"Why not go the route of recapitalising BCRA, confirming the independence of the central bank, while focussing on fiscal and balance of payments sustainability needs given these steps? Then there is at least a chance of avoiding the mistakes from the quasi-currency board and learning from the past. At last."
Yes, I agree this would be better approach. But is it a feasible option? Surely, it would have been implemented long before now if it were doable. The fact that it has not happened suggests otherwise. Which brings us back to the radical option of dollarization.
My question, then, is whether the lack of state capacity that has prevented your preferred approach from happening, will also be a constraint to implementing dollarization in Argentina.
I think the problem is, it has not been tried. And I think the reason is neither debtor nor creditor has had the incentive to deal with this (until now.)
Creditors, as was witnessed in the debt restructuring, don't want to admit the sustainability implications of the central bank quasi-fiscal debt (though market prices ultimately cannot hide from this.)
The debtor, the government, doesn't want to have to balance the books without the support of money printing whenever they need it. (Note, they took another ARS250bn in transfers from the central bank in the past month.)
Both sides gamble for redemption.
Since neither of the two main players want to face the immediate consequences of the hidden debt on the central bank, it never gets fixed.
But the implications will be similar to dollarisation (no monetary financing and debt restructuring) but with a more flexible monetary policy in the steady state and ideally a central bank holding a centralised dollar reserve to support the economy against future external shocks.
So I think it is doable at this moment precisely because it is no worse than dollarisation and potentially much better.
The lack of state capacity being a constraint on dollarisation is also possible. As with convertibility, they can re-legislate in favour of Peso-ization again. If the government cannot finance themselves they can create some non-dollar script.
But it feels like the Milei movement is the opportunity for a better fix than either dollarisation or the current predicament. Here's hoping.
"Why not go the route of recapitalising BCRA, confirming the independence of the central bank, while focussing on fiscal and balance of payments sustainability needs given these steps? Then there is at least a chance of avoiding the mistakes from the quasi-currency board and learning from the past. At last."
Yes, I agree this would be better approach. But is it a feasible option? Surely, it would have been implemented long before now if it were doable. The fact that it has not happened suggests otherwise. Which brings us back to the radical option of dollarization.
My question, then, is whether the lack of state capacity that has prevented your preferred approach from happening, will also be a constraint to implementing dollarization in Argentina.
Good question.
I think the problem is, it has not been tried. And I think the reason is neither debtor nor creditor has had the incentive to deal with this (until now.)
Creditors, as was witnessed in the debt restructuring, don't want to admit the sustainability implications of the central bank quasi-fiscal debt (though market prices ultimately cannot hide from this.)
The debtor, the government, doesn't want to have to balance the books without the support of money printing whenever they need it. (Note, they took another ARS250bn in transfers from the central bank in the past month.)
Both sides gamble for redemption.
Since neither of the two main players want to face the immediate consequences of the hidden debt on the central bank, it never gets fixed.
But the implications will be similar to dollarisation (no monetary financing and debt restructuring) but with a more flexible monetary policy in the steady state and ideally a central bank holding a centralised dollar reserve to support the economy against future external shocks.
So I think it is doable at this moment precisely because it is no worse than dollarisation and potentially much better.
The lack of state capacity being a constraint on dollarisation is also possible. As with convertibility, they can re-legislate in favour of Peso-ization again. If the government cannot finance themselves they can create some non-dollar script.
But it feels like the Milei movement is the opportunity for a better fix than either dollarisation or the current predicament. Here's hoping.