Dollar Disease

A long time ago, economists began studying exchange rate variations caused by exogenous shocks. “Dutch Disease” was the term coined for the phenomenon in which the sudden discovery of natural resources leads to a real exchange rate appreciation, weakening competitiveness across the rest of the economy.

Other scholars have expanded this concept for the era of financial globalization. Alberto Botta’s 2015 paper “The Macroeconomics of a Financial Dutch Disease” emphasizes how foreign direct investment on natural resources can appreciate the exchange rate by short-term capital inflows, often generating exchange rate volatility and macro instability. José Ocampo’s 2020 book applies this concept to Latin America and discusses the consequences of “external dominance,” where short-term macroeconomic dynamics are determined by external shocks — positive or negative — such as changes in commodity prices or fluctuations in US Federal Reserve interest rates. As expected, these short-term cycles jeopardize long-term dynamics.

In Argentina, the recent surge in investments in shale oil and gas within Vaca Muerta, along with the growth in lithium and other critical minerals, has prompted discussions around the possibility of a potential Dutch Disease scenario. While this does not yet appear to be the case, there is notable external dominance coupled with a strong preference among economic agents for assets denominated in foreign currency — commonly referred to as “financial dominance.” Let us simplify this phenomenon as “Dollar Disease” or DD.

DD is an economic phenomenon where the national currency lacks public confidence as a store of value due to recurrent and severe inflationary periods. As a result, the demand for the US dollar remains high and is highly sensitive to any economic or political event.

In the postwar period, economists such as Raúl Prebisch, Celso Furtado, Fernando Henrique Cardoso, Marcelo Diamand, and others developed “structuralist theory” (teoría estructuralista). They sought to explain why Latin American economies regularly faced balance-of-payment problems: import growth rates tended to be higher than export growth rates because of limited industrialization diversification and dependence on imported intermediate goods.

The Washington Consensus in 1990s accelerated the financialization of these economies, characterized by high levels of external debt. The 2008 international financial crisis made emerging markets far more sensitive to the movements of big finance — fly-to-quality movements (when investors flee risky assets for safer ones during market turmoil), stock exchange volatility, currency war, and broader uncertainty in global markets. As a result, the structural weakness of peripheral economies worsened under the era of global finance.

While Argentina shared these dynamics with the rest of the region, it also developed specific characteristics that justify calling its condition the Dollar Disease. In the 1990s, Argentina implemented a fixed exchange rate peg to the US dollar, a policy that ultimately ended in huge financial, economic, and social turmoil in 2001. In the aftermath, Argentina’s financial sector remained stable but weak in its capacity to provide credit to the private sector. Despite subsequent years of growth, the preference for saving and investing in US dollar–denominated assets has persisted. In fact, Argentine residents hold an estimated $20 billon in accounts abroad.

Dealing with DD requires broad political and social consensus to preserve and rebuild the national currency, something Argentina has lacked for the last twenty-five years. Progressive governments answer to DD by implementing exchange rate regulations and limiting access to US dollars, while deploying import substitution strategies. Neoliberal governments, on the other hand, prefer to open exchange rate markets and finance the demand of US dollars with external debt.

In between, millions of Argentines suffer the periodic devaluations of the peso currency that trigger inflation and recession, hitting the most vulnerable hardest. On top of this, external debt has typically come with austerity measures and deregulation agendas, further limiting access to housing, education, and health services for the majority.

The Chainsaw

In 2018, under President Mauricio Macri, Argentina signed a $57 billion loan from the International Monetary Fund (IMF) — equivalent to 1,277 percent of the country’s quota in the fund — which turned out to be the largest loan in the IMF’s history. Ultimately, only $44.5 billion were disbursed, as the program financed massive capital flight and was halted after Macri’s electoral defeat. During the neoliberal government of 2015 to 2019, public debt rose from 50 percent to 90 percent of GDP, shifting largely from national to foreign investors. In its 2021 Ex-Post Evaluation, the IMF acknowledged that the program in Argentina failed to restore fiscal and external confidence or promote economic growth.

