Argentina’s Shock Therapy: Javier Milei Devalues Peso, Cuts ‘Corrupt’ Public Works – But Doubles Child Credit

Javier Milei

The administration of Argentine President Javier Milei announced a series of intensive economic measures on Tuesday to help prevent hyperinflation and balance the national debt, including a dramatic devaluation of the Argentina peso and a pause on all federal public works projects.

The measures, which attracted the support of the International Monetary Fund (IMF) on Tuesday, are part of what Milei promised to bring “shock” therapy for the Argentine economy in his inauguration speech. Telling attendees at the ceremony on Sunday that he was aware “things will get worse in the short term,” he asserted, “there is no alternative to adjustments and there is no alternative to shock.”

On Tuesday, presidential spokesman Manuel Adorni justified the measures by declaring Argentina’s economy a “patient in intensive care, about to die.”

Minister of Economics Luis Caputo announced ten measures that he said Milei and his team believe will help begin reducing runaway federal spending and stabilize the country. While most of the measures were cuts to federal programs – such as not renewing any state worker contracts less than a year old – Caputo announced that social programs that put money directly in the hands of the needy would increase the aid offered.

These actions would join other announced plans to use a “chainsaw” on the federal government, as Milei campaigned on. Shortly after his inauguration, Milei announced, for example, that he would cancel all government publicity campaigns for at least a year, identifying them as unnecessary spending. On his first day in office, he announced he would reduce the number of Cabinet-level ministries in the federal government from 18 to nine.

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Javier Milei via Storyful

The measure that attracted the most international attention on Tuesday was the devaluation of the Argentine dollar, bringing its exchange rate with the U.S. dollar from 366 pesos per dollar down to 800. Under the previous leftist governments, Argentina maintained a confusing system of multiple exchange rates to mask the weakness of the peso, including the inflated U.S. dollar exchange rate, the more official street value of the peso (known in Argentina as “dólar blue”), and something called the “Soy Dollar,” which the socialists introduced in December 2022 for soybean growers.

“Since 2019, Argentina’s peso currency has been kept artificially strong by strict capital controls which create a wide gap between the official exchange rate of 366 per dollar and parallel rates as high as 1,000 per dollar,” Reuters explained on Tuesday.

Caputo’s other measures included the suspension for one year of the federal government’s budget for public corporations and other agencies; the limiting of money donated to the provinces from the federal government, and a cut in socialist subsidies to transport and energy, meaning Argentines will see higher electric bills and pay more at the gas pump.

A small subset of the new measures, however, call for some modest increased spending. Caputo announced that the Milei administration would double the money offered through the Universal Child Allowance – money the Social Security Administration gives to new parents under a certain income – and enact a 50-percent increase in a food program for children. Those programs appear to be directed at aligning the allowances with the true value of the Argentine dollar after a year of skyrocketing inflation, which the government has not kept up with in its Universal Child Allowance payments.

Argentina is in a dire economic situation, nearing an inflation rate of 150 percent and with poor credit to help maintain the costs of it gargantuan federal government. Adorni, Milei’s spokesman, said that the administration is hoping to ultimately balance the budget, a gigantic task in light of the current challenges.

“The national debt is the mother of all battles,” Adorni said. “Beyond the Argentine logic where a large part of our lives we live immersed in cycles of fiscal deficits, we have to understand that we cannot spend what we don’t have or more than what we make.”

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Adorni clarified the new measures would likely be put in place on January 1, describing them as “inevitable to prevent catastrophe.”

“When you spend more than you have, there are two alternatives,” he continued. “Or you go into debt with a bank and a credit card or you ask a friend for money.”

“Here we don’t have either of those because the private banks don’t believe in Argentina anymore, and we are world-renowned for being serial defaulters.”

The friend, he added, was the Central Bank of Argentina, “and its money-printing machine is not our friend anymore and will not finance a single dollar of the Treasury.”

The IMF applauded the announcement on Tuesday.

“IMF staff welcome the measures announced earlier today by Argentina’s new Economy Minister, Luis Caputo,” the financial organization said in a statement. “These bold initial actions aim to significantly improve public finances in a manner that protects the most vulnerable in society and strengthen the foreign exchange regime.”

“Their decisive implementation will help stabilize the economy and set the basis for more sustainable and private-sector led growth,” it concluded.

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