Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Argentina Broke Its Inflation Addiction in 18 Months
Transcript
- Lucas: So Argentina. For decades, it was basically the textbook case of an inflation problem that no policy seemed able to solve. Annual inflation peaked above 200 percent in 2024. The peso had lost 99.9 percent of its value since the early 2000s. And every time a new government came in promising stability, the same cycle repeated. Luna: Right. And then Javier Milei won the presidency in late 2023 on a platform of dollarizing the economy and blowing up the central bank. That was the headline. Lucas: Exactly. But what's interesting is what actually happened once he took office. He didn't fully dollarize. Instead, he executed something closer to a fiscal shock — and it worked faster than almost anyone expected. By June of 2026, annual inflation is running around 15 percent. That's still high by global standards, but it's not Argentina. Luna: Fifteen percent in Argentina is practically price stability. How did he pull that off? Lucas: Let me walk through the mechanism, because it's actually pretty elegant. The core of Argentina's inflation problem was always the same: the government spent way more than it collected in taxes, and the central bank printed money to finance the difference. From 2019 to 2023, the central bank was effectively monetizing about six percent of GDP every single year. Luna: Six percent of GDP — that's massive. For context, the US Federal Reserve has never monetized more than a fraction of that in peacetime. Lucas: Right. So Milei's first move was to cut the primary fiscal deficit — that's the deficit before interest payments — from about three percent of GDP to zero in his first year. He did it through a combination of spending cuts and a temporary tax on exports. The spending cuts were brutal: he fired tens of thousands of government employees, cancelled infrastructure contracts, and slashed energy subsidies. Luna: Which caused a recession. GDP fell by roughly five percent in 2024. Lucas: It did. But here's the key: the central bank stopped printing money to pay the government's bills. Instead, the Treasury started issuing peso-denominated bonds with inflation-adjusted yields — essentially, debt that paid investors a real return above inflation. And because investors started believing the government was serious, they actually bought those bonds. Luna: So instead of creating new pesos out of thin air, the government borrowed existing pesos from the market. That's a huge shift. Lucas: Exactly. The monetary base stopped expanding. And when the central bank stopped printing, the exchange rate stabilized. The blue-chip swap — that's the parallel exchange rate — went from over 1,400 pesos per dollar in late 2023 to around 500 by mid-2026. That's a massive appreciation in real terms. Luna: But Milei had also promised to shut down the central bank. He hasn't done that. So what's the status? Lucas: He hasn't shut it down, but he's defanged it. The central bank's charter was changed to prohibit direct monetary financing of the Treasury. It can still conduct open market operations, but it can't print money to cover the deficit. That's a structural reform that previous governments never attempted. Luna: And the dollarization plan? Lucas: Officially still on the table, but it's been pushed out. The argument now is that if you can achieve price stability without dollarizing, you avoid the costs of giving up your own currency — things like losing lender of last resort capacity and the ability to devalue in a crisis. Plus, you'd need tens of billions of dollars in reserves to actually dollarize, which Argentina doesn't have. Luna: But isn't there a credibility risk? I mean, Argentina has a history of promising fiscal discipline and then abandoning it. How do we know this time is different? Lucas: That's the big question. There are two reasons to think it might stick. First, the fiscal deficit has been enshrined in law with a zero-deficit rule that requires automatic spending cuts if revenues fall short. That's not just a political promise — it's a legal mechanism. Second, the composition of Argentina's debt has shifted. A much larger share is now held by domestic investors — pension funds, banks, local corporations — who have a strong incentive to keep the government from inflating away their holdings. Luna: So the people who would lose the most from a return to high inflation are also the people with the most political influence. That's a pretty powerful anchor. Lucas: Exactly. And it's something that other countries with chronic inflation, like Turkey or Zimbabwe, have never managed to create. The question is whether Argentine politics can sustain this. Milei's party doesn't have a majority in Congress, and the spending cuts have been painful. Poverty rates spiked above 50 percent in 2024. Luna: But inflation falling from 200 percent to 15 percent is a huge tangible win. That's something people can feel in their daily lives — the price of bread and milk stopped doubling every few months. Lucas: Right. And that's the political calculus. Milei's approval ratings are actually higher now than when he took office, which is rare for a leader who implemented austerity. The reason seems to be that Argentines had lived with inflation for so long that the relief from stable prices outweighs the pain of cuts. Luna: There's a lesson in here for other countries dealing with high inflation, maybe. But also a cautionary tale — because Argentina has been here before. In the 1990s, the Convertibility Plan pegged the peso one-to-one with the dollar and inflation fell from 1,000 percent to single digits. That lasted a decade before it collapsed. Lucas: The difference this time is that the anchor isn't an exchange rate peg — it's a fiscal rule and a domestic debt