The COVID-19 pandemic compelled the Peronist government to support families and businesses, increasing the fiscal deficit, which was covered through a form of quantitative easing necessitated by limited access to international markets. High external debt, persistent fiscal and trade deficits — exacerbated by a very strong drought — and a widening exchange rate gap between the official and financial markets pushed Argentina’s annual inflation above 200 percent in 2023.

The high inflation environment secured Milei’s victory in the 2023 presidential elections, where he ran on a populist platform centered on strict austerity measures — dubbed “the chainsaw” — which he claimed would bring inflation under control.

Milei took office on December 10, 2023, and three days later carried out a “mega-devaluation,” moving the exchange rate from $366,50 pesos to $799,98 per dollar. The passthrough effect of the devaluation onto consumer prices was absorbed by peso-denominated wages, inflicting a sharp loss of real income. The resulting recession contributed to inflation reduction. However, after the initial surge, the government adopted a crawling peg exchange rate scheme — a system in which a central bank allows a currency to depreciate over time, rather than through sharp, one-off devaluations, to shape inflation expectations and reduce market shocks — to secure sentiment and stabilize monthly inflation at roughly 2 percent.

The chainsaw economic model extends beyond austerity and can be characterized by five key features: liberalization of the economy and a significant reduction in the role of the state; reliance on exchange rates and interest rates as financial stabilizers; financial valorization; market concentration; and fiscal consolidation achieved through cuts to wages, pensions, and transfer payments.

But as DD illustrates, this model requires more US dollars to fuel the economy. In 2024, the government introduced a regime allowing Argentine residents to repatriate more than $32 billon from previously undeclared activity. In 2025, the government asked for additional funds from the IMF — another $20 billion, of which more than $14 billion has already been disbursed. Consequently, Argentina now owes the extraordinary debt of approximately $57.2 billion to the fund.

Meanwhile, Milei’s political position has weakened, which undermines an economic model based on confidence and expectation. In the Buenos Aires provincial midterm election of September 7, Milei’s party lost by more than 14 points. And in the upcoming national midterm elections, the government is expected to win at most five of twenty-four districts, losing the remainder to opposition governors who are increasingly questioning the president’s ability to govern.

Congress, for its part, has rejected many of the national government’s proposals. It recently passed four important laws declaring fiscal emergencies for people with disabilities and for pediatric health services, along with a pensioners’ bonus and a fiscal stimulus for universities. The government vetoed all four in the name of its commitment to fiscal surplus and the chainsaw agenda. Congress has overturned the vetoes on university funding and pediatric care by large margins and earlier reversed the disability benefits veto; however, an attempt to override the pensions veto fell short in the lower house.

Milei also faces a series of serious corruption allegations. These include bribery within the National Disability Agency (ANDIS), where leaked audio implicated high-level officials — including Milei’s sister, Karina — in kickbacks from pharmaceutical contracts. Nearly a hundred deaths have been linked to contaminated fentanyl, amid accusations of delayed action by health authorities.

Martín Menem, president of the House of Representatives, saw his family business awarded a controversial multibillion peso contract from Banco Nación, raising concerns about nepotism. Milei also publicly endorsed the $LIBRA cryptocurrency scam and further scandals involve uninspected luggage arriving on private flights and forced salary contributions from public employees to political operatives. One of the most damaging cases involves José Luis Espert, a Milei ally and lead candidate in Buenos Aires Province, who was accused of laundering money linked to a drug trafficking network.

MADA: Make Argentina Default Again

Amid the political scandals and Milei’s weakening support, money started flying out of Argentine bonds and markets. As a result, the exchange rate started to depreciate, prompting the government to sell international reserves to stabilize the peso. The reason was simple: with elections looming, Milei’s only chance of performing respectably is to keep inflation low. But under DD, even small movements in the exchange rate movements create panic. Economic actors rush to buy more US dollars, import goods, and delay their exports.

It was in this context that the financial team lead by Luis “Toto” Caputo turned to his friend Scott Bessent for help. There are at least five reasons, absent political support, this gambit might end up in another sovereign default for Argentina.

