(This story will appear in the June 30, 2018 issue of Forbes. )
CRY FOR ARGENTINA: THE IMF IS COMING
ARGENTINA IS in economic trouble--again. But the country has an opportunity to turn the economic world upside down.
Its conservative president, Mauricio Macri, is seeking a deal with the IMF for a $30 billion credit facility. Since his surprise win in 2015, Macri has been lackadaisical about tackling runaway spending, massive borrowing and rampant cronyism. Now the peso is under assault, as the government has been pressuring the central bank to buy more bonds with money created out of thin air--a surefire way to stoke inflation. Argentina has wrecked its currency time and again and seems on its way to doing so once more, the peso having lost 20% of its value this year.
Macri is holding the rotten hand dealt by his two corrupt, tyrannical predecessors, Cristina Kirchner and Néstor Kirchner. But Macri won't find salvation with the IMF. Argentines loathe that agency, because during its last round of austerity measures, which were imposed 18 years ago, unemployment rose to 20%.
There's a simple way for the beleaguered president to stop the currency rot immediately: Buy pesos in the exchange markets with the government's foreign reserves--about $50 billion at last count--until the peso recovers all the ground it has lost. In fact, with that war chest, the government could purchase Argentina's entire basic money supply.
Critics scoff that such a move won't work. After all, Argentina already spent nearly $8 billion in exchange operations without stopping the slide. But these skeptics are missing a rather blatant error Argentina made: The central bank bought pesos, thereby reducing the supply, which was a good thing, but then it turned right around and increased supply by buying bonds. That's the equivalent of using a bucket to scoop out water at one end of a pool and then pouring it back in at the other end.
Macri should send his central bankers a simple memo: Cease such nonsense immediately, and reduce the monetary base until the peso/dollar rate goes from 25-1 to 15-1.
When the crisis passes, which it quickly would, he should consider something truly radical: Make the dollar Argentina's official currency. People would gladly turn in their pesos for dollars at a 15-1 rate. Given their country's sorry history of monetary mismanagement, Argentines know it's only a matter of time before the peso is vaporized again.
Ecuador, Panama and El Salvador already use the greenback. Even though Ecuador was recently ruled by an anti-American leftist, he quickly gave up the notion of trying to reintroduce a local currency--the people wouldn't stand for it.