Buenos Aires, Argentina – Argentine President Javier Milei's decision to reduce discretionary transfers to the provinces forced its governors to look for alternatives to avoid the adjustment. One of La Rioja's proposals was the implementation of a complementary currency that will circulate alongside the Argentine peso. Analysis of the functioning of quasi-currencies, their background and their possible effects on the economy.
“There is no money” is one of the main phrases of the far-right economist Javier Milei since his arrival to the Presidency of Argentina. Publicly, she was coined for the first time just days after becoming head of state of the South American country, after defeating the Peronist Sergio Massa in the second round of the elections on November 19.
However, the phrase reached its maximum popularity when he pronounced it on the steps of the National Congress, on December 10, in his first speech as president.
The phrase encompasses many axes of its Government policies. Mainly, his intention to shrink the State and reduce the fiscal deficit. Those three words that today became memes and songs are their simplest justification to explain their adjustments and cuts to citizens.
It is, in other words, his way of “opening the umbrella” in the face of possible social protests that may arise as a consequence of the shock policies that he has applied since his arrival at the Casa Rosada.
Politics for adults and they will continue to call him a populist, Javier Milei: “There is no money. There is no alternative to adjustment, to shock. That will have a negative impact on employment, wages and the poor and indigent (…) This is the last evil drink”. @JMilei
pic.twitter.com/6UDiggMxnk— Mr.Liberal🇪🇸 (@SrLiberal) December 10, 2023
Among those most affected by the “no money” are the provinces. Milei is preparing a strong adjustment and evaluating cutting “discretionary transfers.” Basically, they are complementary money transfers from the national State to the provinces, which are not regulated by law. For the new Government, they are used to “exchange political favors.”
“We are going to minimize the discretionary transfers from the national State to the provinces, resources that, unfortunately, in our recent history have been used as currency to exchange political favors, to do politics,” said the Minister of Economy, Luis Caputo, on December 12 when he announced the main economic measures of the Milei Government. .
The Argentine economist Juan Galizzi, master in Economic Development from the Université Paris-Est Créteil (Paris XII), agrees with Caputo's vision.
“Discretionary transfers are 100% political. It is a mechanism by which the central government totally conditions the provinces in exchange for support to pass laws in Congress, for example,” he told France 24.
Faced with the fear of not being able to pay state salaries due to the reduction in discretionary transfers, the provinces are already applying alternatives to meet their commitments. One of them is La Rioja, which on January 17 approved by a large majority the creation of a “quasi-currency.”
What are quasi-currencies and how do they work?
The quasi-currencies or complementary currencies They are debt bonds, that is, debt instruments issued by States or public or private companies to finance themselves.. The issuing actors undertake to return with interest the capital that the investors (the recipients) lend them, within a period agreed upon by both parties. It is basically a type of loan.
These complementary currencies are issued when the State or provinces need to meet their obligations (salary payments) and do not have enough liquidity to do so. In the case of La Rioja, they will become part of monetary circulation along with the Argentine peso as a means of payment.
They serve to have liquidity and, to the extent possible, protect themselves from the effects of inflation and be able to continue transactions without having the price disruption that exists today,” Malena Calissano, a graduate in Economics from the University of Buenos Aires, explained to France 24. Aires and master's degree in Economic Policy and Innovation from the European program Economic Policies for the Global Transition (EPOG+).
In Argentina they are not unknown. It is worth remembering the 'Patacones' (Buenos Aires quasi-currency), the 'Lecop' (federal quasi-currency) and other provincial currencies that circulated between 2001 and 2003 during the serious economic crisis that the country went through. In those years, the Convertibility Law prohibited the Central Bank from issuing more pesos without their support in dollars.
All of them would later be rescued by the national State, first at the hands of Eduardo Duhalde and later with Néstor Kirchner. The former presidents canceled their own debt for the issuance of the 'Lecop' and, in addition, those of the rest of the provinces.
Unlike a conventional national currency, the Rioja quasi-currency, called 'BOCADE' (Debt Cancellation Bonds), or 'El Chacho' colloquially, can only be used within the borders of the province.
It is expected that Rioja state employees who receive their salaries in 'BOCADES' will be able to use them physically or virtually for payment in shops or taxes. The main objective is for it to become an accepted currency to acquire goods and services.