First, Argentina has limited international reserves. At the beginning of 2025, Argentina’s central bank (BCRA) had net reserves of around -$6 billion, which have since fallen to approximately -$9 billion. Although gross reserves have improved slightly, they remain insufficient to meet external obligations. The government has failed to rebuild reserves amid carry trade pressures (short-term speculative inflows seeking high-interest returns), rising peso debt indexed to the dollar, and its decision to avoid buying dollars during export liquidations to contain the exchange rate and inflation ahead of elections. The exchange rate band regime introduced in April 2025 allows the peso to float between ARS 900 and ARS 1,500 per US dollar, with monthly adjustments. However, this system limits the central bank’s ability to buy dollars at favorable rates — especially when the peso trades near the ceiling — restricting its capacity to strengthen reserves during periods of peso appreciation.

Second, Argentina faces significant debt rollover risks. If the treasury and the central bank fail to refinance their obligations, they could face tens of billions in principal and interest payments before the end of Milei’s term — an amount that could easily trigger another default. Simultaneously, the trade surplus has been compromised due to the artificially low exchange rate, which discourages exports and incentivizes imports.

Third, Argentina is on the brink of a major social crisis, fueled by austerity measures, mass layoffs, and pension cuts. Labor unions, especially the General Confederation of Labour (CGT), remain highly organized and influential. With poverty rates exceeding 50 percent, further unrest is likely if the government continues its aggressive fiscal consolidation.

Fourth, the $20 billion currency swap agreement between the United States and Argentina provides short-term liquidity and helps stabilize the peso, but it lacks bipartisan support in both countries. In Argentina, critics view it as a political lifeline for President Milei ahead of midterm elections. In the United States, Democratic lawmakers have condemned the move as political favoritism.

Fifth, Milei’s economic program — marked by recession, layoffs, and dollar dependency — risks undermining Argentina’s trade balance. Despite a nominal trade surplus, the current account remains in deficit due to massive debt service obligations. The recession reduces export capacity and domestic consumption, limiting the dollars Argentina can earn. This echoes Néstor Kirchner’s warning: without growth and social stability, debt repayment becomes unsustainable.

Moreover, the preference to save in US dollars, a hallmark of DD, might accelerate a slide toward default. In other words, lending more money to a borrower under financial stress may only accelerate the chances for defaulting. The question is whether this bailout represents a genuine rescue effort or is merely a window for private funds to get out of Argentina at a low cost, leaving institutional investors (IMF and US Treasury) to stay in the nation with the aim of imposing their own economic and geopolitical agenda.

A Progressive International Alliance

The risk of another sovereign default in less than twenty-five years would be catastrophic for Argentina’s economy — harming households, domestic firms, and even international investors. Avoiding such an outcome should be a shared goal. The Argentine people should not bear the cost of the trade war between the United States and China, and national policy shouldn’t be subordinated to the interests of financial markets. Alternatives exist, but they require returning politics to the hands of Argentines and keeping Wall Street’s interests at bay.

Evidence from other debt-overhang cases — where debt approaches 100 percent of GDP, external obligations are heavy, and central bank reserves are depleted — shows that debt restructuring is necessary. Debt relief could follow the example of Greece’s 2010 sovereign haircut. Before that can occur, however, international financial institutions and, in this case, American taxpayers’ money, must no longer be used to guarantee returns for Wall Street investment funds and vulture capital in the Argentine market.

A progressive alternative would rest on several principles:

First, US treasury money cannot be used to buy Argentine bonds or provide cheap dollars to rich Argentines seeking to move their money abroad. A controlled depreciation of the currency may be inevitable.

Second, meaningful debt relief is necessary, and the IMF must accept its own failures by accepting a haircut on both principal and interest. Argentina should repay only the amount consistent with its IMF quota — no more than $25 billion.

Third, the United States should support Argentina in fighting money laundering and fiscal evasion.

Fourth, Chinese investment in the country should not be forbidden, but greater transparency and regional cooperation across the Americas are critical.

Five, the United States could assist Argentine producers by reducing tariffs and committing to transfer technology in areas of common interest like gas, oil, minerals, energy, and digital infrastructure.

Finally, the United States could encourage a Mercosur-level monetary union to help end DD and reinforce Brazil’s role in regional development.

Argentina needs foreign investment, technological exchange, and access to new markets. But these objectives must be pursued in line with national sovereignty and the well-being of its people.