Closer to the Fed's Flame

How the Milei administration plans to use the IMF agreement to shut down the BCRA and dollarize

Welcome Avatar! Ever since the start of its term, much ink has been spilled on the Milei administration getting ready for a renewed IMF agreement. However, few have focused on how Milei’s government is planning to use those funds to shut down the peso printer at the BCRA once and for all. Will it work? Let’s find out below.

The upcoming agreement with the IMF contemplates ending the crawling peg and lifting the current foreign exchange restrictions (CEPO).

It will be a critical test of Milei’s economic plan right before the elections, and the endless wait on the officialization of the agreement combined with the uncertainty of the final amount and the disbursement stages is the perfect cocktail to have Argentines feeling to fight the urge of pressing the buy button on the MEP dollar and getting rid of their peso carry trade.

In the past week, Minister Caputo had so many media appearances that Argentines started to worry that something was about to blow up: historically when Ministers of Economy in Argentina try to “calm the markets”, that is the starting sign to buy dollars because the peso will burn to the ground shortly after.

“Those who bet on the Dollar, will lose out” — Minister of Economy Sigaut right before obliterating peso salaries; in the next 8 months after this “reassurance”, the peso devalued by 3x+ against the dollar.

During a radio interview last week, President Javier Milei once again ruled out a devaluation and downplayed the turbulence by saying that “the exchange rate issue is irrelevant.”

All these were manifestations of the urgency to signal calm, buy time, and get to the IMF board meeting. This sequence of events ended up causing confusion and uncertainty in the market, and the exchange rate started to move a bit faster than usual. The golden rule in Argentina is that when politicians try to reassure everyone that everything is a-okay, the opposite is usually the case.

But even though the opposition is using all its ammunition to try to stimulate a rush to the dollar, these efforts are unlikely to be successful in the near term, despite what Minister Caputo’s media appearances, declining BCRA dollar reserves and the golden rule of politicians’ reassurances might have you suspect.