs.

It reduces labor regulations. It lifts import quotas and eliminates import prohibitions. Export quotas are also gone, freeing ranchers and farmers to sell their meat and milk around the globe. A day later the President sent Congress a bundle of other reforms. His Law of Bases and Starting Points for the Freedom of Argentines proposes to sell some 40 state-owned companies, enact political, judicial, education and tax reforms and allow private investment in public infrastructure.
All of these reforms point in the right direction to attract capital and restore incentives to work. But in the short term they also involve some pain, and they challenge the interest groups that benefit from the status quo, especially labor unions.

Last week the country’s largest labor federation joined demonstrations in Buenos Aires to protest the executive order. And on Wednesday the nation’s appeals court suspended the labor reforms included in the emergency decree. The government said it will appeal, but this won't be the last time Mr. Milei runs into resistance.

***​

The biggest economic risk is the overhang from the former government’s abuse of the central bank, which piled short-term debt on its balance sheet. The Milei administration has promised to move that debt to the treasury where it belongs. But that won’t stop the looming threat of hyperinflation.
Last week a central bank bond auction to raise the estimated $30 billion it owes to importers took in a mere $68 million. The bank blamed the lack of interest on unfamiliarity with the process, but monetary uncertainty is also at play.
Shortly after his victory, Mr. Milei said his campaign promise to close the central bank is “non negotiable.” Yet so far his reform agenda doesn’t include a path to putting the peso out of its misery. It doesn’t even make the U.S. dollar legal tender.
As long as the peso hangs around, the temptation will remain for this government or the next to abuse it. Argentines know this better than anyone. This explains why some $256 billion is outside the domestic financial system, according to the latest government data. And why so many transactions—from real estate to surgery in private clinics—are done in dollars. Undeclared dollar bills held by Argentines are estimated to be worth at least $50 billion.
There’s no shortage of dollars in Argentine hands. What’s scarce is confidence in the country as a destination for capital. A stable currency that people trust is essential for the economic recovery Mr. Milei wants, and his reforms will fail without it.
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The key and most important part is that Milei will fail.