A Swedish Podcast and a Guy with a Chainsaw
What Happens to Buenos Aires’ Yuan Swap If the Country Dollarizes?
A Swedish podcast
I recently had the pleasure of doing a short interview with Gunnar Harrius of Kapitalet, one of Sweden’s preeminent economics podcasts. It was a great time and we talked about central bank swap lines generally and Argentina’s swap with China specifically. I’ve written a fair bit about the swap line, its evolution, and its geopolitics (here, here, and here), so I won’t rehash all of that here. What I do want to do is to recap the conversation and the highlights that I think are most interesting, primarily the following question: What happens to Argentina’s swap line with China if Javier Milei wins the presidential election, rids the nation of its central bank, and dollarizes its economy? For those of you who speak Swedish, please listen to the podcast (link below)! For those who don’t, this post is for you.
Some background: Javier Milei, the guy with the chainsaw
Argentina is in an election year. The race was initially between three frontrunners: Mr. Milei, Sergio Massa, the Peronist incumbent and current economy minister, and Patricia Bullrich, a center-right candidate. On October 23, the race went to runoff when no single candidate won a majority of the vote. That leaves Mr. Milei running against Mr. Massa in a tight race. The final vote will be held on November 19. I am no Argentinian politics expert, so I won’t comment or forecast on that, but for our purposes, Mr. Milei, a radical libertarian and self-described anarcho-capitalist, is on the more idiosyncratic side of politics.1 He’s branded himself as an anti-establishment agitator by wielding a chainsaw at political rallies as a symbol of how he intends to tear down the system. What concerns us here though is that two of his policy darlings are getting rid of the nation’s central bank and adopting the dollar.
What happens to the swap if Argentina dollarizes?
My answer to the above question is admittedly not entirely original: writing in The Diplomat, Xiaofeng Wang and Otaviano Canuto give a superlative answer. I’ll summarize here because I entirely agree with them. In the first order, the answer is simple: if Mr. Milei defenestrates the Argentinian central bank (known commonly by its Spanish acronym, BCRA) and adopts the dollar, then the swap line is, by definition, dissolved, because it is an agreement between the BCRA and People’s Bank of China (PBOC). The second-order question though is much more interesting: in the absence of the Chinese swap line, what services can Beijing continue to provide that the swap line was providing?
This is important because, as I’ve discussed nearby, the Sino-Argentinian swap really plays two roles: (1) it does what a normal central bank swap line does (provide short-term foreign exchange liquidity to cover imports, defend currency, whatever); and (2) more uniquely, acts as a sort of MacGyvered lender of last resort (LOLR) facility, allowing Beijing to lend into Argentinian fiscal deficits (most recently to help it make payments to the IMF). With a dollarized economy, we don’t really care about role (1) because now Argentina has all the dollars it needs (the swap initially served to protect dollar reserves or even to serve as a middleman to dollar liquidity). But role (2) is really important and the most unique about Argentina’s swap with China.
Wang and Canuto say, basically, that China can continue to do a lot of what’s most important about the swap line—that is, role (2), its LOLR functionality—without the swap line, as they’ve done in plenty of other places. In fact, they point to the example of dollarized Ecuador as a perfect case study of exactly that. Here’s Wang and Canuto:
The lack of a swap line does not necessarily discourage China from lending money to Ecuador. In total, Ecuador took on about $18 billion in loans from China, mainly during the presidency of Rafael Correa, an anti-U.S. leftist. These funds were obtained through Chinese state-owned banks for various infrastructure projects or through prepayment agreements, in which Chinese oil companies provided upfront cash in exchange for future oil sales. When pro-American conservative Guillermo Lasso assumed office, despite his prior criticisms of Chinese loans, China extended oil-backed loans and agreed to restructure $4.4 billion of Ecuador’s debt, resulting in the country saving $1 billion from 2022 to 2025.2
Exactly. Swap lines are one of a number of channels through which China lends to sovereigns in non-traditional ways. They work, but so do other things, like commodities prepayment facilities and loans or deposits through private-looking state banks. In the above quote, the authors originally cite an excellent paper I’ve talked about here before, called China as an International Lender of Last Resort. This paper shows that, in fact, China doesn’t need yuan facilities at all: much of its de facto sovereign lending is dollar-denominated (e.g., China has lent dollars through state-owned banks and oil importers to Egypt, Belarus, and Ecuador). The point is that swap lines are one useful channel of Chinese LOLR lending, but they’re not the only type, and one shouldn’t miss the lending forest for the swap line trees.
Moreover, a quick look at the Ecuador case study shows that Beijing seems pretty nonplussed by anti-China/pro-U.S. rhetoric; it’s playing a much longer game than election cycles, so China’s happy to keep the financial taps open. Pro-yuan or pro-dollar, pro-Beijing or pro-Washington, swap line or no swap line, China appears happy to fill gaps.
An empty hypothetical
One technical note, though I think it’s ultimately of little import: In the absence of a central bank, Argentina could theoretically maintain the swap line with China by revising the agreement to be between the PBOC (or Chinese Ministry of Finance) and the Argentinian Ministry of Finance. Historically, sovereign-to-sovereign swap lines haven’t always been central bank swap lines, and even today some fiscal authorities manage swaps (e.g., the U.S. Treasury maintains a $9 billion swap line with Mexico). Now, it’s unclear to me that Argentina would have any interest in doing that, but I can think of three potential reasons it might entertain the idea: (1) legitimate interest in making yuan payments and therefore using the swap as a liquidity backstop for a budding yuan market; (2) to maintain a tried-and-tested conduit through which China can continue to finance Buenos Aires’ fiscal deficits; (3) simple geopolitics—wanting to maintain strong symbolic messaging about Sino-Argentinian relations.
Reasons one and three strike me as relatively unconvincing given we’re imagining a scenario in which the Argentinian leader is pretty outwardly a China hawk (though economic reality hits differently when in office than on the campaign trail). That leaves us with reason number two. Remember, however, that in our hypothetical universe, Buenos Aires can’t print pesos anymore, so its swap borrowing would be limited by the size of its accumulated foreign reserves, which would serve as collateral in the absence of some liquidity facility from the U.S. (unlikely). It’s unclear to me then why a swap line would be advantageous as an LOLR conduit vis-à-vis other options on the Chinese menu, such as a commodity prepayment facility. In sum, a Chinese monetary or fiscal authority-to-Argentinian fiscal authority foreign exchange swap is possible but I don’t see why it would be particularly attractive.
Bye, bye, Beijing?
Where does all this leave us? I don’t know. I don’t have a crystal ball and even if I did I’d trust it more to predict a winning lottery ticket than to predict an Argentinian election. The country is on tenterhooks as it faces two pretty unappealing choices: an incumbent steward of an economy running nearly 140% inflation and a guy wielding a chainsaw talking about shuttering the central bank. My cheap guess is that either way, China is likely to stick around, in one form or another, central bank swap or not, peso or not.
Where that leaves Buenos Aires with the IMF, I have no idea. I’ll leave you with the old macro joke that there are four types of economies in the world: developed, emerging, Japan, and Argentina.
(Disclaimer: This work is independent from and not endorsed by the Yale Program on Financial Stability or Yale University; all views are my own.)
And in life in general for that matter. He once called the mayor of Buenos Aires a “leftist piece of shit,” suggested a government official ought to be beheaded, and has five genetically cloned dogs.
Citations omitted.