The Dollarization of Guarantees in Argentina: Benefits, Challenges, and Outlook
The relationship between the Argentine peso and the US dollar has historically been complicated. With constant fluctuations and growing gaps between the official and parallel markets, this relationship has been a determining factor in the country’s economic behavior. Let’s see how the dollarization of guarantees might interact with this phenomenon.
What is the dollarization of guarantees?
It involves stipulating that guarantees provided by individuals or companies in various transactions (such as loans or rentals) are denominated in US dollars instead of Argentine pesos.
Reasons behind the proposal
Since the economic crisis of 2001, Argentina has experienced persistent distrust in its national currency. Central Bank data indicates that, from 2001 to the present, cumulative inflation has exceeded 2,500%. This has led Argentines to seek refuge in the dollar, perceived as a more stable currency.
The Dollarization of Guarantees and the Current Exchange
If guarantees are dollarized, meaning they are set in dollars rather than pesos, their value would remain more stable against the oscillations of the local market. This would bring significant benefits:
- Contractual stability: The involved parties would have certainty about the real value of the guarantee, avoiding the loss of value a peso guarantee might face amidst strong devaluation.
- Appeal to investors: Investors, both local and foreign, would have more confidence knowing that their guarantees won’t devalue in the short term. This trust could boost investments and, therefore, job creation and economic growth.
- Connection with international markets: Dollarizing guarantees allows the Argentine economy to align with international financial practices, facilitating trade and cross-border investments.
- Reduction of the exchange gap: By promoting the use of the dollar in key aspects of the economy, such as guarantees, greater demand for dollars in the official market could be encouraged, which in turn could help reduce the gap with the parallel market.
Challenges to face
- Disconnection with the real economy: While the dollarization of guarantees can provide stability, there’s a risk that everyday transactions drift from the economic reality of those still managing their finances in pesos.
- Difficulties in monetary policy: With less control over its national currency, the Central Bank could face limitations in employing monetary policy tools.
What do the experts say?
Economists like Martín Redrado and José Luis Espert have pointed out in the past that solutions involving the dollar, without being accompanied by solid macroeconomic policies, are only temporary patches. However, Javier Milei has cited the Ecuadorian dollarization as successful, stating that Ecuadorians are «much better off» than Argentines. It’s essential that the dollarization of guarantees is accompanied by measures that strengthen the Argentine economy holistically.
Although every economic measure has its challenges and must be implemented with caution, the dollarization of guarantees emerges as a valuable tool on the path to a more stable and trustworthy Argentine economy. It’s a proposal that, with an appropriate regulatory framework, could be the boost Argentina needs to rebuild both national and international trust.
If you or your company are considering needing a guarantee or have questions about it, our firm, Muller & Friedman, specializes in this area and is ready to assist you. Contact us and benefit from our expertise and knowledge in guarantees to ensure the safety and reliability of your transactions.