market. Pegs are vulnerable to speculative attacks. A fiscal rule with domestic debt holders is harder to break because the people who would lose are your own voters and institutions. Luna: That's a good point. But there's still the question of growth. Argentina's economy is only now starting to recover from the 2024 recession. GDP grew maybe two percent in 2025, and forecasts for 2026 are around three percent. That's not a boom. Lucas: No, it's not. And the government is still paying very high real interest rates on its debt — something like 15 percent above inflation. That's a huge drag on the budget. If the economy doesn't grow faster, the debt dynamics could become unsustainable again. Luna: So the next test is whether Milei can maintain fiscal discipline without crushing growth. And whether the political opposition, which has been relatively quiet so far, will start pushing back harder as elections approach in 2027. Lucas: Exactly. But for now, Argentina has done something that many economists thought was impossible: it broke a chronic inflation cycle without dollarizing and without a formal IMF program. The playbook — stop monetary financing, cut the deficit, and build a domestic debt market — is actually pretty standard textbook economics. It just took a political shock to implement it. Luna: And that's the part that's hardest to replicate. You need a government willing to impose severe short-term pain for long-term stability. Most democracies struggle with that. Lucas: That's why covering fiscal policy without the pressure of advertisers is so important. We can talk about the actual trade-offs — the pain, the politics, the numbers — without having to simplify it for a mass audience. If you've found that kind of conversation useful, listener support is what keeps this show ad-free and independent. You can help at buy me a coffee dot com slash fexingo. Luna: Yeah, it really does make a difference. A lot of economic coverage either cheers or panics — we try to just explain the mechanisms. And that's only possible because of the people who chip in. Lucas: So back to Argentina. One of the most intriguing developments in the last year is that the central bank has actually started accumulating reserves. They've been buying dollars in the foreign exchange market to rebuild a war chest. That's a complete reversal from the previous pattern of bleeding reserves. Luna: How? Where are the dollars coming from? Lucas: Two main sources. First, the agricultural sector — soybeans, corn, wheat — had been holding back exports because they expected a devaluation. Once the exchange rate stabilized, they started selling. Second, energy exports from the Vaca Muerta shale formation are ramping up. Argentina is on track to become a net energy exporter this year for the first time in over a decade. Luna: So the stabilization is feeding on itself. Lower inflation encourages repatriation of dollars, which strengthens the currency, which further lowers inflation. Lucas: Exactly. It's a virtuous cycle. The risk is that it could reverse if confidence cracks. A bad harvest or a drop in commodity prices could spook investors. But for now, the momentum is clearly positive. Luna: Let me ask about a specific number: the central bank's balance sheet. One of the big concerns was the stock of Leliqs — these short-term central bank notes that were paying sky-high interest rates. They were essentially a time bomb. What's happened to them? Lucas: Great question. The Leliq stock peaked at around 23 trillion pesos in 2023. The new central bank leadership has been gradually retiring them by issuing longer-term debt and allowing some to mature without being rolled over. The stock is down to about 10 trillion pesos now. That's still large, but the average maturity has been extended from 28 days to over a year. So the refinancing risk is much lower. Luna: That's a huge improvement. A 28-day maturity meant the central bank was basically rolling over its entire balance sheet every month. One bad day and you get a run. Lucas: Right. That's exactly the kind of vulnerability that killed previous stabilization attempts. And it's another reason why this time might be different — the technical infrastructure of the debt market has been reformed. Luna: So if I'm an investor looking at Argentina today, what's the biggest risk? Lucas: I'd say it's political. Milei is a disruptive figure. He's fought with judges, governors, and the press. His coalition is fragile. If he loses the midterm elections in 2027 or decides not to run for reelection, there's no guarantee his successor will maintain the fiscal rules. The zero-deficit law can be repealed by a simple majority. Luna: So the credibility is still personal — it rests on Milei and his commitment. That's fragile. Lucas: It is. But you could argue that the domestic debt holders create a constituency for discipline that survives any one politician. If a future government tried to return to monetization, the pension funds and banks would scream bloody murder. That kind of institutional lock-in takes years to build, but Argentina has made a start. Luna: Alright, so let's zoom out. What's the single most important takeaway from the Argentina case for other countries? Lucas: I think it's that you can kill chronic inflation without dollarizing if you're willing to make a credible fiscal commitment and you have a domestic investor base that believes you. The textbook solution — eliminate the fiscal deficit, stop printing money, and let the currency float — actually works. The hard part is the politics of getting there. Argentina shows that it's possible, but it's not painless. Luna: And it's not over yet. We'll be watching. Lucas: Absolutely. Argentina's inflation story is one of the most important economic stories of the decade. Whether it ends in triumph or tragedy is still being written.