China cancels line of credit, pulling the plug on Argentina’s ‘anarcho-capitalist’ president
Dollarization: Javier Milei holds up a giant cardboard sign depicting a U.S. $100 banknote emblazoned with an image of his face during a rally in La Plata, Sept. 12, 2023. Milei wants to replace the peso with the U.S. dollar as Argentina’s currency and says that the country’s Central Bank should be abolished. He's got a new financial challenge, though: China just cut his line of credit. | Natacha Pisarenko / AP

The Chinese government may have pulled the plug on far-right “anarcho-capitalist” President of Argentina Javier Milei, just weeks after his shock election win.

In a spectacular demonstration of how the lines of geopolitical power are shifting, the People’s Bank of China has withdrawn its “swapline” to the Argentinian central bank, depriving it of a vital source of cheap funding.

This leaves debt-ridden Argentina without ready access to funding to meet its promises to pay creditors. These international creditors include the IMF, to whom Argentina owes a world-record $43 billion. China provided the Argentinian government with funds for its $2.7 billion IMF repayment over the summer, lending it ultra-cheap foreign currency through its swapline arrangement.

Milei, a fanatical free marketeer, was elected with 55% of the vote in November from a population desperate for a break with the failed political Establishment. Developing his public profile through TV appearances and his 1.4 million followers on TikTok, Milei was able to present his program of ferocious spending cuts and the abolition of the Argentinian currency, the peso, as the bitter medicine the country needed to end its economic crisis. Younger voters, in particular, flocked to him in droves.

This was a product of desperation. Two-fifths of Argentinians live below the poverty line, and close to 60% of children. Inflation was over 140% when the election campaign ended, meaning prices doubling roughly every six months.

Since the government defaulted—halted payments—on its debts at the end of 2001, the two decades since have seen governments both pro and anti-neoliberal attempts to negotiate agreements with Argentina’s creditors and break the cycle of crises.

The latest round of these was a colossal 2018 loan from the IMF, attached to conditions on cutting government spending over the following three years.

But what tipped the country over the edge into its latest round of crisis has been the catastrophic drought that began in 2019. This ongoing drought is the worst for over 60 years, hammering farmers and severely cutting harvests—soybean production fell to its lowest level for a century.

For a country dependent on agricultural exports for foreign exchange earnings, it has been a disaster. Its trade deficit ballooned, taxes fell and government spending mushroomed. Government borrowing swelled and the Argentina central bank resorted to issuing more money to cover spending costs. Climate change almost certainly worsened the drought.

Milei’s program offered nothing on this—he is a climate change denier, claiming that those who “blame the human race” for climate change are “fake…only looking to raise funds for socialist bums who write for fourth-rate newspapers.”

The colorful language is very much part of his appeal, along with waving a chainsaw at his public appearances, to symbolize what he planned for government spending, and smashing a piñata of the central bank on live TV.

But cartoonish posing shouldn’t kid us: Milei’s program is neoliberalism on steroids. He campaigned on a promise to cut government spending by 15% of Argentina’s GDP.

His plan to abolish the peso and “dollarize” the economy was arguably even more radical, claiming this would prevent Argentinian bureaucrats and politicians from printing money. Although two other Latin American countries, Ecuador and Panama, use the dollar as their official currency, neither is the size of Argentina, the continent’s second-largest economy.

And while many Argentinians already use the dollar, with $246 billion in dollar savings, the government has no dollars to hand, and would have to either buy them to replace pesos, or perhaps seize them from those mostly middle-class savings.

The plan is a non-starter. Confronted with the economic realities, Milei has rapidly defaulted to conservative type, appointing a former president of the central bank, Luis Caputo, as his economy minister, and appointing a close associate of Caputo as the new central bank head. So much for “burning it down.”

The ferocious spending cuts are still planned, along with a 54% devaluation of the peso as part of a program approved by the IMF.

Far from a radical break, Milei is a stooge for the maintenance of Argentina’s failed elite—including even the rehabilitation of the dictatorship, with his running mate for Vice President, Victoria Villaruel, claiming the figure of 30,000 “disappearances” under the regime is a “myth.”

This is a familiar pattern. Across the world, supposed populists from the radical right have taken power, often with the promise of taking on corrupt local elites. They don’t follow through.

Italy’s radical right government, for example, in August threatened a windfall tax on banks that were profiteering from interest rate rises. But they rapidly backed down after howls of protests from the banks themselves.

Milei has almost certainly bitten off more than he can chew. Expecting protests, harsh new guidelines for police and military, including the criminalization of the parents of younger protests have been rushed through—“prison or bullet,” as one pro-government MP described them. Inflation has accelerated, to 3,678% a year, which the government are now using to justify their “shock therapy.”

However, it is anti-China posturing that could prove his undoing. China is Argentina’s second-biggest market for exports, and loans from China make up over 42 per cent of Argentina’s foreign exchange reserves.

Yet Milei called China an “assassin” during his election campaign, promising to sever ties and instead reorienting Argentina towards full-throated support for Israel and the U.S. Argentina’s foreign minister has confirmed that the country would not be joining the China-led BRICS coalition, as pledged by the last government.

This was treated as a “slap in the face” by China: Cutting loan support to Argentina is the inevitable response. As Milei himself might put it: Fuck around and find out.

Morning Star

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James Meadway
James Meadway

Economist, former political advisor, Progressive Economy Forum, Macrodose Q&A host.