“Currency competition”: what does the step prior todollarization that Milei talks about talk about and alerts the market

Even if the Presidency excludes any type of economic announcement in the speech that Javier Milei will give this Friday inaugurate the ordinary sessions of the National Congressall eyes in the market are on keys that the president can give About direction of the economy for the next few months.

While waiting, the voice crept in adollarization announcement which Milei himself had the task of banning. Instead, he recognized that the country can move forward towards a scenario of “currency competition”.

True to his style, the president cited a social network thread the conditions fordollarization are not met and that the intermediate step would be a “free competition of currencies”, with a first phase in which a basket of other countries’ currencies coexists freely with the peso in the daily economy.

In a scheme of free currency competitionthe national currency does not lose its legal tender status and continues to be used for things such as paying taxes, salaries, money transfers and intrastate payments. However, other currencies appear, such as the dollar, which coexist so that citizens can choose with which to pay, save or invest.

In City I agree with this the persistent fall of the financial dollarwith a gap that this Thursday is just above 27%, and the constant repurchase of reserves by the Central Bank, which only one day in the last 54 rounds ended with a negative balance due to its interventions on the market and Since the change of government, 8,634 million dollars have already been accumulatedthey are conditions “necessary but not sufficient” to start talking about a change in the monetary scheme.

A market analyst explained to this newspaper: “In order for there to be free competition between currencies there should be no traps. and for that they should release all restrictions which still exist and which are the same ones that Massa left behind. I think that we’re far of all this.”

In the latest statements from the economic team, it was insisted that the shares could be raised towards the middle of the year. In the market they coincide: Before easing all the restrictions in force on the exchange rate front, it is necessary to finish cleaning up the balance sheet of Banco Central, further increase the level of reserves, which despite this year’s purchases remain in negative territory, and support demand for pesos, to avoid a massive flight towards the dollar.

“The consolidation of the Central Bank’s balance sheet is a necessary condition in order to advance the elimination of exchange controls that still exist. The question is how much needs to be improved and what is the scheme chosen to eliminate exchange controls,” explained fund manager MegaQM.

“If an extreme situation occurs, such asdollarization, it is necessary cover monetary liabilities in pesos with dollar reserves. Since then that level of coverage is still a long way off Currently it is possible to cover 55% of these liabilities also considering the gross reserves, which include liabilities that may be payable in the short term (swaps, mandatory reserves, etc.)”, they added and underlined: “The conditions for the unification of the exchange rate can be achieved , butdollarization increases the level of balance sheet cleanliness much deeper.”

Despite these reservations, the financial system is preparing for any change in direction. “Basically, Coin competition already exists today and the use of the dollar has been expanded into different markets such as homes, automobiles and others. The formal competence would be to be able to freely decide in which currency not some, but All Transactions and that’s why you have to do it amend the civil code. For the financial system, the dynamics will depend on how this transition unfolds, since in a currency competition the exchange rate may be higher if there is a clear preference for hard currency“, they explained on the front line.

At another private bank they agreed: “If we moved to a currency competition scenario, it would not be so destructive to the system.”

In a third entity consulted by Clarion They stated: “There are banks that are more prepared than others for this. We believe that the unfreezing of shares and the unification of exchanges could happen in stages. Today we have a great diversity and number of controls, some of which can be removed more quickly but others not“.