Argentine President Milei's plan to remake the economy with a wrecking ball
If your economy is broken, you can try to fix it — or you can essentially just throw it in the trash and try to build something new from scratch.
Why it matters: The latter is, broadly, the plan of anarcho-capitalist Argentine president Javier Milei, while the former is the plan of Zambian president Hakainde Hichilema.
Where it stands: Milei came in like a wrecking ball after he took office in December. He slashed the official value of the currency in half, introduced a "mega-decree" scrapping 366 separate rules, and laid off 5,000 government employees.
- Alejandro Werner, the former head of the International Monetary Fund's Western Hemisphere department, explains that this course of "shock therapy" carries enormous risks, both to the upside and the downside.
- The devaluation, at least for the next few months, increases the Argentine inflation rate, which was over 200% in 2023. Milei's budget cuts will also cause a plunge in household income, as well as a deep recession.
- The economic pain will embolden Milei's opposition — including in the courts, which have already suspended many of his early decrees. A general strike is planned for Wednesday.
What we're watching: Werner is hopeful that Congress will be at least minimally cooperative, that a good agricultural harvest will help replenish foreign reserves, and that inflation will fall to an annualized rate of 50% by the end of the year.
- Argentina being Argentina, however, Werner notes, it's entirely possible that Milei's opponents in Congress will block most of his policies and devastating hyperinflation will result.
Reality check: Argentina's action stands in stark contrast to the zugzwang in Zambia, which is trying to restructure the old-fashioned way. There, creditors find themselves in a standoff without any obvious resolution — and where even the IMF seems powerless to move things forward.
Between the lines: Milei was quite the toast of the Davos elite this week, notwithstanding the fact that he's on the record calling climate change "a socialist lie."
- "The Argentine economy is in such bad shape that it has to be shaken up. President Milei and his team are doing exactly that," said IMF chief Kristalina Georgieva in a CNN interview.
- Milei returned the favor, saying that the CEOs assembled for his speech were "social benefactors" and "heroes."
- "Let no one tell you that your ambition is immoral," he added.
The bottom line: For the time being, Milei seems to be able to draw on a wellspring of support and goodwill from the international community.
- The IMF has restarted its program in the country, which means $4.7 billion in international funds have been unlocked and default isn't imminent.
- All the same, Argentina's bonds are still trading at roughly the same level as those of Spirit Airlines. Some kind of default remains more likely than not — just pitched as part of a bold recovery plan, rather than being draped in anti-creditor rhetoric.