Cavallo: Freeing the Exchange Market is Key to Stopping Currency Runs

Domingo Cavallo, the architect of Argentina's controversial convertibility plan, has once again stepped into the economic debate, urging the government of Javier Milei to fully dismantle currency controls. His prescription is clear: a completely free foreign exchange market, a move he insists is the only way to effectively combat speculative attacks on the peso and foster genuine economic recovery.

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If everything is totally freed up and there is a single foreign exchange market, exporters can dispose of foreign currency as they wish, importers have to go to that foreign exchange market to buy, and anyone who has to make transfers has to go to that market, then the market will find its level.

Cavallo's argument centers on the idea that a unified and liberated exchange market would create a self-regulating system. Exporters, he posits, would have the freedom to manage their hard-earned dollars, while importers would be compelled to participate in this open market to acquire the currency they need. This, in turn, would allow the market to discover its true level, free from artificial distortions. He further suggests that a falling dollar presents an opportune moment for the Central Bank to bolster its reserves, a crucial step towards regaining the capacity to intervene and stabilize the currency should speculative pressures arise.

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The probability of that happening is greater with the current exchange regime, when it is known that the Central Bank does not have its own foreign currency to really stop a run.

From the perspective of many Argentine economists and policymakers, Cavallo's proposals often carry the weight of past experience, both positive and negative. His insistence on market liberalization resonates with a segment of the economic establishment that believes unfettered markets are the key to unlocking Argentina's potential. However, the specter of past crises, often exacerbated by rapid liberalization, also looms large, fueling skepticism about the feasibility and consequences of such a drastic shift, especially in an election year.

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If the dollar price were to fall, it is the opportunity to buy reserves. What better than to start buying reserves because the dollar is tending to fall and the Central Bank has to buy to accumulate reserves?

Cavallo's latest intervention underscores the ongoing ideological battle within Argentina regarding economic policy. While the current government has embraced market-oriented reforms, the debate over the pace and extent of currency liberalization remains fierce. His call for immediate action, warning that without these steps, inflation will persist and genuine economic reactivation will be delayed, serves as a stark reminder of the challenges and choices facing the nation.

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And then, when the BCRA has reserves, it will have the capacity to intervene against a threat of a currency run to stop it.