“The currency would work with a percentage in cash and a percentage in bonuses. These bonds are received by the province to pay for services, taxes and fees. As for commerce, we must agree with the Chamber of Commerce to receive this currency as a form of payment,” explained the governor of La Rioja, Ricardo Quintela, in statements to Radio 10 on January 13.
Its issuance opened the debate about its constitutionality, since the provinces are not allowed to create their own currency.
The provinces cannot issue their own money. Now, since these are short-term bonds, they are not money 'per se', they are a debt instrument and that is why they are called quasi-currencies,” Calissano said.
The Argentine economist, who currently lives in Paris, welcomes its implementation.
“In a period of crisis, where the situation is very complicated, it seems to me to be an alternative that has potential, if done intelligently and consciously,” he added.
For Galizzi, on the contrary, “it is a consequence of the poor management of the public accounts of a province.”
La Rioja vs. Javier Milei
Peronist Governor Quintela has long been one of Milei's most critical provincial leaders, even before he became president. Last September, he suggested that he might resign from his position if the libertarian prevailed over Massa in the elections.
“The resources for our province are going to be restricted and it is going to be difficult for us to solve the problems (…) Govern my province to punish all sectors, I am not going to do it (…) I prefer to leave and have him come another to be a sniper for the Riojans,” he expressed in different institutional events. Then he recanted and confirmed his continuity.
After the announcement of the creation of the Rioja quasi-currency, Milei sarcastically celebrated the news and made it clear that his Government will not rescue them.
“To think that during the campaign they treated me as crazy for postulating a scheme in which there was free competition of currencies and now they promote it… Welcome the provincial currencies to the competition, which, I want to point out, unlike what happened in the past, in no way are they going to be rescued by the National Government,” the president wrote in his X account on January 16.
To think that during the campaign they treated me like a crazy person for postulating a scheme in which there was free currency competition and now they are promoting it…!!!
Welcome the provincial currencies to the competition, which, I want to point out, unlike what happened in the past, of… https://t.co/R32q3gGiyh— Javier Milei (@JMilei) January 16, 2024
However, this Monday, January 29, the Minister of the Interior, Guillermo Francos, stated that the Rioja proposal “is illegal” and threatened to sanction the province.
“All governors know that it is illegal. There is a fiscal pact that prevents the issuance of quasi-currencies, which are actually bonds. In accordance with the law and the fiscal consensus agreements, this has certain sanctions within the agreement itself. (…) This has fines and the State Treasury Advances can be cut off, if there is money,” declared the minister on Neura Media radio, with journalist Alejandro Fantino.
The effects of quasi-currencies on the economy
According to Galizzi, one of the risks that the quasi-currency has is “that it is worth less than the Argentine peso.”
“To equalize the value of the peso, what La Rioja is going to have to do is pay interest on that bond. A 'BOCADE' in 30 days will be worth 50% less than what it is worth. So that compensation will have to be obtained from somewhere else. The provincial government is going to issue more quasi-currencies and that will generate an inflationary spiral of 'BOCADES',” he explained.
“On the other hand, knowing that the province does not want to make the adjustment, it is also worth wondering if private businesses are going to accept this quasi-currency,” he added.
For French economist Raphaël Porcherot, PhD in Economics from the University of Paris-Saclay, an inflationary effect “is not a defect of quasi-currencies, but rather their purpose.”
It does not mean that the people who implement or defend them want there to be inflation and salaries to be devalued in real terms. Only that is what is going to happen, because what generates the need for quasi-currencies, an economic crisis, is resolved like this,” he told France 24.
Porcherot finds benefits in quasi-currencies and assures that “they help postpone the moment of adjustment in time.”
“It is buying time, exchanging a heart attack for a chronic illness. Maintaining public spending means continuity in economic transactions. It can have a multiplier effect, that is, lead to greater income. In the 2001 crisis, they were a form of devaluation of real wages, which made it possible to recompose the wage and monetary conditions of capital accumulation and thus resume a new cycle of economic growth. It is a less brutal way than layoffs and company closures, but they perform the same function: lowering real wages,” he concluded.
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